US markets surprised a few with the 0.8% gain yesterday, despite the government shutdown. Sentiment was boosted by some solid US manufacturing numbers and signs the republicans could be seeing the reputational damage at hand.
It’s actually a huge shame we aren’t going to see Friday’s non-farm payrolls, as the indications are this would have been fairly strong. It’s also a shame manufacturing makes up only around 12% of US growth, because the employment sub-component of this ISM manufacturing (at 55.4) suggests around a 20,000 contribution from the manufacturing space towards the full payrolls print. Also, if you look at the headline manufacturing print at 56.2 (the highest in some 29 months), it suggests an average manufacturing print at 55.8 for the quarter – a number thematic of 3% growth.
We are not really any closer with regards to the shutdown, although it was interesting to see a number of House Republicans favouring a ‘clean’ short-term spending bill (i.e. without cutting funding for Obamacare), although this was later contradicted to a degree by talk that House Republicans could look at bills funding individual programmes. It’s interesting to see the lack of buying in the US bond market, although yields were influenced by the solid data. We have been looking more closely at the US T-bill market, specifically the bill maturing two days after the CBO detailed that the US government will start missing payments, including social security on October 24. This is where the stress can really been seen, with the yield on this instrument trading in a range of negative one basis points to ten basis points in two days.
It’s also interesting to see Netflix (NFLX) rally 5%, to a new all-time high. If you want to leverage yourself to a stock that will directly benefit from 800,000 workers staying at home, then it seems logical we could see a short spike in demand for Netflix accounts.
Asia hasn’t really followed suit and again the lack of clarity is keeping the buyers at bay. Japan is reacting to the sales tax and the subsequent stimulus offsets, however it seems the measures announced were widely expected and in the price. If anything, the lack of any real distinct content or clarity around the corporate tax reductions is being seen as a negative by some, and there are uncertainties around the coming supplementary budget. All-in-all if this is the ‘third arrow’ there are factors here which the market will like, however judging by the selling that’s coming into the Nikkei (closed down 2.1%) as the day rolls on, and given the lack of clarity, yesterday’s moves are being seen as a negative. USD/JPY is eyeing the September low of 97.50 in earnest.
AUD/USD has been offered through the day and has been unable to make ground above 0.9400, testament to the poor August building approvals and trade balance figures. We can’t get too excited about the pair right here and really want to see a break above 0.9510 (the 38.2% retracement of the 16.4% fall during April to August). Bullish moves should be contained around these levels; while interest rates don’t look like they will be going up this year, we will be watching USD developments just as keenly. The ASX 200 staged a modest 0.2% rally, although this was a function of pricing in a strong lead from Wall Street.
European markets on the other hand have already priced in solid US trade, while having their own issues for traders to position themselves around. The Italian market looks to be supported after a big day yesterday, although today’s speech from the Italian premier could herald some volatility (due to speak at 09:30 CET), with traders looking out for whether or not he calls a confidence vote straight after. Price action yesterday in the Italian bond and equity markets (and EUR as well) suggest traders feel Enricco Letta will call a confidence vote and get the support from Silvio Berlusconi’s PDL members. This in theory should give him the 161 votes needed to gain a majority in the upper house. A failure to get these votes will lead to uncertainties, as there are a number of different scenarios which could play out, all of which should bring out sellers.
I’d personally be using any spikes in EUR/USD above 1.3600 as a selling opportunity, given the ECB should verge on the dovish side. Mario Draghi is due to speak at 22:30 and given recent rhetoric, talk of providing fresh liquidity to European banks is highly likely, although we don’t see this happening anytime soon. As things stand the European banks are still repaying previously borrowed funds, and with yields on Spanish debt at the lowest level since May, and Italian debt in the middle of the 4.20% to 4.60% range since late June, clearly they aren’t going to be too compelled to take funds right now. Still, with EUR/USD above 1.3500, the prospect that we actually see the ECB laying the foundations for a November rate cut is high. Short EUR/GBP has been one I’ve been calling for some time and I’d stay short for a potential move to 0.8285, although the way this trend is shaping up, 0.8160 could be seen in the next six months.
More US focused, we get the latest read on the ADP private sector jobs report (consensus is for 180,000 jobs), while we also get speeches from Fed members Eric Rosengren, James Bullard and Ben Bernanke. Gold is also looking interesting, having closed below the 50% retracement of the $1180 to $1433 rally at $1307.16 yesterday. Support has been seen in at the exact 61.8% retracement of the mentioned move at $1277 and a break of this level should see the June low of $1180 come back into play. The technicals suggest further downside, but it’s hard to get too aggressive in case the debt ceiling is hit and subsequently gold rallies hard.
