Macro Morning

Courtesy of ANZ.

• It was a relatively thin session of trading on Friday night. US equities gained modestly, while US Treasuries were little changed. An auction of Italian government debt went well, and overall core European government bonds rallied. Gold declined as stops were triggered after the price fell through USD1280 per ounce, sparking a further fall to a low of around USD1260 per ounce before it steadied in the USD1265-70 range. In currency markets, AUD/USD has fallen around 50 pips this morning to around 0.9420 due to a stalling in the debt ceiling discussions.
• Progress remains scant on resolving the US political impasse. Senate Republicans voted down a Democrat proposal to suspend the debt ceiling through 2014 (with 53-45 in favour, falling 7 short of the required numbers), and Senate Democrats rejected a proposal put together by a group of moderate Republicans that involved pushing the next debt-limit fight to the end of January and extending government funding at current levels for six months. There is still some optimism that a version of this proposal will be found that is acceptable to both sides. New talks have also begun between Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell, with the hope being that these two will be able to find some common ground. However, even if the Senate agrees to a plan, there is no guarantee that House Republicans would bring it to the floor to be voted on.
• The University of Michigan consumer confidence series fell to 75.2 (mkt: 75.6) in the preliminary October print, down from 77.5 in September. The fall was entirely driven by the expectations series which fell to 63.9, its lowest level since December 2012.
• China’s September trade growth slowed in September mostly due to festival effects. Export growth eased to -0.3% y/y (mkt: 5.5% y/y) in September from 7.2% y/y rise in the previous month, but import growth rose 7.4% y/y following a 7.0% y/y gain in August. Notably, iron ore imports hit a record high in September, reflecting recent solid steel output, led by the property and automobile sector.
• In Australia today, housing finance data is published and is expected to have declined in August (ANZ: -4.0% m/m, mkt: -2.5% m/m). Looking further ahead, an extended period of low interest rates should continue to support housing finance and sales over the remainder of 2013. For the remainder of the week, the RBA Minutes are published tomorrow and RBA Governor Steven speaks on Friday.
• In Australia yesterday, the Opposition Australian Labor Party decided on its new leader, with Bill Shorten from the party’s right taking leadership by a slim margin against the only other contender, Anthony Albanese. Mr Shorten is the first Labor leader to be elected since the 7 September election and under new ALP rules in which party members and MPs are each given 50% of the vote. Caucus voted 63.95% in favour of Mr Shorten, while ALP members voted 40.08% in his favour, giving him a majority of 52.02%.

OVERNIGHT MARKETS UPDATE

• US Treasuries ended Friday modestly lower after rallying earlier in the day. The 2‑year bond yield rose 1bp to 0.35% and the 10-year bond yield rose 1bp to 2.69%.
• Australian bond futures also rallied slightly across the curve. The implied 3‑year yield declined 2bps to 3.12% and the implied 10-year yield was unchanged at 4.09%.
• US equities rose again on Friday, building on the strong rally on Thursday, as hopes continued for a solution to the US government impasse. The S&P 500 rose 0.6% to 1,703, the Dow Jones climbed 0.7% to 15,237 and the Nasdaq jumped 0.8% to 3,792.
• European equities were also stronger overnight. The German DAX gained 0.4% to 8,725, the Euro Stoxx 50 rose 0.2% to 2,974 and the FTSE 100 closed the session 0.9% higher at 6,487.
• Australian SPI futures rose 0.6% to 5,262.
• In currency markets, the stalling of debt ceiling discussions has seen a risk-off type response in early Asian trade, with the AUD around 50pips weaker to 0.9420. Other high-beta or high yielding currencies like the NZD and CAD were also softer. In contrast, the core currencies of EUR, GBP and JPY are all modestly firmer against the USD. Today in Asia should be relatively quiet, with Japan out and few local data releases of note. Later tonight, the US and Canada are also out for public holidays. More broadly, the thematic of a stronger core against a stronger periphery is expected to remain in place during the transition to a debt ceiling deal and whilst markets adjust to the Fed’s post-taper policy settings. We are short AUD/JPY via a put option to reflect this and see current levels in AUD/USD as attractive for setting medium term short positions.
• Indicative trading levels: AUD 0.9424, AUD/EUR 0.6947, AUD/GBP 0.58977, AUD/NZD 1.1358, AUD/JPY 92.462
• EUR/USD 1.3565, GBP/USD 1.5979, USD/JPY 98.1
• Oil prices were lower on Friday as the US budget crisis continued and reports of some chart-based selling. Brent futures decreased 0.2% at USD111.28 per barrel, while WTI futures declined 0.7% to 102.02.
• The spot gold price fell 1.2% to USD1,272.2 per ounce on reports of large sell orders in New York futures.
• Base metals prices were higher on Friday. Copper (+0.8%) moved higher after sliding for most of the week on improved prospects of an end to the US government shutdown. Aluminium was broadly unchanged, while lead (+1.1%), nickel (+1.2%), and zinc (+0.8%) all rose. Meanwhile, thermal coal futures were broadly unchanged at USD83.3 per tonne, while the spot iron ore price edged 0.1% higher to USD133.1 per tonne.
• Agricultural commodities prices were mixed. Soybeans (-1.6%) and corn
  (-0.1%) fell due to seasonal pressure from the US crop harvest, while wheat (+1.4%) moved higher on a run of bargain buying. Canola (-1.4%) and palm oil (-0.5%) both fell, while sugar (+1.1%), cotton (+0.2%), cocoa (+0.6%) all closed higher.