Macro Morning

Cross-posted from ANZ.

• It was another quiet session overnight. US equities traded in relatively tight ranges early, but lost ground late in the session as US debt ceiling negotiations stalled. US Treasuries were little changed in a quiet session of trading, while both core and peripheral European bond yields sold off. In currency markets, the only major move was USD strengthening (particularly versus EUR and GBP) on headlines from the Chinese Vice Finance Minister Zhu Guangyao who stated he hoped the US “can deal with its fiscal cliff issue in a timely way”.
• Progress on US debt ceiling and fiscal negotiations remained slow overnight. There are two separate proposals on the table – one from the House and one from the Senate. It is being reported that Senate Majority Leader Reid has rejected the House plan, saying it “can’t pass the Senate and won’t pass the Senate”. Unlike the Senate plan, the House plan would include a two year suspension of the medical device tax included in Obama’s health care reforms. Both deals would fund the Government through to mid January, and suspend the debt limit until 7 February.
• In the US, the Empire manufacturing survey was much weaker than expected, declining to +1.5 (mkt: +7.0) from +6.3 in the previous month. However, the details of the survey were more encouraging with the forward orders component rising as well as the forward expectations. This suggests that the ISM manufacturing survey is likely to consolidate at around current levels.
• In Australia yesterday, the Minutes of the RBA October Board meeting showed that the RBA is comfortably on hold in the near term but remains open to the possibility that rates may still need to be lowered further. The key messages from the Minutes were similar to those in the August and September Board minutes, although the Bank did note higher confidence among Australian households and businesses, as well as the appreciation of the Australian dollar (AUD), which is currently sitting at a little above USD0.9500. Importantly, however, the Board is uncertain whether these developments would be sustained. Our strongly held view is that the cash rate will remain around its current low level through most or all of 2014 as the economy navigates the transition of growth drivers from mining investment to other sources of activity.
• There are no major data releases in Australia today, although the Q3 New Zealand CPI is released at 8:45AEDT.

OVERNIGHT MARKETS UPDATE

• US Treasuries were little changed overnight. The 2-year bond yield was unchanged at 0.35 and the 10-year bond yield rose 1bp to 2.72%, while the short end continued to sell off on concerns over the debt ceiling impasse.
• Australian bond futures were also broadly unchanged. The implied 3‑year yield rose 1bp to 3.18% and the implied 10-year yield was unchanged at 4.17%.
• US equities fell through the session, extending their losses on news that a potential agreement on the fiscal impasses had fallen through. The S&P 500 closed 0.5% lower at 1,701, while the Dow Jones fell 0.8% to 15,180. The NASDAQ declined 0.5% to 3,795.
• European equities were higher overnight. The Euro Stoxx 50 rose 0.9% to 3,005 and the FTSE 100 closed 0.6% higher at 6,549. The German DAX rose 0.9% to 8,804.
• Australian SPI futures fell 0.4% to 5,230.
• In currency markets, the EUR and GBP both fell in early London trade on the weaker-than-expected German ZEW survey. Some attributed the strength in the USD at the same time to comments from China’s Vice Finance Minister urging the US for a quick resolution to the debt ceiling. The AUD was sidelined most of the session but concurrently weaker as the EUR and GBP fell, peeling off from 0.9550 to eventually open in Asia around 0.9515. With few major releases of note, the next few days appear destined to be filled by headline watching. We expect a stronger AUD in the event of a deal, though any appreciation will be limited by renewed confidence in the USD and expectations that monetary tapering will commence earlier.
• Indicative trading levels: AUD 0.9514, AUD/EUR 0.704, AUD/GBP 0.59492, AUD/NZD 1.1365, AUD/JPY 93.562
• EUR/USD 1.3515, GBP/USD 1.5992, USD/JPY 98.34
• Oil prices were lower overnight after a US senator said the Senate would suspend fiscal negotiations until the Republicans had a plan for the US debt limit. WTI futures were 1.2% lower at USD101.00 per barrel but Brent futures fell 1.2% to USD109.64 per barrel.
• The spot gold price increased 0.7% to USD1,282.3 per ounce.
• Base metals prices were mixed overnight. Copper (+0.1%) was broadly unchanged, while lead (+0.6%) was higher. Nickel (-0.2%), zinc (-0.2%) and aluminium (-1.1%) all declined. Meanwhile, thermal coal futures rose 0.5% to USD84.1 per tonne and there was no price recorded for spot iron ore.
• Agricultural commodities prices were also mixed. Corn (+1.5%) rose as investors engaged in bargain buying and short-covering after prices fell to three year lows earlier this week. Soybeans (-0.5%) fell due to on-going seasonal US harvest price pressure, while sugar (-1.8%), wheat (-1.0%), palm oil (-0.7%) and canola (-0.6%) also declined. Cotton (+0.1%) and cocoa (+1.7%) were both higher.