0:10 US negotiations continue to drive markets ahead of Thursday debt ceiling deadline
1:34 Chinese exports fell 0.3% despite expectations of higher demand
2:39 Imports remain strong boosting Australian growth hopes
3:08 China CPI rises to 3.1% from 2.8%
[B]Europe higher on hopes of debt ceiling deal[/B]
Today’s UK opening call provides an update on:
• Senate leaders confident of a deal to avoid hitting the debt ceiling;
• Aussie boosted by less dovish RBA minutes;
• UK inflation expected to fall to 2.6%;
• Earnings to provide crucial insight into consumer activity.
European indices are expected to open higher on Tuesday, on increased optimism that a deal will be struck on Capitol Hill to increase the debt ceiling and reopen government.
Investors have remained relatively confident throughout this process that a deal would eventually being done, although that hasn’t stopped them taking precautions as the deadline approaches. The most notable of these has been the selling of very short-term US debt, which has risen significantly over the last month.
While we have seen risk aversion among investors over the last few weeks, resulting in consistent small daily losses, we haven’t seen the kind of selling that would reflect an opinion among investors that a default is likely. This morning, we’re actually seeing quite the opposite, with European index futures trading around half a percentage point higher, tracking those gains made in the US and Asia over night.
The renewed optimism came after comments from Senate Majority Leader Harry Reid, who claimed he was “very optimistic” that a deal would be agreed, and the minority leader Mitch McConnell, who was confident that a deal would be struck that would be “acceptable to both sides”. This is the first clear sign we’ve had that a deal may be close.
That said, based on the size of the gains seen in the stock market, what we’re actually seeing is a case of cautious optimism. Investors are clearly still concerned that negotiations can collapse which, would be disastrous so close to the deadline. This lack of faith highlights the trust that has been lost in the government, not just among the public but also in the financial markets.
The Australian dollar is trading higher against its US counterpart this morning, after minutes from the Reserve Bank of Australia meeting earlier this month suggested that the central bank is becoming less dovish as the economy shows signs of recovery. There are early indications that the record low interest rates are helping to re-balance the economy away from its over-reliance on the mining industry. At the same time, the recent recovery in China will also be providing a boost to the Australian economy. A combination of the two make another rate cut in the near term unlikely.
Data released this morning is expected to show inflation in the UK falling in September to 2.6%, marking the third consecutive reduction in the CPI figure in as many months. This reduction in the inflation rate is encouraging for two reasons. Firstly it closes the gap between the rise in the cost of living and the rise in people’s incomes, which has been very low in recent years. Secondly, it could help ease fears that the Bank of England’s low interest rates will be jeopardized by high inflation.
One of the reasons why Governor Mark Carney has struggled to convince consumers and businesses on the central bank’s commitment to low rates is because they’re dependent on inflation expectations remaining below 2.5%. When inflation is currently significantly higher than this, it’s difficult to gain comfort from this commitment. Those fears should now subside somewhat, especially if inflation continues in the same direction.
Economic sentiment is expected to rise slightly in the eurozone in October, while in Germany its expected to remain unchanged below 50, the area that separates optimism from pessimism. The ZEW survey has seen substantial improvements over the last few months which only adds to the increased optimism surrounding the eurozone. The eurozone figure is expected to rise to 59.4, while the German figure is expected to remain at 49.6.
US corporate earnings season continues today, with Citigroup, Coca Cola, Domino’s and Yahoo among the companies reporting. While Citigroup and Yahoo earnings will be followed closely, investors may be more interested in the earnings of Coca Cola and Domino’s on this occasion. The figures should provide crucial insight into the spending appetite of consumers at a time when economic figures aren’t being released due to the government shutdown.
Ahead of the open we expect to see the FTSE up 33 points, the CAC up 14 points and the DAX up 29 points.
[B]Investors cautiously optimistic as deal edges closer[/B]
Today’s US opening call provides an update on:
[ul]
[li]Debt ceiling deal looks close;
[/li][li]Reaction suggests investors only cautiously optimistic;
[/li][li]Corporate earnings season likely to take centre stage;
[/li][li]Consumers continue to suffer as UK inflation remains stubbornly high;
[/li][/ul]
Most major European indices are more than half a percentage point higher on Wednesday, on rising expectations that a deal on the debt ceiling will be struck before Thursday’s deadline.
The comments coming from Capitol Hill are very encouraging, especially when you consider how far away we were only a week ago. I’d say there’s very little chance that a deal won’t be agreed now, not that I thought it was a realistic possibility previously. Even US lawmakers, the same people that pushed through the sequester despite neither side wanting it, wouldn’t be stupid enough to allow the US to hit the debt ceiling and default on its debt.
What’s interesting is that, while the markets have responded positively to the comments made by Senate Majority Leader Harry Reid and minority leader Mitch McConnell, the reaction has been relatively small. Clearly, what we’re seeing here is more cautious optimism from investors, as opposed to confidence in Congress to avoid such a catastrophe.
With a deal now looking likely, we should see more attention on the corporate earnings season. So far the first week or so had been somewhat overshadowed by the negotiations in Congress. Going forward though, I expect it to take centre stage. Not only does earnings season carry its usual importance, it’s also the only real indicator of economic health available to investors during the government shutdown.
Today we have plenty of major companies reporting earnings, including Citigroup and Yahoo. The ones that may attract the most attention though are those linked to the consumer, such as Coca Cola and Dominos. These should give insight into consumer spending habits in the third quarter and expectations going forward. The consumer is extremely important to the US economy so a lot of interest will be paid to how these companies see consumers responding to the recent events, along with what could be tough conditions in the final quarter of the year.
The inflation data out of the UK wasn’t so great this morning, especially from a consumer perspective. The CPI figure remained at 2.7% in September, against expectations of a drop to 2.6%. At a time when wages are rising at a measly 1.1%, these high inflation figures are very unwelcome.
The Bank of England could also do with a drop in the figure, given that one of the reasons why no one trusts its forward guidance is because the 2.5% threshold for inflation expectations is still 0.2% below the current level of inflation. With energy prices due to rise later this year, we’ll be lucky to see inflation fall below 2.5% any time soon.
Ahead of the open we expect to see the S&P up 2 points, the Dow up 25 points and the NASDAQ up 6 points.
[B]Fitch places US on rating watch negative as talks continue[/B]
Today’s UK opening call provides an update on:
• Financial markets appear convinced about debt ceiling deal;
• US at risk of losing another of its AAA ratings;
• Role of US dollar as world’s reserve currency under threat;
• UK employment data in focus this morning.
The financial markets continue to buy into claims on Capitol Hill that a deal on the debt ceiling will be done before tomorrow’s deadline, despite both sides appearing to be no closer to an agreement.
Yesterday’s vote on the House plan to avoid hitting the debt ceiling and reopen government was cancelled late on Tuesday, in a clear sign that the Republican party still remains split on what they will accept in order to sign the bill. Certain sections of the Republican party still believe they can force the opposition to at least delay the implementation of Obamacare, something that looks extremely unlikely at this stage and that the rest of the party appears to have accepted defeat on.
The decision to abandon the vote in the House suggests that at least some of these votes are needed to support the bill in order for it to pass in the House. If this is the case, the markets should be more concerned because these sections appear unwilling to back down on the issue, regardless of the consequences.
As it stands though, investors remain convinced that a deal will be done before tomorrow’s deadline. This can be seen in the futures market where most European and US indices are trading in the green this morning. That said, ultra short-term Treasury yields suggest otherwise, having risen again yesterday to 0.3397%, up from 0.0203% less than two weeks ago.
The US inability to resolve its debt issues in a timely manner could once again cost it its AAA credit rating, after Fitch placed it on rating watch negative. The US was stripped of its AAA credit rating by S&P back in 2011 when Congress again could agree on a deal to raise the debt ceiling and ended up coming to an 11th hour deal. The same looks likely again and it seems the ratings agencies are just as disapproving on this occasion as they were in 2011.
Another downgrade could have a very negative impact on US Treasury yields given that certain institutions are only able to buy AAA rated assets. US Treasuries have previously been seen as the safest kind of investment leading many institutions to hold large quantities of them. If they are forced to sell, yields would inevitably rise, unless the Fed responds by buying more. Regardless, this is an extremely undesirable outcome for all concerned.
The role of the US dollar as the world’s reserve currency could also be in doubt going forward, thanks to the second debt ceiling debacle in three years. Certain officials in China, the US largest creditor, have accepted that for now there is little alternative to holding US debt due to the sheer size of their reserves. However, they have said in the future, Eurobonds could be an alternative, if and when they are introduced. The damage being done in Congress right now may not be instantly felt, but may be irreversible further down the line.
This morning, the focus will briefly switch back to Europe, with some economic data being released. First up, we have employment figures out of the UK, including the change in earnings in August compared to a year ago. The unemployment rate is expected to remain at 7.7% in August, after falling unexpectedly last month, while the number of jobless claims are expected to fall by 25,000.
The bigger concern is wages, which are expected to have risen 1% compared to the same month a year ago, well below current inflation levels of 2.7%. This gap could grow further later on this year with energy bills expected to rise for a large number of households. Also being released is the CPI figure for the eurozone for September, which is expected to be confirmed at 1.1%, in line with the preliminary figure that was released on 30 September.
Ahead of the open we expect to see the FTSE down 3 points, the CAC down 4 points and the DAX up 8 points.
[B]US futures higher as debt ceiling deadline approaches[/B]
Today’s US opening call provides an update on:
[ul]
[li]US futures suggest investors are unfazed by debt ceiling deadline;
[/li][li]S&P 31 points off all time highs, 24 hours before the deadline;
[/li][li]Attention to turn to corporate earnings with focus on the consumer.
[/li][/ul]
The deadline on the debt ceiling is fast approaching, the Republicans failed on two occasions to get the House to vote on an alternative bill, the US AAA rating with Fitch is under threat as they put them on negative watch and yet, investors are confident that a deal will be reached in time.
Well, you’d certainly be forgiven for having that impression when you see US index futures trading slightly higher across the board. We are still seeing signs that investors are acting with an element of caution, with yields on 1-month Treasuries continuing to edge higher, but that same caution isn’t being seen in equity markets.
The S&P ended yesterday’s session only 31 points off the all time highs of 1,729, set on 19 September after the Fed surprised investors by leaving its asset purchase program unchanged. That is pretty staggering when you consider that the US could default on its debt in a few weeks time.
Clearly investors are not taking that threat seriously right now, which they could pay the price for further down the road. I’d say contributing to this false sense of security is the Fed’s bond buying program, with investors confident that once a deal is done, equity markets will continue their liquidity fuelled move higher.
While this is likely to continue to dictate things on Wednesday, there are some other things to focus on, in particular, corporate earnings season. This has been somewhat overshadowed so far, but once a deal is done on Capitol Hill, it’s likely to come back to the forefront of trader’s minds, especially in the absence of US economic data.
There are a number of companies reporting third quarter earnings on Wednesday, including PepsiCo, eBay and American Express, with companies including BNY Mellon and Bank of America having already reported today. Once again, focus is likely to be on earnings linked to the consumer, due to the lack of data out of the US, including the all important retail sales figures.
Ahead of the open we expect to see the S&P up 7 points, the Dow up 68 points and the NASDAQ up 11 points.
0:10 Markets mixed as US runs down towards debt ceiling deadline
0:55 Failed House deal moved emphasis towards Senate
2:12 UK unemployment claims show biggest fall since crisis began
2:56 Wages rose by 0.7%, yet trails cost of living
[B]European futures lower as US default is averted[/B]
Today’s UK opening call provides an update on:
• US default averted, investors not surprised;
• Moderate to modest growth seen in the US, according to the Fed’s Beige Book;
• UK retail sales and US jobless claims being released today;
• Corporate earnings back in focus now that crisis has been averted.
A catastrophic US default has been averted, a short-term budget has been agreed which will send furloughed workers back to work and yet, European indices are trading marginally lower on Thursday.
The reaction to the deal in Congress has been relatively small, when you consider how close the US came to bringing global financial markets and the global economy to its knees. Although, you could argue that investors never truly bought into the idea that the US would default in the first place, which would explain why these gains, like the losses over the last couple of weeks, have been minimal.
You could also argue that the reason investors aren’t getting too carried away is that this “resolution” isn’t really a resolution at all. Once again, Congress has simply put off dealing with these massive issues until a later date, or kicked the can down the road. The deal only funds the government until 15 January, while the debt ceiling will be reached again on 7 February. This means the first few weeks of 2014 will once again be dominated by more political infighting, bringing another possible shutdown and more concerns over whether the US will default on its debt. On the bright side, at least this time, lawmakers have given themselves Christmas off.
In terms of who won this battle, I think it’s pretty safe to say that the victory belongs to the Democrats. They may have failed to reverse the sequester spending cuts that came in earlier this year, but aside from one or two minor changes, Obamacare was left untouched, to the despair of the Republicans, who wanted it repealed.
While there hasn’t been a huge response to the deal in the equity or FX markets, we have seen it reflected in US bonds, in particular 1-month Treasuries which were seen as most at risk of default, had a deal not been struck. Yields on 1-month Treasuries rose significantly in the weeks leading up to the deadline, but have dropped considerably since. They’re not quite back to the levels seen a few weeks ago, but I’m sure they will in the coming days.
With a deal now done, investors can focus more on what matters, earnings and economic data, although the Fed is also likely to play its part. The Beige Book, released last night, claimed growth remained at moderate to modest levels and that so far, the impact of the shutdown on the economy has been small. Although, that’s not to say we won’t see it have more of an impact in the months ahead.
The economic calendar is looking a little thin today, with UK retail sales the only major release this morning, followed by US jobless claims and the Philly Fed manufacturing index this afternoon. Next week is likely to be very important, in terms of economic releases. All of those pieces of data that couldn’t be released as a result of the government shutdown, including the jobs report and the retail sales figure, should now be released next week.
Corporate earnings season is now getting into full swing and with the focus no longer on Capitol Hill, it should draw more attention from investors. Among those reporting on Thursday, we have Goldman Sachs, Verizon and Google, all of which are likely to attract a lot of attention.
Later on we’ll also hear from a few members of the Fed, who could provide more insight into how the shutdown and debt ceiling debacle has likely impacted the economy and how this impact the Fed’s bond buying program.
Ahead of the open we expect to see the FTSE down 13 points, the CAC down 3 points and the DAX down 11 points.
US averts default with 11th hour deal
UK retail sales highest since Q1 2008
US downgraded by Chinese ratings agency Dagong
[B]US futures lower on downgrade rumours[/B]
Today’s US opening call provides an update on:
[ul]
[li]US ratings downgrades start with Chinese agency Dagong;
[/li][li]Traders buy the rumour and sell the news;
[/li][li]Goldman Sachs, Verizon and Google report earnings;
[/li][li]Jobless claims to remain elevated for a couple more weeks.
[/li][/ul]
US futures are pointing to a lower open on Thursday, while the US dollar is coming under pressure, as rumours circulate that the US may be on the verge of another downgrade.
Chinese ratings agency Dagong beat the others to the punch over night, downgrading the US from A to A-, citing the political infighting over the debt ceiling and the lack of a long term solution as the reason for the downgrade. The downgrade doesn’t necessarily come as too much of a surprise, given that we already had a warning from Fitch earlier this week that the US had been put on negative watch.
That said, if rumours in the markets this morning are anything to go by, it may not be the last downgrade the US receives. That’s one reason why we’re seeing US futures trade in negative territory this morning and the US dollar under pressure against the other major currencies.
The other reason is simply a case of investors buying the rumour and selling the news. Despite all of the political brinkmanship and infighting, investors remained convinced up until the final day that a deal would eventually be done. On top of that, rumours circulated throughout yesterday that a deal would be done on Wednesday, a day before the deadline. The result of this was that it was almost entirely priced into the markets, prompting investors to lock in gains today and wait for another opportunity to jump back in.
Once the uncertainty surrounding a US downgrade passes, some form of normality can return to the markets and investors can focus on what they should be concerned with, earnings and economic data. Although, the Fed is going to continue to play its part for a little while yet, with the recent government shutdown likely to delay tapering until December at the earliest.
Investors are now free to pay more attention to the US and European earnings seasons, with some big companies having already reported and plenty more still to come. In the US, we’ll get earnings from Goldman Sachs, Verizon and Google, among others today, while in Europe BSkyB are scheduled to report.
We should get a flurry of economic releases from the US over the next week or so, as the backlog of data that was not collected due to the shutdown, is compiled and released. That includes important figures such as the non-farm payrolls, unemployment rate and retail sales, all of which are expected to be released next week. Today though, the focus will be on US jobless claims, which are expected to fall to 335,000. This figure should take into account any remaining backlog in California following the IT issue as well as any spike relating to the government shutdown. Even if we do see another spike today, it’s not a cause for concern as it’s only likely to be temporary. I expect the figures to settle back down in the coming weeks to near 300,000.
Ahead of the open we expect to see the S&P down 4 points, the Dow down 83 points and the NASDAQ down 9 points.
A key week ahead for the global economy where the resolution of the US shutdown means we will begin to see a greater degree of focus upon the economy over politics. The pick of the week will of course be the September jobs report which has been rescheduled to Tuesday. In the UK, a similarly busy week sees the major focus turn to Friday’s preliminary GDP figure for Q3. Meanwhile in the eurozone, the dominant day of the week will be Thursday, when the French, German and eurozone PMI figures are released. Finally, in Asia a pretty quiet week sees the Japanese trade balance and Chinese HSBC flash manufacturing PMI figure represent the only two events of note.
[B]US[/B]
The US can begin to fully function again this week, with the government funding shutdown finally resolved. As a result, the Bureau of Labour Statistics (BLS) have the task of catching up with almost three weeks worth of data releases. The result of this is that the BLS have had to prioritise which figures to release when and shift next month’s data releases back somewhat. The most notable events of the week come in the form of the jobs report on Tuesday, along with the home sales figures out on Monday and Thursday.
Of course, the jobs data is the most important, with the non-farm payroll and unemployment rate likely to bring the usual degree of market volatility and speculation. In recent months the strength of the jobs market has been tied closely with the decision by the FOMC as to whether the current $85 billion asset purchase scheme should be cut back. However, with the full economic impact of the two week government shutdown still unknown, the decision to keep asset purchases at the current level seems almost a foregone conclusion. The next opportunity for a taper would come at the December meeting, and thus we have a three jobs reports until that decision.
The non farm payroll figure released on Tuesday is expected to show a rise in September in comparison to August, with market forecasts pointing to a rise towards the 180k mark. This would represent a rise of 11,000 jobs from the August figure of 169,000. Bear in mind that the past two figures have disappointed somewhat, with both falling short of market expectations. Despite the fact that this will have somewhat of a lessened impact upon tapering chances, this event always brings great volatility and for many it is an event to steer well clear of at the time of release.
The unemployment rate is also released on Tuesday, where markets are expecting little change in the August 7.3% figure following two months of consecutive reductions in this measure. The jobs market does seem to be picking up somewhat and confidence appears to be creeping back into the US. Until this month that is. However, studying the weekly unemployment claims, it does seem as though there was a moderate slowdown in claims compared with August, which supports a continued reduction in unemployment going forward. Thus there is a possibility that this rate could fall to 7.2%, which would represent the third consecutive beat should it occur.
Finally, the existing and new home sales figures are notable releases to watch out for throughout the rest of the week. The obvious importance of the US housing sector is driven by the fact that the 2008 crisis was caused in large part by the weaknesses of this sector. The resurgence of the housing market reflects very positively upon current economic prosperity along with future expectations and thus while we often do not get the biggest market response from these releases, they are key.
The existing home sales figure is released on Monday, where market expectations point towards a reduced figure of 5.31 million for September. This would be a reduction of -1.6% over the August number. However, we have been pleasantly surprised over the past two months and given continued focus within the US to stimulate the economy through low rates and asset purchases, there is a high likeliness that this provides a more positive picture than expected.
The new home sales figure is a similar story, except the markets are somewhat more positive about this figure. Forecasts point towards a rise to 425,000, from 421,000 in August. As with both of these figure, we are looking for a significant miss for the markets to pay serious attention and this could occur with a miss of 10,000 or more.
[B]UK[/B]
A notable week for the UK economy, in a large part due to the first release of the Q3 GDP figure. Alongside this we will be looking towards the BoE for the release of the minutes and votes from the last MPC meeting.
The Q3 GDP figure is of course the dominant release of the week, with many seeing this as the true and all encompassing measure of economic strength to note. The expectation is that we will see a continuation of the positive movement of the UK economy, with a rise in the GDP figure to 0.8% from 0.7% in Q2. Whilst this may not be the big headline rise we are seeking, it would be a stable grounding and given that this figure is often revised higher at a later date, it could end up at 0.9% or 1.0%. That being said, there has been notable strength within Q3, with PMI data pointing towards evident strengths across the board and thus there is a possibility of a better than expected figure. That being said, the unofficial NIESR GDP estimate provided earlier this month points towards a number of 0.8% and thus expectations could be on point.
Elsewhere, the release of minutes from the latest MPC meeting will attract attention on Wednesday. The votes are somewhat of a foregone conclusion, with the existence of forward guidance meaning that the focus is away from any traditional monetary policy changes for the time being. However, the markets always watch for anything which could provide any weaknesses to this forward guidance strategy.
[B]Eurozone[/B]
The eurozone region has had a particularly strong Q2 and Q3 in 2013, following a long due period of relative stability for the region. This week we will be looking towards the PMI releases for further indications of strength in the two largest economies, along with the region as a whole.
The German PMI figures of course dominate as usual, with the manufacturing figure of particular note. The signs point towards continued confidence of purchase managers, with the manufacturing PMI expected to rise to 51.6 from 51.1 in September while services are forecast to rise to 54.0 from 53.7.
A similar story for the French economy, where markets expect a rise in both figures. The manufacturing PMI is the most notable of these, with it representing a major part of the French economy. And on this occasion we are looking to see if it can finally break back above 50.0, which represents an industry in expansion. Forecasts point towards a figure of exactly 50.0, however we will be closely watching to see if this can push above or if it is set to remain in contraction for another month.
In the eurozone as a whole, the story is somewhat mixed. The manufacturing and services figures are both expected to rise above last month’s figures where both are well into expansion. However, it is the composite figure which is a worry, where it is expected to fall to 51.5 from 52.2 last time.
On the whole, given that there are so many figures released, often it is the general direction of the releases which determine the market movement and thus make sure you take into account the importance and direction each of these figures move for a greater picture.
[B]Asia & Oceania[/B]
A quiet week in Asia, where the two events of note come in the form of the Japanese trade balance figure, alongside the Chinese HSBC manufacturing PMI figure. The Japanese trade balance is always highly notable given that it reflects whether the exports show significant strength given the relative weakness of the yen in 2013. The imposition of a sales tax has been hotly discussed over recent months and thus increased signs of international competitiveness would provide extra leeway for such a tax. Market expectations point towards a rise of both exports and imports on a year on year basis, however it is the imports which are expected to rise 20% while exports are predicted to rise by only 15.6%. Thus should we see a continued divergence of these two in such a manner, it could bring about heightened need to devalue the yen further to reduce the trade balance deficit that exists.
In China, the HSBC manufacturing PMI figure on Thursday is the event of the week, where expectations point towards a continued strengthening after a notably weak period for the Asian powerhouse. The forecasts point towards a rise to 50.5 in October, compared with the 50.2 number in September. Bear in mind that this figure typically is viewed as highly important given that it is entirely independent and thus provides a reliable barometer of the economy. It is also more focused upon smaller and mid-sized firms, which explains why the number is typically below the official figure which is dominated by larger, government funded firms. Given the resurgence of the Chinese economy, this figure will be heavily watched for signs that the economy is coming back into strength across both large and small firms alike.
[B]US data and corporate earnings take centre stage this week[/B]
Today’s UK opening call provides an update on:
• Investors buoyed by last week’s resolution and the prospect of prolonged Fed easing;
• Japanese trade deficit narrows in September, but falls short of market expectations;
• Earnings season takes centre stage with more companies reporting than any other week;
With the S&P 500 and DAX 30 closing at all time highs on Friday, and the Australian S&P/ASX 200 hitting new five year highs over night, I think it’s pretty safe to say that investors are feeling much more optimistic as we approach the end of the year.
And you can understand why they are in a more positive mood. The government shutdown has finally come to an end after more than two weeks of political brinkmanship on Capitol Hill, a US default has been averted, and the disruption caused by the both of these events has almost certainly ensured that the Fed won’t taper until at least December, but probably towards the end of the first quarter of 2014.
This is hardly ideal for the long term health of the markets as it simply means that the bubble, created as a result of the Fed’s ultra-loose monetary policy, is going to continue to inflate for a few more months. If the Fed doesn’t handle the job of deflating this bubble carefully, as part of its exit strategy from its asset purchase program, we could see a small crash in the stock market next year that would be devastating to confidence at a time when the global economy is still in recovery mode.
Japanese exporters are continuing to benefit from the weakness in the yen, that has been created over the last 12 months following the introduction of the Bank of Japan’s quantitative easing program, with exports rising 11.5% in September, compared to the same month last year. However, exports didn’t rise quite as much as we though they would, while imports rose more due to higher fuel costs, leading to a larger trade deficit than we had expected for September.
The economic calendar for the rest of the day is looking a little thin. The only other notable release will come from the US later on in the day, in the form of the existing home sales for September, which are expected to fall slightly to 5.37 million. The rest of the week would ordinarily been relatively quiet, in terms of economic data, however with many releases having been delayed in recent weeks due to the government shutdown, there is more than normal to keep an eye out for.
For example, we have the US jobs report, which was originally scheduled for release on 4 October, being released tomorrow, while the retail sales figure will probably be released later this week, although this hasn’t been confirmed yet.
With investors no longer distracted by the prospect of a US default and a government shutdown, corporate earnings season should start to have more of a bearing on the markets. So far, it has been relatively overshadowed, which is probably a good thing given that results haven’t necessarily been that great.
Revenues are still not growing at a fantastic pace and even earnings growth, which hasn’t been too bad over the last year or so, is struggling a little, with companies no longer able to cover up their disappointing sales with efficiency savings and mass lay-offs.
Ahead of the open we expect to see the FTSE up 28 points, the CAC up 6 points and the DAX up 13 points.
James Hughes discusses the implications of the US government shutdown on tapering forecasts and the revised schedule for economic data releases.
[B]Investors cautious ahead of September jobs report[/B]
Today’s UK opening call provides an update on:
• Traders cautious ahead of September jobs report;
• Rally to last as long as the Fed provides liquidity;
• Are September figures actually important?
• Earnings season continues with ARM Holdings and United Technologies.
European indices are expected to open relatively flat on Tuesday, as investors continue to act with caution ahead of the release of September’s jobs report, which is scheduled to be released this afternoon.
The jobs report is usually released by the Labour Department on the first Friday of each month, but the government shutdown which started on the 1st of the month and only ended last Wednesday has so far prevented the data being released. Now that the data has been collected, we should get an idea of how the labour market performed in September, including how many jobs were added and whether there was any change in the unemployment rate.
These figures are monitored very closely every month and can create big moves in the markets, which is why we tend to see investors sitting on the sidelines in the days leading up to the release. This is even more the case at the moment. As well as providing insight into how the economy is performing, these figures can also be used to determine when the Fed will begin scaling back its asset purchases, from the current pace of $85 billion per month.
The latter is all investors are concerned about at the moment, as the Fed’s liquidity injections into the financial system are the main reason why the S&P, Dow and DAX are at all time highs. When the Fed pulls the plug, the rally is over. We know that these figures play a big part in the Fed’s decision making process every month, which is why people use these to predict the beginning of the end for the bull run.
Clearly, other things are also going to play a part in the Fed’s decision making process, such as consumer and business confidence, budget talks in December, the potential for another government shutdown in January, the debt ceiling, which will be hit again in February, not to mention the potential for talks to break down with Syria or Iran and things to escalate in the middle east. It’s because of these risks, particularly the budget and the debt ceiling, that I don’t see the Fed tapering this year, regardless of the data.
It will be interesting to see how much of an impact these figures have. Some investors will argue that the impact of the government shutdown and the debt ceiling fiasco makes these September figures far less useful. Clearly, the reaction of investors over the last 24 hours suggests that they’re still seen as important, but you can certainly understand why they’re not necessarily as important as October’s figure for example. While I still expect the release to have a significant impact on the market, I would also take them with a pinch of salt, as a lot has changed since then and the figures in the final quarter of the year will be much more important, in my opinion.
There is very little else due to be released on Tuesday, in terms of economic data. The UK public sector net borrowing figure will be released at 9.30 and is expected to fall to £10.4 billion, from £11.45 billion last month.
Corporate earnings season is well underway now and that is also going to attract a lot of attention. There’s more S&P 500 companies reporting earnings this week than any other so it’s certainly worth keeping an eye on how they’re performing as it could easily have an impact on investor sentiment. In the UK, we have earnings from ARM Holdings, while in the US, United Technologies are scheduled to report on the third quarter.
Ahead of the open we expect to see the FTSE flat, the CAC down 2 points and the DAX down 4 points.
0:10 Market indecision ahead of jobs report
1:21 FOMC tapering link lessened after shutdown
2:51 Chinese house prices rise above expectations
3:39 MPC member highlights flexibility of forward guidance
Today’s US opening call provides an update on:
[ul]
[li]Traders remain on the sidelines ahead of the US jobs report;
[/li][li]Report unlikely to have major impact on Fed decision;
[/li][li]Earnings season gets into full swing tomorrow;
[/li][li]Currency and commodity markets also flat ahead of data.
[/li][/ul]
European indices, like US index futures, are trading relatively flat on Tuesday, ahead of the late release of September’s US jobs report.
The jobs report itself is probably not going to have a huge impact on whether the Fed tapers or not at the meeting in October, or even December for that matter. However, investors are clearly treating it with an element of caution, as seen by the lack of movement in the markets so far this week.
The main reason why I believe it won’t have a major impact is because it doesn’t take into consideration how the economy was impacted by the government shutdown and the US almost hitting the debt ceiling. The direct impact of the latter, and to an extent, the former, may be minimal, but the impact on business and consumer confidence may take a couple of months to show. And this is important.
That said, the report is clearly important to investors, primarily because they want to see if the US economy was making progress in the lead up to the fiasco on Capitol Hill. The last jobs report, released at the start of September, was very disappointing, with the number of jobs added falling short of expectations and previous figures being revised lower.
On top of this, the unemployment rate fell to 7.3%, driven again by a drop in the participation rate, rather than real job growth. If we get a similarly disappointing report on this occasion, we can kiss goodbye to tapering in December, something I’m already convinced won’t happen anyway.
The jobs report really is driving markets today, with little else to focus on. Corporate earnings season is getting into full swing this week, with more companies from the S&P 500 reporting than any other week, although today is actually pretty quiet. Things will pick up here over the final few days of the week, but as far as today is concerned, investors are mostly focused on the jobs report.
Other markets are responding in much the same way to equities in the lead up to the release. The US dollar index is trading pretty much flat on the day, which is hardly a surprise, and has traded in a very small range. We’re not seeing much movement in any of the majors so far overnight. Even the crosses, such as EURGBP are trading in a tight range and close to its opening price. This will probably change once the jobs report is released though.
Gold is reacting in much the same way, as is oil. Both of these are priced in dollars, so any movement can impact the price. While no movement in the dollar can contribute to the lack of movement in these, it’s not entirely responsible.
Take Gold for example, a lot of this price action has been driven by the Federal Reserve. Gold is seen as a natural hedge against inflation, which is one of the risks associated with the Fed’s ultra-loose monetary policy. Therefore, any sign that the Fed is unlikely to taper this year should provide a boost to Gold. Hence why we’re seeing little movement in the price this morning.
Ahead of the open we expect to see the S&P down 1 point, the Dow down 4 points and the NASDAQ up 3 points.
We’ve been made to wait for it, but the September US jobs report didn’t disappoint, with the headline non-farm payrolls figure falling well short of expectations at 148,000. We did see a small upward revision to the August figure, but based on the reaction in the markets, this was no compensation for the poor September figure.
If there was any question about whether the Fed would taper later this month, this has surely put an end to it. Most people had already accepted that it would not happen, but now the earliest date we can possibly be looking at is December. And even that is too early as far as I’m concerned.
One of the most concerning things in all of this is that companies were not confident enough in the economy to hire new staff before the government shutdown and the US almost hit the debt ceiling. Imagine what the figures will be like in October and even November in December, given that crisis was only just averted and the can kicked down the road by only a few months. This does not bode well for the US.
This explains why we saw so much selling of the dollar and buying of Gold immediately following the release. A lack of tapering, which to an extent had previously been priced in, leads to further dollar weakness, something that I expect to continue in the coming months.
Gold, which is seen as a hedge against inflation, also benefitted greatly from the release. The precious metal broke back above $1,300 last week and I see no reason why it can’t reach its previous highs, hit at the end of August, around $1,433 in coming months .
The only real surprise today came around the unemployment rate, which fell despite fewer jobs being added, than expected, and the participation rate remaining at the same level as last month. I expect this to rise in the coming months, with revisions to this month’s figure and companies taking on fewer people, taking its toll.
Chief Market Analyst James Hughes discusses the implications of yesterday’s US non-farm payroll figure and bank write downs data out of China.
[B]Fears over Chinese banks drive markets lower[/B]
Today’s US opening call provides an update on:
[ul]
[li]Fears over Chinese banks drive markets lower;
[/li][li]Corporate earnings in focus on Wednesday;
[/li][li]Eurozone consumer confidence expected to improve again;
[/li][li]BoE minutes show upward revision to growth forecasts.
[/li][/ul]
European indices are trading lower on Wednesday, following reports over night that the number of bad loans being written off by China’s largest banks have tripled.
This has reignited fears over China’s shadow banking system and whether the People’s Bank of China will be forced to raise interest rates in order reign in it. Earlier this year we saw a significant spike in lending rates, which saw some shadow banks lending at more than 20%.
If we do see a tightening of monetary policy from the PBOC, it could choke off the recovery being seen in the world’s second largest economy, which in turn would impact growth globally. Given that the global recovery is still fragile, with the US repeatedly shooting itself in the foot and the eurozone constantly on the verge of another crisis, investors are very concerned about what kind of an impact this latest Chinese issue could have.
Over in the US we’re seeing index futures also trading lower this morning, paring yesterday’s gains which came following the release of the US jobs report. Further proof that the US economy isn’t performing as well as the Fed had hoped has helped propel markets higher over the last month, as this only reduces the probability that the Fed will taper later this year.
This afternoon, there’s very little economic data being released from the US, so attention is likely to remain on corporate earnings season. There are a number of major companies reporting earnings on Wednesday, which could provide key insight into how the economy performed in the third quarter, as well as how it is expected to perform in the current one. Among those reporting we have Caterpillar, Boeing and AT&T.
In the eurozone, it’s been relatively quiet so far. There’s a number of PMIs to look forward to tomorrow morning, but today all we have is the consumer confidence figure for October. We’re expecting a ninth consecutive improvement here, with the figure rising to -14.4. This is still in negative territory, which shows consumers remain pessimistic, but the fact that we’re seeing a consistent improvement must be a positive thing.
The minutes from the Bank of England didn’t provide us with any information we didn’t already know. The bank upgraded its growth forecasts for the UK this year, which is no surprise given the improvements across the board in the economic data. The improvement in the data and the unemployment rate, has prompted concerns about interest rates, with the BoE previously stating that rate hikes wouldn’t be discussed until unemployment falls to 7%.
The market has taken this to mean that rates will be hiked at this stage, making the BoEs three year guideline irrelevant. Policy makers have tried to ease concerns over this by claiming that rates will only be discussed at this level but it looks as though the forward guidance will have to be modified in the future if investors, consumers and businesses are going to accept it.
Ahead of the open we expect to see the S&P down 8 points, the Dow down 72 points and the NASDAQ down 21 points.
[B]Markets look higher on Chinese data and an unlikely 2013 taper[/B]
Today’s UK opening call provides an update on:
• Traders continue to take the lead from Tuesday’s jobs data
• FOMC unlikely to taper until March 2014 at the earliest
• Spain pushes out of recession in Q3
• Chinese HSBC manufacturing PMI shows fastest expansion in seven months
European and US futures point towards a likely resumption of the positive sentiment seen throughout this week and in particular on Tuesday. Yesterday’s breather appears to be just that as a lowered likeliness of tapering is accompanied by a strong Chinese manufacturing PMI figure overnight.
The markets are clearly still within a bad is good scenario with regards to many of the economic releases, as seen by the buoyancy of the indices off the back of the largely disappointing jobs report out of the US. The sharp decline in the non-farm payroll to a six month low, was only counteracted somewhat by the reduction in the headline rate. However, with a participation rate remaining at a 35 year low, there is no wonder that many perceive the current employment picture as far from impressive. However, with the association between a weak jobs market and the inability of the FOMC to begin tapering, it is no wonder that we have seen the likes of the S&P500 reach an all-time high this week.
By now we know that we are almost certain to not see a taper next week when the FOMC reconvene to discuss when to begin trimming back on the current $85 billion monthly asset purchase scheme. The unknown economic impact of the 16 day government shutdown for many is likely to be reason enough for the ever cautious Fed to hold off on stimulus reduction. However, it is the ‘solution’ reached by those within congress which is most alarming and provides a clearer picture. The decision to push both the debt ceiling and budget talks back into two seperate deadlines in January and February 2014 make for almost certain deadlock and brinkmanship in just a few months. Thus given the unknown conclusion of these talks, we will be very unlikely to see the Fed taper prior to the notably dovish Janet Yellen takes up the chair position.
Add to this a jobs market where poor September employment figures are almost certain to be followed by a similarly disappointing October release and the picture becomes very clear. The imposition of the 16 day shutdown is likely to provide significant shifts in the market where many will have lost their jobs, albeit possibly temporary or part time. Thus there is unlikely to be a single decent figure until we get to the November report, due in December, which is the month of the last 2013 decision. The overall effect of all this is to feed into the continued feeling that tapering is still a long way off and thus the easy money scenario seems likely to play out for some time yet in the US.
Yesterday saw the Spanish central bank announce that the beleageured nation had finally pushed out of recession when the country posted 0.1% growth in Q3, in line with previous expectations. This has provided a boost to the markets, in a sign that the worst is truly over for the eurozone after a period of around three years of crisis. Representing the fourth largest economy within the eurozone, this is a notable coup and marks a turning point for many given the previous expectations that the country would need a bailout.
Overnight, the release of the Chinese HSBC manufacturing PMI figure made for easy reading as the notable recovery from the much publicised slowdown in the region appears to be gathering pace. The manufacturing sector represents the driving element behind the country’s success and thus the ability of this sector to perform and grow is key to both regional and global growth. The rise to 50.9 in this measure is significant owing to the focus upon those mid to small sized businesses which have often found conditions a little more challenging than the larger, state backed businesses that the official figure measures. However, whilst this does represent the fastest expansion in the sector for Seven months, it is clear that the really strong rebound hoped for by many remains somewhat elusive.
Looking ahead, the markets are awaiting the eurozone PMI data this morning, where the expectations point towards strong PMI growth in both Germany and France. However, the picture is a little less clear when taking into account the eurozone, which is expected to fall short on the manufacturing figure this month after a strong recent run. Keep an eye out for the French manufacturing PMI release, where there is a possibility it could push back into expansion for the first since January 2012.
European markets are expected to open higher, with the CAC +23, DAX +38 and the FTSE100 +29 points.