What happened overnight
– Slovakian coalition party says it will not support EFSF enhancement
– UK manufacturing production weaker than expected
– Sweden CPI below consensus forecast
The USD has regained some of its Columbus Day losses but still remains broadly weaker on net from Friday’s close. This morning, the CE3 currencies have lost ground, and EURUSD has retreated to 1.36 after trading to just shy of 1.37 Monday. AUDUSD has slipped back to 0.9907 lows after testing above parity again in Asia. Nervousness about today’s Slovakian vote on EFSF enhancement and a report of a delay in the scheduled Eurogroup meeting at the end of this week appear to be contributing to a less risk friendly environment overall. Equity markets in Europe are moderately lower across the board, while the S&P future is down 0.7% after Monday’s 3.4% rally. Italian bond yields are slightly higher, with the 10-year yield rising to 5.6%.
The SaS party, a coalition partner in the Slovakian government, has said it will abstain from today’s vote on EFSF enhancement. This makes ratification highly uncertain, even as negotiations continue into today’s vote which is expected to begin some time between 11:00 and 13:00 GMT. Failure to pass the legislation today could lead to a collapse in the government although its enhancements could still be ratified in a subsequent vote with opposition support. The situation remains highly fluid and uncertain heading into the event. A “no” vote today could deal a setback to the risk recovery of the past week, although many market participants would likely assume that legislation would ultimately pass with some delay, as was the case in the Slovenian parliament earlier this month.
UK manufacturing remained weak in August. Overall industrial production rose 0.2%mom in August, above the consensus forecast for a -0.2%mom fall, primarily driven by gains in the mining and oil sectors. Meanwhile, manufacturing production fell -0.3%mom. With negative revisions to July data, manufacturing has now been contracting for three months in a row. Even as QE2 has been already announced by the BoE, cyclical data in the UK remain important. Continued weakness going into 2012 is likely to spark expectations of a possible further extension of QE. In other data, BRC like-for-like sales rose 0.3%yoy in September after falling -0.6%yoy in August, better than the consensus forecast for a 0.9%yoy fall. The RICS house price index was unchanged at -23 in September versus the consensus expectation of a deterioration to -24. We remain bearish on sterling and favor positioning for Cable downside.
Swedish inflation printed a touch below consensus forecasts. Headline inflation moderated to 3.2%yoy from 3.4%yoy previously, below the 3.3%yoy expected. Core inflation moderated to 1.5%yoy from 1.6%yoy previously, in line with consensus forecasts. The deterioration in core Europe growth, especially Germany, bodes ill for the manufacturing intensive Swedish economy. Against this background, the ECB’s reluctance to spur euro area growth with interest rate cuts is negative for Sweden, in our view. We hold a one-month EURSEK topside seagull in our model derivatives portfolio as an expression of this view.
China’s central bank fixed USDCNY 103 pips lower to a new low of 6.3483. Reports that China’s domestic sovereign wealth fund, Huijing, is buying shares of the four-largest Chinese banks helped boost risk sentiment, although Shanghai’s market has continued to lag recovery elsewhere.
NAB business confidence bounced, but remained weak in September. The forward looking confidence index rose sharply from -9 in August to -2 in September as the more coincident business conditions index bounced to 2 from -3 in August.
Japan’s current account surplus surprised strong in August at ¥652.6bn, seasonally adjusted. This was still down from ¥752.5bn in July and the trade balance deteriorated to a deficit of ¥199.2bn, the largest in three months. With the trade balance weak, the current account impact on the yen depends on the extent to which Japanese investors repatriate rather than roll-over investment income.
New Zealand credit card spending grew 0.4%mom in September, less than expected. The consensus estimate was for 1.1%mom growth.
Malaysia industrial production jumped 2.6%mom in August, much stronger than expected. Although a 6.1%mom rise in mining accounted for much of the growth, manufacturing grew 2.1%mom after a 1.4%mom contraction in July. Much of the latter seems to be related to production for government spending programs.
Philippines exports fell 15.1%yoy in August, much weaker than the consensus forecast of a 6.1%yoy fall. This is driven by the 30.6%yoy fall in electronic exports. The weak manufacturing sector and GDP growth suggest that the Philippines central bank will likely keep the volatility of the PHP low.
Earnings watch
The US Q3 earnings season begins today, with the first Dow component company reporting today after the close. Correlations in Exhibit 1 below suggest the AUD, CAD, and NZD are most exposed to US equity market moves. Over the next four weeks, 320 companies from the S&P 500 comprising of 71% of the index by market cap will report their calendar quarter Q3 earnings. Our equity analysts are looking for the earnings beat ratio to be around 66%, the lowest level since Q1 2009 (see report here). They argue that, in this environment, a straight positive surprise may not be enough for a stock to rally – results need to be clearly solid on both the top and bottom lines. We think any earnings disappointment will encourage concerns that financial market stress has begun to spill from the sovereign and banking sectors to the real economy and could weigh on risk and growth sensitive currencies.
What to watch for today
EUR: EFSF final approval. The Slovakian Parliament is scheduled to vote on the EFSF today, with a vote expected some time after 11:00 GMT, possibly as late as 13:00 GMT. Slovakia is the last country to vote and given divisions within the coalition government, there is uncertainty whether the vote will be passed. Passage would enact the July EFSF expansion and would be viewed as good news, though in many ways markets have already moved beyond this round of EFSF enhancement and are looking for indications of new measures to support the larger peripheral borrowers.
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http://www.easyforexnews.net/wp-content/uploads/2011/10/document-804526540.pdf
Credit Suisse
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