Last (%ch)
S&P Fut: 1249.2 (-.15%) O:1255 H:1259 L:1246.8
Fri S&P: 1253.1 (-.6%) O:1260.8 H:1260.8 L:1238.9
UST yld (12hr bps ch): 2y 0.22% (0.00) 10y 2.06% (0.03) 30y 3.12% (-0.03)
A fairly subdued start to the week price action wise, with G10 FX trading with a slight USD bid tone but well within recent day’s ranges (EURUSD and AUDSUD both sliding ~70pips off Wellington highs, now 1.3765 and 1.0360 respectively) and Asian equities in the red but only slightly (S-shares the underperformer at -0.9% as Premier Wen was hawkish on property prices in a speech – more below, Hang Seng least worse at -0.25%). This all comes post news last night that Greek politicians have agreed to form a unity government after the opposition agreed to back the austerity measures and bailout plans. The new PM has not yet been announced however. The other news story of note are reports that the G20 might schedule another meeting before Christmas.
In NJA FX, with most South Asian markets (INR, MYR, PHP, SGD) closed for a local holiday things have also been quiet. CNY is thus the focus ahead of this week’s slew of data (CPI, IP, RS, FAI, money and credit). A slightly higher CNY fix of 6.3212 (+47pips) didn’t deter the offshore market, with the NDF curve flattening by 150 pips and 1y NDFs down 130 pips as we start to see the first meaningful response to the sustained trend of lower fixes.
PIC: Our proprietary FX positioning score (which controls for rate differentials on the latest IMM data) suggests that overall USD positioning, which switched to USD longs eight weeks ago, remains close to max long USD. Thanks to Robin Brooks (GS Research) for this.
China Snap
Spot Fix Today / Yesterday / 1 Week Ago
6.3212 / 6.3165 / 6.3233
Historical Spot Fixes / Fwd Now / Implied % Move / Implied Y’day
1M: 6.3586 / 6.34 / -0.3% / -0.38%
3M: 6.4305 / 6.3475 / -0.41% / -0.58%
6M: 6.5003 / 6.349 / -0.44% / -0.66%
1Y: 6.6692 / 6.351 / -0.47% / -0.75% /
Historical fix indicates where CNY fixed in the past. 3M shows where USDCNY fixed 3M ago.
Greece to form coalition government (FT)
Greece’s two largest parties decided to form a united government in order to start implementing a €130 bail-out plan before holding elections. George Papandreou and Antonis Samaras, leader of the opposition conservatives, reached the deal during a 90-minute meeting with Greece’s president, Carolos Papoulias. Papandreou will stand down as PM but the two leaders have put off naming the new leader after failing to reach an agreement on an appropriate candidate. The front runners are Lucas Papdemos, a former president of the ECB, and Stavros Dimas, a former European Union commissioner who worked at the World Bank. No date has been set for the election, however Papandreou has said it should be held early next year.
G20 seeks more talks on Eurozone crisis (FT)
The FT reports that the G20 is planning to meet again, potentially before Christmas, in order to try orchestrate a deal to provide an international ring-fence around Greece. The FT’s sources said talks at the summit had been close to an agreement. According to the source, negotiations of the three-part package of measures broke down because one element was vetoed by the German Bundesbank. If reassurance can be given to the German central bank then a G20 finance minister’s meeting will be called and held this month in France or in Mexico in December. The proposed plan to hold another G20 meeting before the scheduled February one, was endorsed by Canada’s finance minister, who said, “The consensus view is that we cannot wait that long [until February]. We do need to restore market confidence.”
Wen Pledges Property-Tightening Resolve (WSJ)
Premier Wen has said that China’s government must resolutely carry out its property-tightening measures with the aim of returning prices to “reasonable levels,” He added “I will especially stress that there will not be the slightest wavering in China’s property-tightening measures—our target is for prices to return to reasonable levels. The property-tightening measures have been ongoing for two years, and some major policies have already been rolled out, especially this year’s construction of 10 million public housing units, which will temper pressure on prices, and slow demand for private housing.
Greek banks in €6.4bn bond switch (FT)
€6.4bn of government-guaranteed bonds have been issued by three of Greece’s biggest banks which will likely to used as security to obtain financing from central banks the FT reports. Pireas, Alpha Bank and EFG issued the floating rate notes which will most likely be used as part of a new €30bn liquidity facility created for Greek banks earlier in the year. This is the first Greek government-guaranteed bank bond issuance since the summer as Greek banks have previously not made full use of the ability to issue an additional €30bn of government-guaranteed bonds -a decision thought to be because the ECB was not prepared to accept them as collateral. However, Friday’s issuance suggests a softening of that stance by the ECB.
The ECB and G-20 Meetings – Implications for Italy and the Euro Area Markets (GS Research)
Here Huw Pill, Francesco Garzarelli and Peter Oppenheimer lay out their views post last week’s ECB and G20 meetings. They anticipate that Italy will continue to pursue its announced reform agenda. Votes of confidence have been attached to the legislative passage of a number of key elements of the reform programme, the first of which is scheduled in the week of November 14. Ahead of this, the main focus will be on a vote in the Lower House this Tuesday on the approval of last year’s audited budget accounts. Their central scenario is characterized by high volatility in local assets, but probably also a reduction in broader systemic risk (we have seen indications of this in the price action last week). Should positive breakthroughs eventually occur (e.g., an ambitious fiscal package in Italy supported by a larger majority), they suspect that the reduction in fiscal risk premium in government bonds will be partly offset by investors’ attempt to reduce exposures in the rally, particularly in intermediate to longer-dated maturities where the price discount is currently large.
Ahead This Week (GS Research)
This coming week brings IP for some key Eurozone countries, which is expected to show more softness. The weakness of activity and the deteriorating outlook caused the ECB to cut rates by 25bps last Thursday, and our econs now expect a move of a similar magnitude in December. With all the negativity surrounding the European situation, it is easy to overlook more optimistic information – our econs expect confirmation that China’s inflation is coming down meaningfully with headline CPI for October to soften to 5.6% from 6.1% (consensus expects 5.4%). Central banks wise, we have Indonesia (we expect 25bps cut vs. cons for no change), BoE (no change as per cons), Korea (no change as per cons) and Malaysia (no change as per cons).
German Coalition Plans Income-Tax Cuts (WSJ)
Merkel’s ruling center-right coalition said it plans a package of income tax cuts worth €6bn for low and middle-wage earners which would be implemented in two steps ahead of the 2013 general elections. Merkel said yesterday “We have to strengthen the forces of economic growth in Europe and we want to do our part. But we also want to thank our citizens for the sacrifices they have had to make during the economic and financial crisis.” It is still uncertain whether the cuts will be implemented – Merkel face disapproval on the cuts from the center-left opposition in parliament and also from within her CDU party. Hubertus Heil, a leading member of the Social Democrat party said “If we see that tax cuts are being financed by new debt a legal challenge cannot be ruled out.”
PM faces twin tests on Europe (FT)
UK PM Cameron is today expected to face critics from the Labour party and also from some Tories regarding his willingness to increase Britain’s support for the IMF. Danny Alexander, Treasury chief secretary, said yesterday that the coalition could make available almost ?40bn of funding to the IMF without asking MPs for further consent (the IMF can currently call on the UK to provide up to ?29bn of funding and ?39bn is the maximum allowed for under a parliamentary vote passed in July). Ed Balls, shadow chancellor, has argued that Britain should withhold extra support for the IMF until there are guarantees that Eurozone countries including Germany are playing their full part in resolving the debt crisis.
Beijing Existing Home Sales Near 3 Year Low (Bloomberg)
Beijing’s existing home sales volumes in the past three months were close to the lowest level since the second half of 2008, China Business News reports today, citing Zhang Dawei, a researcher at Centaline Property Agency Ltd. The city’s October existing home sales were fewer than 10,000 units for seven consecutive months and the lowest in 34 months, according to the newspaper. Beijing sold 7,262 existing home units in October, 17% fewer than in September, according to the report.
IMM Data: JPY intervention boosts long USD positioning (GS Research)
This report shows positioning as of Tuesday, Nov. 1, and thus offers a somewhat out-of-date snapshot of positioning in a very eventful week, which ended on the Greek confidence vote and the G-20 summit in Cannes. This report shows that long USD positioning, which has been close to max long USD for two months, rose further this week following JPY intervention, which saw the one USD short position in this report – against JPY – scaled back sharply. Meanwhile, even with all the uncertainty surrounding Greece and the G-20 summit, USD long positioning was scaled back slightly against other currencies, notably against EUR but also cyclical FX such as AUD and CAD. As such, leaving aside the sharp move in JPY positioning which reflects intervention, this report has a slightly bullish tone, as long USD positioning has been slowly pulling back for some weeks now against cyclical currencies. Our proprietary positioning score suggests that overall USD positioning, which switched to USD longs eight weeks ago, remains close to max long USD. In terms of specifics in this release, our proprietary positioning score (which controls for rate differentials) suggests that overall long USD positioning registered a reading of 8.7 from 8.5 in the previous release. In terms of individual currencies, EUR short positioning fell somewhat this week (our score was -9.0 last week and is -8.2 this week). Short positions in cyclical FX also fell this week. Our AUD positioning score is now -4.8 versus -5.3 last week. For CAD our positioning score is -7.2 from -7.7 last week. Our aggregate USD long positioning score rose because JPY intervention scaled back the only USD short that now remains on our positioning score (our JPY positioning score fell to +1.7, down from +6.0).
Trade Update: Long HSCEI vs. SPX (GS Research)
On the open last night, Noah Weisberger and team put out a new reco in Chinese equities, specifically the HSCEI, relative to the S&P500 with a target of a +10% gain and a stop of a 5% decline. While Chinese growth has clearly slowed recently, they think HSCEI currently prices at about 8 times forward earnings, which is quite moderate, and so we think the market may be poised to continue to shift from the pricing in of hard landing scenarios to the pricing in of some policy-driven relief and reacceleration. They view this as a tactical trade on a specific macro theme, buoyed by the strong conviction that past underperformance is hard to square with both forward views and the current data set with the biggest risk to equity positions (both long and short) the still-fluid situation in Europe and the resulting market volatility. Click the link for the full rationale.
US Views: Still Sluggish (GS Research)
Following Friday’s increase of our Q4 GDP estimate to 2% from 1%, here Jan Hatzius lays out his views on the US economy. In short, it looks sluggish but stable for now. He thinks that growth will slow in early 2012 due to more fiscal restraint and the continuing issues in Europe. Our highlight of the piece is on inflation: “The slowdown in inflation over the past few months has caught our eye. The core CPI and PCE indexes for September were flat on the month, the first meaningful downside surprise since late 2010, and the ISM price indexes suggest that inflationary pressure was also subdued in October. We see room for a reversal of the upward pressure on core inflation from the short-term commodity pass-through and the increase in auto prices following the Japanese earthquake in March. The one factor that could go the other way is further upward pressure on actual and imputed housing rents in a tighter rental housing market. But even here the recent data look a bit softer, with a drop in rent/OER inflation in September, a drop in survey measures of “rental market tightness,” and an increase in the multifamily vacancy rate. All of these measures could be fluky on their own, but together they suggest that the inflation pickup is reversing.”
Anaemic exports across most of Asia, softness to last some time (GS Research)
Our October Asia MAP score shows that economic activity disappointed across most Asian economies. It remained negative at -0.9 in October, marginally better than the -1.3 in September. Overall, six out of the ten countries covered by us surprised on the downside Looking ahead, our econs expect activity to remain anaemic throughout Asia, although in China they expect a slight macro easing. Click the link for more.
Rates Thoughts for the Day (GS Sales and Trading)
GBP – look toward tomorrow’s ?900mm 30-year linker auction. After the significant recent underperformance of the 30y sector on the back of QE, will be interesting to watch how this auction will be received.
UST – overnight in TKY saw Tsys open to an early weekend safe haven unwind, with the curve as much as 0.5-4.5bps weaker in a bear steepening.
Goldman Sachs Global Investment Research
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