Generally speaking risk came off on Monday amid signs that U.S. government would close. Risk appetites appeared to return yesterday, perhaps on sell the rumor, buy the fact type of activity. Today investors seem to have lost conviction.
Asian shares were mostly higher, and this includes Hong Kong (+0.55%), which re-opened for the first time this week due to the Chinese holiday. The Nikkei was the main exception, shedding nearly 2.2%, apparently on profit-taking following Prime Minister Abe's affirmation of the retail sales tax and a supplemental budget, which a bit smaller than speculation, though discrepancy was over the corporate tax cut, which is yet to be decided.
The MSCI Emerging Market equity index is up marginally, while European bourses are trading heavily, with the Dow Jones Stoxx 600 off about 0.66%. Italy is the main exception in Europe. Growing confidence that there may be greater political stability in Italy after all is leading to an out-performance of Italian asset markets. A resolution to the current challenge could actually lead to a stable government through next year as well. Note that Italy assumes the rotating EU presidency in the second half of 2014. Separately, we note that Portugal's stock market is also advancing, with more than a 1.2% gain, helped by the sharp rally in Portugal Telecom was merging with Brazil's Oi. This underpinned this sector through Europe.
The U.S. dollar itself is mixed, but in line with how we saw the underling technicals: firmer against the dollar-bloc and weaker against the euro, sterling and yen. Early strength in the dollar against the latter has been reversed in the European morning. The weakness of the dollar-bloc currencies can be linked to macro-developments.
Although the Reserve Bank of Australia issued a neutral statement yesterday, today's economic reports illustrate why we continue to think it may come around and see more scope for another rate cut. There is a dramatic blow-out of Australia's trade balance. The August shortfall was twice the consensus at A$815 mln, and the July deficit was revised to show almost twice the deficit that was originally reported (A$1.375 bln from A$765 mln). Separately, building approvals, a volatile series, fell 4.7% in August. The consensus had expected a 0.5% decline. In July approval rose a revised 10.2% (from 10.8%).
The Canadian dollar has been weighed down the downward revision to the central bank's growth forecast (to 2.0-2.5%). The U.S. dollar is moving above its 20-day average (~CAD1.3026) for the first time in nearly a month. We continue to see near-term potential toward CAD1.0370-CAD1.0420.
More importantly for investors with Canadian dollar exposure, there appears to be a subtle but important regime change at the central bank under the new Governor Poloz and it became evident yesterday. Previously although minutes of the BOC meetings were not released and there are no votes reportedly among the 6-member governing board, statements and policy was announced by the Governor. This changed yesterday. The revisions to growth were announced by the Senior Deputy Governor and in what was also reportedly unprecedented, reporters were in "lock-up" for 90 minutes, which is what only apparently was done for the Governor. This means that going forward, the speeches by the Deputy Governors may be more important for insight into policy.
Italy's Letta gave an important, even if not rousing speech in Parliament and it will likely solidify his government. Berlusconi appears to overplayed his hand, when instructed the five cabinet ministers to resign over the weekend. Letta has rejected the resignations. Berlusconi is not trying to get ahead of the curve, by potentially supporting the government in confidence vote. A number (estimates range from 20-40) center-right Senators apparently are forming a new party and will support Letta and provide the basis for a more stable government through next year. This will give Letta a new mandate for the 2014 budget and electoral reform. The Senate is still reportedly scheduled to vote on Berlusconi's ban from public office at the end of the week.
The ECB meets today in Paris. It will most likely not change policy or its forward guidance. With soft inflation data and a still fragile and uneven recovery, Draghi is likely to continue to point to downside risks to growth. He will reaffirm the ECB stands ready to do more "if needed" and point to the relative stability (except at quarter-end) of the EONIA despite the reduction of excess liquidity.
In the UK, the construction PMI, like the manufacturing reading, remains at high levels even if off the August peak. The September construction PMI slipped to 58.9 from 59.1 and breaks the four-month improving streak. Sterling initially dipped on the news, but quickly recovered to new session highs, but still below yesterday's 9-month high of $1.6260.
The U.S. ADP jobs report is the most important economic data for the North American session. If the federal government remains closed, the BLS report will not be released on Friday. The ADP report does a fairly good job tracking the trends of the BLS data (and has been revised to do so). The bias is that on average this year is for the ADP to underestimate the actual (including revisions) private sector employment change by 16k. The Bloomberg consensus is for ADP's estimate to increase by 180k.