US Austerity Still a Long Ways Away, New Trades

Risk aversion dominated on continued European concerns and the likely failure of US deficit-cutting efforts. JPY, USD and EUR were generally unchanged against each other but handily outperformed the rest of the pack, with AUD as a notable laggard. The lone event on the calendar is RBNZ inflation expectations. 2 new trades on Gold & EURUSD.

Sentiment was dragged lower as it appears the US deficit supercommittee is well on its way to failure. The 12-member panel hoped to find cuts of $1.2 trillion over 10 years and its failure will trigger across-the-board cuts of the same amount beginning in 2013.

The question now is whether politicians will rescind the automatic budget cuts, something Moodys said would probably cause a downgrade. If not, the automatic cuts (71% tied to discretionary spending) would be a hard hit to the economy.

To us, the market reaction to this news seems overdone. The hopes for a grand bargain were always fanciful and all a failure means is that the dealing will drag on for another year and the stakes in the 2012 election will be higher.

The Treasury market remains unconcerned; long-term yields fell 5 basis points on the day.

Risk aversion peaked at the European close but improvements afterward were minimal. At the same time, EUR shot higher for no clear reason. The euro outperformance could be a sign of an involuntary unwind or a pressing need for euro liquidity.

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The S&P 500 bounced late in US trading but still closed below the 55dma for the first time since early Oct losing 1.9% to 1193.

Economic data was low-tier as US existing home sales for Oct climbed to 4.97m compared to the 4.80m expected. Sept Canadian wholesale sales disappointed at +0.3% versus the +0.6% consensus.

The Feds Lockhart said Q4 GDP could exceed 3% and that there is a very high bar for QE3, which shouldnt be implemented unless the US is in recession.

The MF Global trustee announced that the client account shortfall may reach $1.2, double the previous estimate and raising the possibility that clients may never recover 100% of their funds.

Asia-Pacific Preview

At 0200 GMT, the RBNZ will release the fourth quarter survey of inflation expectations. Japanese fin min Azumi will also hold a news conference after a cabinet meeting. The yen is likely on the agenda.