Intraday Market Thoughts Archives

A six week debt ceiling extension was all it took to send US stocks to the best day in 9 months. Yen crosses also made gains but FX was more cautious than the stock market. There is no market-moving data on the schedule in Asia. 

Republicans floated a plan to raise the debt ceiling until Nov 22 in exchange for 'negotiations' on long term spending and rules that will ban accounting tricks to skirt future debt ceilings.

The outsized equity reaction hides some clear concerns. First the government shutdown has not been addressed at all and Harry Reid said there will be no negotiations until it's reopened. Second, Democrats have yet to formally respond and they will surely be looking for more.

Headline risks will be extremely high in the day ahead.

The reaction to initial jobless claims was instructive to what the next few weeks may look like. The headlines were soft but skews in the data, including from the shutdown made the numbers unreliable. USDJPY dropped then quickly rebounded to a session high as traders took a second look. Yesterday's FOMC minutes were a similar headfake and make us wonder - should we be fading all moves on US data until the shutdown skew is gone?

One other thing stood out in today's trading: the Canadian dollar was wholly unable to rally on good news and underperformed AUD and NZD. That points to more problems for the loonie. Meanwhile, the S&P 500 posted a classing bullish morning star pattern and AUD/JPY continued send positive signals.

The FOMC minutes revealed what most marketwatchers already knew but the headlines were an excuse to squeeze dollar shorts. On the day, the Australian dollar was the top performer while the pound lagged. Aussie jobs data is up next.

The headline grabber from the Minutes was a line that most Fed members believed it would be appropriate to begin the taper this year and wind it down in mid-2013. Another headline was that the decision was a close call.

The market reaction was to buy the dollar on the timeline because most economists are now leaning toward January as the first taper date. EUR/USD fell below 1.3500, USD/JPY rose above 97.50 and cable dropped to 1.5920, capping a miserable day for the pound.

The movers reversed soon after because the content of the minutes were old news. Bernanke said in the post-Fed press conference that the timeline was intact and several Fed members said it was a close call. More importantly, the government shutdown and debt ceiling are gamechangers and will certainly alter the Fed's timeline to 2014 if they continue.

Another event on the day was small ratings agency DBRS putting the US rating under review. The market didn't react but the move foreshadows a similar possible decision from other, larger agencies. In particularly Fitch, which has signalled it's watching the debt ceiling closely. Watch out for a creditwatch warning from them in Thursday or Friday; it would be a signal to sell USD/JPY.

Finally, Yellen was introduced as the Fed nominee. He speech mostly lacked meaningful content but she did say the Fed 'must have vigorous debate, then unite behind response.' The nod to unity suggests the Yellen Fed will tolerate less public dissent.

Up later, Draghi speaks at 2200 GMT. He's unlikely to make waves outside European hours.The highlight is at 0030 GMT when the October Australian jobs report is out. The consensus is for a rosy +15K with unemployment unchanged at 5.8%. Aussie has been searching for direction this week and this report is likely to make a lasting impression.  

Over the last 10 years, October has been the worst performing month for the US dollar index, with 2008 and 2005 as the only exceptions–October 2008 was the great deleveraging and October 2005 culminated with large USD repatriation flows resulting from the Bush Home Investment Act. So will this month break with tradition? More chart & analysis

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The S&P 500 dropped to a four-week low on the continued deadlock in Washington. The FX market was surprisingly indifferent and Australian dollar was the best performer while CAD lagged. Up later are the BOJ minutes and Japanese machine tool orders.

The day was filled with political rhetoric but few signs of progress. The Senate will try to push through a clean debt ceiling hike later on Tuesday but Republicans will almost assuredly vote against it. Obama continued to say he will not negotiate on the budget or debt ceiling while Boehner insisted he only wants to negotiate.

The debt market is beginning to squirm. A 4-week T-bill sale was very weak and yields on the Oct 31 maturity moved up 12 basis points on fears the US won't pay. It's the first tangible sign of bond market worries.

Some Republicans are pushing the idea of prioritizing payments. That would help the bond market but would send the economy into recession if prolonged. A debt downgrade from Fitch is also an increasing possibility while Moody's has brushed off any risk to the US rating.

The stock market fell for the second day, taking out the long-term trendline from Nov 2011. The 100-dma, the Oct lows and the 61.8% retracement of the Sept rally also broke.

The market is finding it difficult to sell the US dollar because of its safe-haven status. Instead, economically-linked CAD is under pressure. In addition, Canadian trade data was soft. Unfortunately, US trade balance numbers were delayed due to the shutdown.

Minor economic data was released on consumer sentiment from IBD/TIPP and Gallop. Both showed dramatic declines in consumer confidence. That's probably an expression of frustration with Washington rather than chances in spending habits but it shows how frustrated the public is.

Looking ahead, USD/JPY made gains earlier on Japanese current account figures. The focus will remain on Japan with the BOJ minutes for the Sept 4-5 meeting at 2350 GMT and machine tool orders at 0600 GMT. However, the market will likely remain focused on the latest from Washington.

Back in April, I wrote a letter to the Financial Times “It is premature to claim the end of the yen's safe haven”  arguing against  Axel Merk's statement that the yen no longer served as a safe haven during volatile markets. Not only I proved the yen rose during 2 clear episodes of falling equities in February and April but it continues tp do so as equities hesitate on US policy paralysis. This brings back the old positive relationship between bond yields and the yen. Those wondering about treasuries' rising values (and falling yields) despite the ongoing shutdown ought to consider the implications of lost salaries to over 500,000 govt worker and the consequences for consumer demand.

The White House warmed up to a short-term deal as a solution to the stalemate remains elusive and USD/JPY broke a key level. The yen was the top performer while USD and CAD lagged. China returns from holiday and Japan releases current account data later.

A rumor of a 6 month continuing resolution deal boosted the US dollar early in US trading but it was a false alarm. We stress that it's extremely unlikely any deal will be leaked or rumored before it hits the mainstream media. Both parties employ departments to spin news and the race to claim victory in any battle means a rush to make announcements.

The pop in USD / JPY sprang from support near the late August low of 96.80. Despite the strong bounce, a soft close in stocks led to a breakdown and the pair continued lower to briefly break the 200 dma at 96.65. It was the first break of the key moving average since November and points to further trouble ahead.

The tone in Washington is not hopeful and neither side is giving ground. The debt ceiling is now tied to a budget deal and a solution to either is unlikely until at least Friday. Even when a deal comes it could be a disappointment. The White House opened the door to an extension of as little as six-weeks. We struggle to see how that term is enough to forge any kind of lasting deal and the uncertainty will continue to weigh on sentiment.

In the short-term, the market will be focused on the re-opening of Chinese markets after a week of holidays. The World Bank cuts its China forecast Monday and traders will be eager to react to the stalemate in Washington.

Also on the schedule, at 2350 GMT, Japan releases current account data and expected to show a 520 billion surplus. At 0045 GMT, the focus turns to China and the HSBC/Markit Services PMI. The prior reading was 52.8.

Spain's IBEX-35 breaks above its 200-WMA for the first time in 5 years and is up 20% year to date. Will it hit 10,000? Full chart & analysis

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