Key news
- The US congressional super committee announced that it has failed to reach an agreement on budget savings underscoring the political gridlock in the US.
- Standard & Poor’s and Moody’s announce that this will have no imminent impact on their US rating. However, a downgrade from Fitch is possible.
- The failure by the super committee to reach an agreement was expected and there has been little market impact.
Markets Overnight
The US congressional committee (super committee) responsible for striking a deficit cutting deal yesterday after market close announced that it would not be able to reach an agreement. The legally required target for the negotiations was USD1,200bn in budget savings over a 10-year period. Without a political agreement the targeted budget savings will now be reached by across-the-board spending cuts starting from 2013. The failure to reach an agreement underscores that it will be difficult to tackle the public debt issue until after the 2012 presidential election and of more imminent concern that it might also be difficult to reach an agreement on the most important part of President Obama’s job bill before year-end. The most important parts are extension for 2012 of payroll tax cuts and jobless benefits for people in longer-term unemployment.
After the announcement Standard & Poor’s said the failure to reach an agreement would not affect its US sovereign debt rating as the political gridlock was already reflected in its downgrade to AA+ in August. Moody's said it also planned no change to its US sovereign rating (Aaa" with a negative outlook). However, Fitch yesterday warned that a failure to reach an agreement "would likely result in a negative rating action", which it would decide upon by the end of November (Fitch’s rating is AAA with “stable outlook”).
The failure by the super committee to reach an agreement was no surprise. Together with continued concern about the European debt crisis it added to the negative sentiment in financial markets, but there has been little impact on financial markets after the announcement. The US stock market closed markedly lower yesterday with S&P 500 down 1.9%. Asian stock markets are mostly lower this morning, largely catching up with the negative development in the US and Europe yesterday. US stock futures are slightly higher in Asian trade and most Asian stock markets are off earlier lows.
In the US bond market the yield curve has steepened slightly since market close in Europe yesterday with 2-year yields down 2bp and 10-year yields up 2bp. The auction of 2-year treasury notes yesterday was extraordinarily strong. In the European bond market 10-year Spanish bond yields increased by more than 15bp to 6.51% despite the relatively clear election result in Spain. The FX market has been largely range trading overnight with no significant movements in the major crosses. Both EUR/USD and USD/JPY are trading largely unchanged this morning.
Global Daily
Focus today
will continue to be on the development in the European bond market. Otherwise a relatively light calendar with as main focus the release of the FOMC-minutes this evening. While data in the US remain encouraging it will be interesting to see whether the doves in the FOMC are turning more dovish on the back of the increasing stress in the financial markets. Euro area consumer confidence and revised Q3 GDP in the US will also be released today.
Fixed income markets: Spanish bond yields rose yesterday after PM-elect Mariano Rajoy told Spaniards to brace for difficult times as work starts on winding down the eurozone’s third-largest deficit. We believe pressure will remain on Spain due to weak economic performance and lots of challenges ahead. On the issuance side today, the Netherlands will print up to EUR3bn in the January 14 maturity.
FX markets: Focus did turn to the US yesterday, but the failure of the super committee did not lead to dollar selling, as rating agencies stated that it will not affect the US credit rating and as European sovereign spreads widened further. EUR/USD traded below 1.35 again yesterday, but the big euro sell-off appears to have slowed for now as EUR/USD struggles to break below strong technical support around 1.34. Stretched positioning (investors are very short euro) means that it is likely to take new negative shocks to fuel a further sell-off. Use potential relief spikes in EUR/USD to hedge downside risks. The stalled euro sell-off has also led to fresh buying in EUR/GBP. As long as EUR/USD remains fairly stable, we see potential for a temporary break above 0.87.
Scandi Daily
Norway
Q3 GDP will be released today. Based on recent data we predict growth in mainland (non-oil) output of 0.7% q/q. While consumption growth seems to have been relatively moderate in Q3, there will probably be a substantial positive contribution from net exports. All in all, mainland growth will be pretty much on trend in Q3, but given the growing global uncertainty this is unlikely to be enough for the market to stop discounting rate cuts.
In Sweden the labour market indicators suggest the a turnaround is nearing, e.g. in the form of rising layoffs. However, historical data from SCB have so far been stable or even strong. According to the seasonal pattern we should see a slight decline in unemployment in October, which is what we have assumed in our 6.6% forecast.