The political rhetoric out of Washington escalated yesterday, sending a few tremors throughout markets as investors decided it was appropriate to hunt for safety in order protect against continued indecision on Capitol Hill. Dueling press conferences from Boehner and Obama caused the VIX to spike above 20%, while the S&P shed 1.23% to finish the day below its 100 day moving average as it was clear the two sides in Washington are still a fair ways off from striking a deal.
While markets have generally been a little on the complacent side in regards to the debt-ceiling debate and government shutdown thus far, it is apparent money markets are getting a bit nervous, with yields on one-month US treasury bills spiking to 0.3175% (almost a 100% increase) as investors are worried about the near-term prospects of short-term money market instruments backed by the full faith and credit of the United States. This risk-off atmosphere caused the Loonie to slide against the USD, while the AUDJPY pair, a barometer for the high-yield carry trade, continued to show weakness and closed near the lows of the day.
Late Tuesday afternoon the Wall Street Journal broke the news that Obama is set to announce Janet Yellen as the next head of the Federal Reserve today at 3:00pm EST, a move largely priced into markets after Larry Summers withdrew his name from the nomination earlier this year. The finalization of Yellen as the next Fed chief should give markets confidence that we will see a continuation of similar Fed policy after Bernanke leaves the post next year, which is crucial at a time when there is so much indecision on fiscal policy at the moment. Investor sentiment is somewhat more positive then where we finished yesterday, a combination of Yellen’s nomination and some buying opportunities after yesterday’s selloff; yields on one-month treasury bills have found some relief sliding down to 0.2375%, AUDJPY is up by 0.77% to make a run at the 92 level, and S&P futures are in the green. The Loonie remains under pressure against the USD despite some moderate risk appetite in markets this morning, as momentum for Loonie bears starts to build. Buying interest in USDCAD has pushed the pair through both the 50 and 100 day moving averages, with the Loonie negatively affected by Canada’s widening trade deficit and the weakness in Western Canadian Select compared to other international oil benchmarks like WTI and Brent. USDCAD is making its way into the high 1.03s, with continued risk aversion likely to weigh on the CAD and see the pair move up into the mid-1.04s to make a run at the high from September 9th. If we see an exhaustion of USDCAD buying, with the pair unable to vault into the 1.04s, downside support will come in at the daily low of 1.0350 and then the Tenkan Line at 1.0328.
The overnight session has seen European stocks trade with a positive tone, buoyed by dovish comments from the ECB’s Asmussen who said the central bank of the common-currency zone still has room to maneuver in terms of interest rates, while having a number of nonstandard measures available to it. The FTSE is struggling to move itself from the red, trading off earlier lows after industrial production in the UK fell by 1.2%, the most since January of this year, and well short of the median analyst forecast of 0.4% growth for August. While the surprise drop in output is a red flag for bullish momentum in the British economy, one data point does not derail the positive gains made prior to this point, therefore it will be key to watch for the Bank of England’s interest rate statement tomorrow to see how the BoE sees the economy developing in the near-term. The pound is off over a big figure against the USD after the release, pressured below the 1.6000 handle on the worse than expected production numbers.
The same tale of slumping industrial production was not a problem in Germany for the month of August, as the Economy Ministry in Berlin released its stats showing output rose by 1.4% from the previous month, outpacing the 1.1% drop that was posted in July. The better than expected production numbers are in contrast to the drop in factory orders that we saw yesterday, which eases some of the worry around manufacturing output, but continues to highlight the struggles the zone will see in regards to continuity of the recovery. The EUR is struggling to make headway against the broad USD strength seen this morning, back down into the low 1.35s, while the Dax is up by 0.13%.
Due out today at 2:00pm EST are the minutes from the FOMC meeting that was held back in September, and with this week (and the majority of last) being slow in terms of economic data south of the 49th parallel, these will most likely garner heavy attention from the markets. As mentioned yesterday, we think that any overt hawkishness will be a good opportunity to sell into the USD strength, as a drawn-out battle over the debt-ceiling increase and any subsequent harm to the markets will most likely push the Fed’s tapering timeline further back.
Looking ahead to tomorrow, the Bank of England will be deciding on the appropriate path of monetary policy for the British economy, with expectations that Mark Carney and the BoE will not stray from the current overnight rate of 0.5% and the £375 asset purchase facility. Given the recent foray into forward guidance from Carney, the main focus of tomorrow’s meeting will be the corresponding press release and if the language should indicate anything as to expectations for the British economy moving forward. While the BoE is expected to hold fire on any policy amendments, the recent economic data has increased confidence that the recovery is on firm ground, leading markets to believe the BoE might be forced to raise interest rates before the bank’s target of 2016. While it is probably too early for Carney to tinker with his forward guidance and the corresponding knock-out clauses for fear of damaging his credibility, any hawkish language from the Central Bank Governor on the strength of the recovery will support the pound, and give GBP longs a chance to see Cable make another run back into the 1.60s.
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