Investors are looking to add risk back to their portfolio in modest amounts this morning, viewing yesterday’s decline in equities as a buying opportunity. With the US government still shuttered, traders and investors are unwilling to push the market too heavy in either direction, looking for clues from Washington as to how the situation will resolve itself. There is growing speculation that there are now enough votes in the House to pass a clean CR and get the government opened, which puts Boehner in a bit of a tight spot from a bargaining standpoint as he still remains adamant the votes aren’t there. Should the moderate Republicans break from party lines and become more vocal about wanting to reopen the government and raise the debt-ceiling, it could severely damage Boehner’s credibility, and speed up the process in getting a clean bill to the floor.
The DXY seems to have stemmed its bleeding for now, edging closer to the 80 level, while the yield on the 10-year US treasury inches higher to 2.65%. The energy complex is garnering some bids this morning, with front-month WTI increasing by 0.53% to trade north of $103.50/barrel. Equity performance throughout the Asian session was positive, which helped USDJPY push itself above the 97 handle on yen weakness, while S&P equity futures are testing positive territory ahead of the opening bell in North America.
Checking in on Europe, the majority of equities indices across the Atlantic are trading in the red, unable to replicate the decent showing in Asia and the slight rebound in risk that is taking place. Trade numbers from Germany showed that the current account surplus increased by more than expected coming in with a seasonally adjusted reading of €15.6bn in the month of August, however both exports and imports grew by less than had been expected, taking some of the shine out of the better than expected print. Industrial orders for the Eurozone power house also disappointed to the downside, decreasing by 0.3% in August when the median analyst estimate called for a gain of 1.2%. The economic numbers from the backstop of the EZ highlight the how uneven the recovery in the region has been thus far, with the road ahead likely to remain bumpy. The German Dax is off 0.12%, while the EUR is slightly lower against the big dollar heading into the North American open, currently trading in the high 1.35s at the time of writing.
Heading into the North American open, the economic releases on the docket are CAD-centric, with both Housing Starts and Trade Balance figures both hitting the wires earlier this morning. After mounting somewhat of a comeback in early 2013, housing starts have been on the decline for the last few months, and expectations were that tighter lending conditions and increasing mortgage rates would see new housing activity remain flat in September. The print came in slightly stronger than expected at 194k, with the previous reading for July being revised up from 180k to 184k. The Loonie firmed to its highs of the session after the release, but the fact that the trend in housing starts remained close to the range its been locked in for the majority of this year, wasn’t enough to spur a sustained bout of Loonie buying.
In addition to housing sector activity, Trade Balance numbers for the month of August were also released this morning, with expectations the current account deficit would narrow slightly to 0.7bn. As evidenced by Bank of Canada Deputy Governor Tiff Macklem in a speech last week, exports for the Canadian economy remain sluggish, and will be a focal point in regards to the timeline for when the Bank of Canada may feel comfortable assessing an interest rate hike. After peaking in December 2011 exports have struggled to make any meaningful gains, slowed down by weaker than expected global demand and a relatively strong Canadian dollar. The numbers this morning echo the caution from the Bank of Canada, as the trade deficit increased to $1.3bn, after imports grew by a larger amount than expected while exports struggled to keep pace. The bright side of the report was that Canada’s trade surplus with the US increased from the previous month, as exports to the US reached their highest value since December of 2011. Although the export data to the US was encouraging, it’s hard to foresee a strong turnaround for Canadian exports in the short-term, as we’ll need to see a fairly well sustained upturn in the American economy along with confirmation of a bottoming in Chinese growth trajectory before we can be certain exports are on their way to carving out new highs. USDCAD saw offers lifted after the trade deficit in Canada grew by more than expected, however not enough to meaningfully drive the pair away from the level it closed yesterday at.
The big event on many traders economic calendars for tomorrow will be the release of the minutes from the last FOMC meeting. Despite many market participants anticipating the Fed would look to taper their monthly asset purchases, the Fed decided to hold fire and stay the course, and the minutes should provide some further insight into how the two-day discussion played out behind closed doors. Since the meeting adjourned we have had many Fed members hit the speaking engagement circuit, with the hawks and doves getting plenty of representation along the way. While it has been touted that the decision was a relatively close one, the events in Washington that have transpired post-FOMC increase the likelihood any fiscal drag or market damage from the shutdown/debt-ceiling debate will factor into the Fed’s decision making process, ultimately extending their timeframe for its current pace of asset purchases. Because of this, should the minutes read a little more hawkish than market participants are expecting, the impending big dollar strength should give corporates that are long USD a nice reprieve to offload some short-term exposure, as the minutes will most likely be considered a tad stale after they are digested.
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