Futures Fall On Government Shutdown Uncertainty

Following yesterday's modest bounce in equities punctuated by the traditional last minute spike, sentiment has reverted lower once again, driven by the uncertainty surrounding debt ceiling talks in the US,

where lawmakers have until next Tuesday to agree to a spending bill, or
much of the government will shut down. The Senate will vote on a spending bill later today, which will then be sent back to the House putting republicans in a quandary (Politico explains the complications surrounding the GOP's "Plan C"). 

It was reported that US House leaders are considering postponing action on a bill to extend the US government's borrowing power, with the leadership discussing a change of strategy to complete action on the stopgap spending bill
before debating the debt-limit debate. In FX, GBP strengthened across
the board this morning after BoE’s Carney said he does not see a case
for more quantitative easing.

Stocks traded lower in Europe, with Italian FTSE-MIB underperforming yet again, where despite the favourable reinvestment flows, IT/GE 10s widened by over 10bps. (Note, there were renewed rumours of negative sovereign rating action on Italy - refer to 0957BST headline feed for more on Italy). The move lower in stocks was led by basic materials and consumer goods sectors, with commodity prices also under pressure amid reports that Iran's foreign minister proposed implementing an agreement on Iranian nuclear program within a year, while analysts at Bank of America cut price forecasts for precious and base metals.

On today's docket in the US there is Personal Income/Spending data, as well as the final UMichigan survey reading.

Overnight news bulletin (from Bloomberg and RanSquawk)

• BoE governor Carney said does not see a case for more quantitative easing.
• The Iranian foreign minister Zarif entered P5+1 nuclear talks with US Secretary of State Kerry and other foreign ministers
• Today: U.S. senate vote on spending bill; German CPI M/m  expected to remain unchanged at a 3-mo. low; U.S. Aug. personal income expected to rise 0.4% vs prior 0.1%; University of Michigan consumer confidence expected to rise;
• ECB’s Draghi in Milan; Fed policy makers speak today
• Analysts at BofAML say risks around Oct. 2nd ECB meeting are skewed
  toward sell-off in Eonia forwards as central bank probably won't
  announce new LTRO at this point.
• Fed’s Evans says inflation well below long-run objective
• Fed’s George says job gains warrant tapering bond buying
• BoE Governor Carney told a U.K. local newspaper he sees no case for further stimulus
• U.S. Senate plans to vote today on a spending bill, 3 days before federal spending authority runs out and a few weeks before the country hits its borrowing limit
• Euro-zone Sept. economic confidence rises to 96.9 vs est. 96
• U.K. consumer confidence rose to highest in almost 6 years in September as signs of a sustainable economic recovery spurred consumers to spend
• British productivity rose 0.5%, in first increase for 2 Years, led by manufacturing
• U.K. Sept. house prices rise 0.9% M/m vs est. +0.5% M/m,  Nationwide says
• Japanese investors were net buyers of foreign bonds during week ended Sept. 20
• Japan Pension Panel said depending on domestic bonds must stop after record fixed-income losses and as inflation returns
• ECB’s Coeure says more liquidity, LTRO not urgent necessity
• Says ECB guidance set to keep market volatility in check so it doesn’t derail euro-area recovery
• ECB adopts decisions on collateral rules to boost SME lending
• WTI set for third weekly loss as UN nears vote on Syrian weapons
• Italy borrowing costs steady at 3.5% 2018 bond auction

Asian Headlines

Japanese National CPI (Aug) Y/Y 0.9% vs. Exp. 0.8% (Prev. 0.7%) - Highest since Nov '08.

S&P says it sees nothing wrong with its negative outlook for Japan's sovereign rating and that Japan's budget deficit is shrinking somewhat, but cannot be secure in pace of decline.

EU & UK Headlines

BoE governor Carney said does not see a case for more quantitative easing. In other UK related news, BoE said its financial policy committee is to make annual assessments of UK's 'Help To Buy' housing programme and that the committee is to advise whether price cap and fees charged to lenders under 'Help To Buy' are appropriate.

Eurozone Business Climate Indicator (Sep) M/M -0.20 vs. Exp. -0.10 (Prev. -0.21, Rev. -0.22)
Eurozone Economic Confidence (Sep) M/M 96.9 vs. Exp. 96.0 (Prev. 95.2, Rev. 95.3)
Eurozone Industrial Confidence (Sep) M/M -6.7 vs. Exp. -7.0 (Prev. -7.9, Rev. -7.8)
Eurozone Consumer Confidence (Sep F) M/M -14.9 (Prev. -14.9)
Eurozone Services Confidence (Sep) M/M -3.3 vs. Exp. -4.6 (Prev. -5.3, Rev. -5.2)

Germany CPI - Saxony (Sep) Y/Y 1.5% (Prev. 1.6%)
German CPI - Hesse (Sep) Y/Y 1.1% (Prev. 1.1%)
German CPI - Bavaria (Sep) Y/Y 1.4% (Prev. 1.4%)
German CPI - Brandenburg (Sep) Y/Y 1.3% (Prev. 1.5%)
Germany CPI - North Rhine West. (Sep) Y/Y 1.5% (Prev. 1.6%)

Italian bond auction results, sells EUR 6bln vs. Exp. EUR 6bln.
- Sells EUR 3bln in 3.5% 2018, b/c 1.43 (Prev. 1.22) and avg. gross yield 3.38% (Prev. 3.38%)
- Sells EUR 3bln in 4.5% 2024, b/c 1.38 (Prev. 1.52) and avg. gross yield 4.50% (Prev. 4.46%)
Analysts at BofAML say risks around Oct. 2nd ECB meeting are skewed toward sell-off in Eonia forwards as
central bank probably won't announce new LTRO at this point.

- Draghi may talk down expectations of imminent LTRO, reiterating comments by ECB's Constancio and Coeure.
- ECB will probably refrain from policy action at meeting, while trying to anchor rate expectations better, amid better economic outlook and before bank balance-sheet assessment.
- On that note, ECB's Coeure said that providing further liquidity injections and LTRO isn't an urgent necessity.

In other news, it was reported that Greece's far-right Golden Dawn Party leader has threatened that his party could pullout of parliament, a move that would trigger a wave of by-elections that could destabilise the country.

Barclays month-end extension: Sterling Aggr +0.24y
Barclays month-end extension: Euro Aggr +0.11y

US Headlines

Fed's George (Voter, Hawk) said that the decision not to taper bond buying at the September meeting threatens credibility of future policy. This morning, Fed's Evans said that using monetary policy to combat financial instability would lead to below target inflation and more resource slack.

US Senate majority leader Harry Reid said the procedural Senate vote on spending bill is set for today. There were also reports that US House leaders are considering postponing action on a bill to extend the US government's borrowing power, with the leadership discussing a change of strategy to complete action on the stopgap spending bill before debating the debt-limit debate. According to the Republican Whip, the US House plans to meet at noon on Saturday for legislative business.

Barclays month-end extension: Treasury +0.06y

Equities

Stocks traded lower in Europe, with Italian FTSE-MIB underperforming yet again, where despite the favourable reinvestment flows, IT/GE 10s widened by over 10bps. (Note, there were renewed rumours of negative sovereign rating action on Italy - refer to 0957BST headline feed for more on Italy). Despite softer stocks, Adidas remained in the green, supported by the release of better than expected earnings report by Nike yesterday.

FX

GBP strengthened across the board this morning after BoE’s Carney said he does not see a case for more quantitative easing. AUD dented AUD/USD as well as AUD/JPY and consequently dragged other JPY crosses lower, whilst JPY was also strengthened after Japanese finance minister Aso said he’s not thinking of lowering effective corporate tax rate right now.

Commodities

Bank of America expects gold to avg. USD 1419 in 2013 and silver to avg. USD 24.31. Analysts at the bank also cut 2013 palladium price forecast to USD 733 from USD 751 and platinum forecast to USD 1550 from USD 1575. Forecasts for 2013 also cut for copper to USD 7371 from USD 7446 and aluminium cut to USD 1839 from USD 1863.

The Iranian foreign minister Zarif entered P5+1 nuclear talks with US Secretary of State Kerry and other foreign ministers. According to reports, Iran's foreign minister proposed implementing an agreement on Iranian nuclear program within a year, commenting that in the endgame there has to be total lifting of all sanctions and hopes to move in that direction in short span of time.

US and Russia submitted a draft Syria roadmap to OPCW with the chemical weapons group's decision expected tomorrow. According to reports, Russia backs enforceable accord, while in related news, the Saudi foreign minister commented they must enhance support to Syria opposition to change the balance of power on the ground. BP faces pressure over Algerian gas plant attack from Islamist militants that killed dozens at the site.

* * *

We conclude with Jim Reid's (DB) recap of overnight events

Asian equities are trading higher with the sole exception of the Nikkei (-0.1%). This comes despite headlines that the Japanese government is ready to announce a JPY5trn supplementary budget which form part of stimulus measures to be announced by PM Abe next week. Japanese CPI data for August showed that national inflation was up 0.9% YoY (vs 0.8% expected) while CPI was +0.8% YoY excluding fresh food (vs +0.7% expected). DB’s Japanese economist Matsuoka-san believes that CPI should continue to trend upwards to a maximum of 1.0-1.5%YoY in 1H 2014. USDJPY is trading 0.3% lower at 98.7 this morning. Outside of Japan, Asian equities are up between a quarter and half a percent. In China, there is building anticipation ahead of the launch of Shanghai’s free trade zone this weekend. The FT suggests that the free trade zone could be a testing ground for financial reforms including interest rate deregulation, a more freely-floating exchange rate and the elimination of investment restrictions for foreign firms. Chinese interbank rates hit multi-week highs today, but this is mainly being driven by quarter-end effects and a strong demand for liquidity ahead of a week-long Chinese holiday starting Oct 1st.

Back in Europe, the Italian fixed income market came under pressure yesterday (10yr yields +10bp), as did its stock market (MIB -1.2%), following a renewed bout of political uncertainty. Late on Thursday, PM Letta said that he was headed back to Rome from NYC to save his coalition from collapse  after a number of Berlusconi’s political allies threatened a mass exodus from government. According to the lower house leader for Berlusconi’s Forza Italia party, Renato Brunetta, many party lawmakers have signed their resignation letters (Dow Jones). Mr Letta will meet immediately with President Napolitano on returning to Rome on Friday to determine the best course forward. Potential actions include a new parliamentary confidence vote for his government. The uncertainty comes at an awkward time for the government which must finalise its 2014 budget by mid-October. Note that in its rating downgrade of Italy in July, S&P mentioned that a “downward revision of our view of Italy's institutional and governance effectiveness score could lead to a lowering of the rating by one notch or more”. Both Moody’s and S&P have a “negative” outlook assigned to Italy’s Baa2/BBB ratings.

Moving back across the Atlantic, the USD rallied against its DM and EM counterparts, treasuries closed weaker and US equities snapped a 5-day losing streak after sentiment was supported by the release of better than expected US initial jobless claims data (305k vs 325k expected). This figure is the lowest since 2007, excluding the week ending September 6, when a change in computer systems in California and Nevada distorted the data (Bloomberg). Other data was more mixed. Pending homes sales fell 1.6% vs (1% expected) in August after July was revised lower to -1.4% (-1.3% initially), potentially showing the impact of low inventory and rising rates. There was little apparent progress in US fiscal talks and a number of political analysts mentioned that it’s now increasingly likely we will see a short-term government shutdown. After the US close, consumer-bellwether Nike  reported Q1 results that topped EPS and revenue estimates. Its shares were up 6%+ in afterhours trading. Retail stocks bounced back 0.9%, partly unwinding Wednesday’s Wal-Mart-inspired losses.

Political developments look set to dominate the news flow today. In Italy, PM Letta is due to discuss the future of his coalition with President Napolitano this morning. In Washington DC, markets will be eyeing the passage of the continuing resolution through the US senate. The data docket features business sentiment surveys in Europe, August US personal income/spending and the final UofMichigan consumer survey reading. The Fed’s Dudley, Evans and Rosengren speak today, as will Draghi who is scheduled to speak in Italy.

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