Key news

  • US stock markets lost 0.5% – Asian markets mixed.

  • Reserve Bank of Australia ‘only’ cut rates by 25bp – AUD slightly higher.

  • Republicans make budget counter-offer.

  • No key data releases today.


Markets Overnight

US equity markets closed with around 0.5% losses in fairly quiet trading. The VIX volatility index moved slightly higher to 16.6 but volatility remains very low across markets and it is worth noting that so far this year there have only been six days with an above +/- 2% move in the S&P500 index. In 2011 there were 35 such days and in 2010 the number was 22.

A disappointing US ISM report concluded the big PMI day yesterday. The headline index fell to 49.5 from 51.7 in October – in great contrast to the decent PMI report published earlier yesterday. It is difficult to assess how much weight to put on the ISM report, however, as hurricane Sandy (and potentially also the fiscal cliff debate) is sure to have affected this survey negatively. Our US economists still look for the ISM to move sideways between 49.5 and 52.0 over the coming months, before rising in H1 13.

In Europe PMIs were mixed, although generally suggesting that manufacturing growth troughed in October. The improvement is very fragile, though, and dependent on a strengthening recovery in the rest of the world. In Scandinavia, focus was on the strong divergence between Sweden (falling to 43.2) and Norway (rising to 50.1). NOK/SEK jumped on the release and has traded in the high 1.17s overnight. Asian PMIs have generally improved, which supports our view of improved global growth.

US fiscal negotiations continue as the Republicans make a budget counter-offer. The Republicans suggest USD800bn in 10-year tax increases (through lower deductions, not higher tax rates) and significant spending cuts – totalling USD2.2trn in deficit reduction over 10 years.

US bond markets closed with only minor price moves but in Europe the strong performance in the PIIGS continued. The 10-year government bond yield is now down to 4.44% in Italy and 5.22% in Spain.