Political unrest concerning Berlusconi puts equities under pressure

Market Review

Market movement yesterday gave us a real taster of what we are in line for the over the course of the next weeks, the volatility in the emini S&P at times was reminiscent of two years ago when the US was downgraded by one notch to AA+ by Standard & Poor’s. There were three key reasons for this volatility: #1 A date was finally announced for when the debt ceiling will get hit (17th October), #2 There were rumours of Moody’s reviewing the outlook of the US – which may be a precursor for a downgrade. #3 Traders are well aware of how politics, and especially how American politics, work. Unless a miracle hits, we can almost guarantee that there will be no deal made before at the very earliest the same week as the ceiling is predicted to get hit. Our stance remains that we have no belief in any significant efforts will made by either side, they may as well relax until the last day as any efforts before will be a waste of energy. New Home Sales posted an in line number at 421k and not impacting the market immensely, though considering that we now have seven out of the last 8 postings with numbers above 400k one can argue the trend is positive and is normalising. Crude finished in negative territory for the fifth straight session in a row, and inversely correlated, we have US10Y posting its fourth straight up-day.

Today's Fundamental View

The session today started in the green for equities but they have since come under pressure on political unrest in Italy surrounding former Prime Minister Silvio Berlusconi and his allies who refuses to oust him. On the subject of QE – Federal Reserve’s Lacker has stated that it will be difficult for the central bank to remain credible on forward guidance as it is clear that he disagrees with the decision on delaying tapering, he stated further that in his own opinion there is no reason not to start tapering in October. BNP Paribas analysts revealed their new expectations of Fed’s tapering date to be March 2013. The afternoon session may be an interesting one with Initial Jobless Claims and final US GDP reading, as well as Pending Home Sales. Our stance is relatively neutral overall. The sessions biggest mover may yet again be on the debt ceiling, and we will be listening out for any speakers from both the political parties in the US, as well as members of the Federal Reserve on the mentioned tapering. The US10Y should be supported throughout the afternoon, though we favour the downside on WTI, EURSUD and the S&P.