A very heavy event risk calendar this week is likely to ensure choppy markets


MAJOR HEADLINES – PREVIOUS SESSION

  • CA Aug. GDP out at -0.1% m/m vs. +0.1% expected and flat prior 

  • US Sep. Personal Income out at flat, as expected, vs. revised +0.1% prior 

  • US Sep. Personal Spending out at -0.5%, as expected, vs. revised +1.4% prior 

  • US Q3 Employment Cost Index out at +0.4%, as expected and unchanged from previously 

  •  US Oct Chicago PMI out at 54.2 vs. 49.0 expected and 46.1 prior 

  • US Final Oct. Univ. of Michigan Confidence out at 70.6 vs. 70.0 expected and 69.4 previous 

  •  China Oct Manufacturing PMI out at 55.2 vs. 54.7 expected and 54.3 prior 

  • AU Oct. AiG Performance of Manufacturing out at 51.7 vs. 52.0 prior 

  • AU Oct. TD Securities Inflation out at -0.3% m/m, +1.2% y/y vs. flat/+1.3% prior resp. 

  • UK Oct. Hometrack Housing Survey out at +0.2% m/m, -4.2% y/y vs. +0.2%/-5.6% prior resp. 

  • AU Q3 House Price Index out at +4.2% q/q, +6.2% y/y vs. +3.0%/+4.3% expected and +4.2%/-0.7% prior 

  • JP Sep. Labour Cash Earnings out at -1.6% y/y vs. -2.1% expected and -3.1% prior


THEMES TO WATCH – UPCOMING SESSION

(All times GMT) 

  • Sweden PMI Survey (0730) 

  • HK Retail Sales (0830) 

  • Denmark Retail Sales (0830) 

  • Swiss SVME PMI (0830) 

  • GE PMI Manufacturing (0855)

  • EU PMI Manufacturing (0900) 

  • UK PMI Manufacturing (0930) 

  • US ISM Manufacturing (1500) 

  • US ISM Prices Paid (1500) 

  • US Pending Home Sales (1500)

  • US Construction Spending (1500)

  • Swiss SNB’s Jordan to speak (1630) 

  • US Fed’s Tarullo to speak (2000) 

Market Comments:

It was a disappointing close to the month on Friday for those looking to grasp risk by the horns after Thursday”s US GDP release. All the positive sentiment evaporated and Wall St gave back all the gains, and some more, though there was no one specific news item or event that triggered the heavy aversion to risk. Indeed, US data releases were generally better than expected with the Chicago PMI coming in at a very strong 54.2 versus 49.0 expected while the final University of Michigan confidence was revised higher to 70.6. The continued improvement in these kinds of numbers may be an encouragement to the bulls ahead of this week’s various ISM releases.

The weakness was apparent right from the get-go with the financial sector particularly vulnerable. Adverse comments on the outlook for the commercial real estate sector (a huge “crash” in the sector is just beginning) from billionaire investor Wilbur Ross and a negative speech by George Soros (the recovery is liable to run out of steam with a double-dip possible in 2010 or 2011) contributed to the gloomy mood and talk that Citigroup was facing more significant write-downs effectively consigned risk appetite to the dustbin.

The weakness of the financial sector also hit the headlines over the weekend as it was announced that CIT had formally filed for bankruptcy protection amid a “pre-packaged” restructuring supported by its creditors. While relatively old news and not unexpected, the headline caught the attention of early Asia traders and we saw a heavy “risk-off” move in currencies shortly after the open ( though, as has happened before, some suspected that traders had mistaken CIT for Citigroup!). In addition, another 9 banks were closed by the FDIC at the weekend bringing the total number of failed banks to 115 this year, the most since 1992.

So generally we started the week with a certain risk aversion theme permeating through markets and early thin liquidity adding to the mayhem. Optimists might wish to latch on to the better Chinese data at the weekend when PMI registered an improvement to 55.2 in October from 54.3 the previous month. It was encouraging that improvements were widespread across the various components, suggesting the economic rebound is broadly on track despite the tightening of credit control measures implemented by the China Banking and Regulatory Commission (CBRC). 

Other positives for risk could be garnered from the Australian data that was also released this morning. The Australian government revised its near-term growth and inflation forecasts in its latest mid-year economic and fiscal outlook, upping growth for 2010 to +1.5% from -0.5% previously and +2.75% for 2011 from 2.25% previously. Inflation was also revised higher to 2.25% through 2010 to 2012, though still within the RBA’s target rate. In other data releases, the house price index saw another strong recovery for the second quarter in a row with a 4.2% q/q gain and the first annual improvement (+6.2%) since Q3 2008. AUD managed to regain the 0.90 handle slowly but surely.

As a result, risk was out of the emergency room by midday (though equities remained heavily in the red) and risk currencies staged a minor comeback after the early fall. Asia has been rife with talk that the wild moves early in the session were due to one bank incorrectly executing an order. With a very heavy risk event calendar this week one suspects that risk-on/risk-off sentiment will be switching with alacrity so it may be prudent not to get too attached to positioning one particular way. Today’s data calendar is populated by numerous PMI and ISM surveys of the manufacturing sector which have all been showing more positive tendencies of late.