Dollar Mixed, US Fiscal Brinkmanship Suffocating Animal Spirits

The US dollar is broadly mixed, though except against the yen remains largely within its pre-weekend trading range against the major currencies.  The lack of a risk appetite is being expressed largely in the equity markets.   The MSCI Asia Pacific Index fell almost 1%, while the MSCI Emerging Markets equity index is off almost 0.5%, snapped a four-session advance.   

Japan's Topix fell 1.4%, extending its losing streak to the seventh session, the longest losing streak in a little more than a year.   It appeared that companies with the greatest exposure to the US, like Sony, Toyota and Ninetendo were among the hardest hit.    

The so-called safe haven status of the yen appears to be more a function of Japanese investors keeping more of their savings at home rather than foreigners flocking to Japanese assets.    The dollar has slipped to new lows since late August, falling to about JPY96.85 in early European activity.    There may be some support near JPY96.75, but a convincing break warns of risk toward JPY96.00. 

European bourses are also moving lower, with the Dow Jones Stoxx 600 off 0.9% near mid-day in London, with only the defensive utility sector posting small gains.    US S&P S&P 500 is off by more than 1%, after having turning in a rather benign performance during the government's closure last week, falling in two sessions and gaining in two.  The US corporate earnings season kicks off tomorrow. 

There appears to be little movement by the key protagonists in the US fiscal melodrama.  Many still see a last minute deal that avoids the default by the US government.   Even the rating agency Moody's says there is a "very low" chance of default.  That said, we note that if the US misses a payment, the rating agencies will likely respond by putting the US in "selective default" until the payment is made.  Even after the fact, it could impact the US ratings, which would likely have knock-on effects on other debt, such as GSEs.  Recall Moody's and Fitch still give the US the highest rating, while S&P  previously cut it one notch.  

In respect to the credit-default swaps, the five year is firmer today but well within the ranges seen before the weekend.  These are lightly traded.  As of the end of September, there appears to have been about 23 bln (euros) in gross exposure and 3.3 bln in net exposure.  Note that true brinkmanship as far as the CDS is concerned may be a bit later than for the rating agencies in the sense that the CDS has a three-day grace period build in.  

Recall too that the CDS insurance makes an investor whole after the recovery from the debtor.  In this case, one would expect that the creditor will eventually paid in full, making a anticipated CDS payout inconsequential.  

News from Europe has been light.  The Sentix sentiment indicator for the euro area fell unexpectedly to 6.1 in October from 6.5 in September.  The consensus had expected an uptick to 8.0.   The euro reached the session high in early Europe, near $1.3590, prior to the data.  The low since the report near $1.3570.  

Some of the recent demand for euros has been linked to foreign interest in distressed assets in the euro area.  There also reports suggesting some leveraged participants are looking at Greek bonds.  In addition, US money market funds have reportedly been boosting their European exposures. 

Norway reported  disappointing industrial output and manufacturing figures and it underscores the point we made earlier about the gap in Europe between the survey data (PMI) and the real sector.  In August, Norway's manufacturing PMI rose to 53.20 from 48.20 in July.  It was also below the 50 boom/bust level in June.  Yet Norway reported today that in fact manufacturing output fell 0.7% in August, wiping out the small 0.1% gain in July.   Overall, industrial output fell 3.8% in August after rising 3.0% in July.  On a work day adjusted basis, Norway's industrial output  is off 4.4% after snapping a 6-month contraction streak in July, when industrial output was 2.8% above the year ago level.  

The krone lost about 0.75% against the euro before stabilizing.  Norway reports September inflation figures on Thursday.  Base effects suggest the year-over-year headline and core rate may ease from the 3.2% and 2.5% pace respectively.