Market Drivers for September 30th, 2013
Euro and dollar both weak as political turmoil reigns
China PMI misses
Nikkei -2.09% Europe -.89%
Oil $101/bbl
Gold $1341/oz.

Europe and Asia:
CNY PMI Manufacturing 50.2 vs. 51.2
EUR GE Retail Sales 0.5% vs. 0.9%
EUR CPI 1.1% vs 1.3%
GBP Mortgage approvals 62K vs. 61K

North America:
USD Chicago PMI 9:55

Its been a cautious opening to the start of week’s trade as possible political crises on both sides of the Atlantic weighed on euro and the dollar, while the rest of the G-10 FX seesawed back and forth.

In Italy the wholesale resignation of Silvio Berlusconi PDL party threw Prime Minister Letta’s government into a lurch as it threatened to topple the fragile governing coalition. Letta said that he would request a confidence vote on October 2 to preserve his ruling majority as he scrambled to find support amongst individual legislators of the PDL. Letta needs 24 votes to secure a new majority and he is unlikely to find support from Beppe Grillo’s Five Star movement which is the main opposition party in Parliament.

The turmoil in Italy has taken its toll on the country’s sovereign bond market as Italian to German bond spread widened to nearly 280 basis points. Mr. Letta may yet be able to avoid snap elections but until the situation is resolved the pressure on the country’s sovereign debt is likely to remain and should keep EUR/USD contained below the recent highs at 1.3570.

The fresh political tension in Italy, along with lack of any resolution in German elections, one week after the polls have closed could put fresh pressure on the ECB to act. Today’s EZ CPI data which printed at 1.1% versus 1.3% eyed indicates that there is absolutely no threat of inflation in the region and allows European monetary policymakers to ease conditions further should they choose to do so. In his recent public appearances Mr. Draghi has signaled that the ECB is fully willing to consider a rate cut as well as new rounds of LTRO and if the political situation in the Eurozone does not improve he may resort both tactics at this week’s monthly ECB meeting.

Meanwhile across the Atlantic all signs point to a shutdown of the US government, as Republicans in the House continue to link the Affordable Care Act to funding the US budget. Barring any last minute compromise it appears that US government may close many non-essential operations tonight. Aside from the heavy political and economic costs that such a move would entail it may also leave capital markets in the dark.

This is the week that markets were to get a look at last month’s labor data to determine the likelihood of a Fed taper. However if the BLS is furloughed the most important economic data point of the week may be released only adding to the confusion this week.

With turmoil in DC showing no signs of resolution it is becoming more evident by the hour that the Fed may not consider a QE taper until perhaps the end of the year. That in turn is likely to put fresh downward pressure on USD/JPY especially if the ISM data misses its mark this week. The pair has been trading below the 98.00 handle for most of the night and could test support at 97.50 if the Chicago PMI report – due at 13;45 GMT today – disappoints the market.

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