Participants Ignore Political Pantomime As Jobs Day Postponed

WHERE WE STAND – At risk of speaking too soon, sanity might finally have prevailed.

I allude, of course, to signs that market participants look to, at last, be taking a much more logical view of proceedings, largely ignoring the political pantomime surrounding the ongoing US government shutdown, blocking out the noise, and adopting the rational view that said shutdown has next-to-no material impact on the macro, or monetary policy, outlooks. Without wanting to take too much of a victory lap, I have been banging this particular drum since the start of the week, though at times it’s felt more like I’ve been banging my head against a brick wall!

In any case, markets took on a much steadier tone yesterday, with stocks continuing to grind higher, Treasuries treading water within recent ranges, gold notching a new record high before retreating a bit, while the dollar traded firmer against most major peers. Frankly, I’m not entirely sure the price action yesterday told us much that we don’t know already, while we certainly didn’t learn anything new from the distinct lack of fundamental developments through the day, amid a dearth of data releases, and lack of impactful news flow.

Given this lack of fresh information, I see little reason to alter my overall biases. To recap, they remain a bullish equity view, with dips continuing to be seen as buying opportunities; a bullish USD view, as the Fed’s ‘run it hot’ strategy tilts risks to US growth to the upside; long of precious metals, chiefly gold and silver, amid unsustainable fiscal spending, and the risk of inflation expectations becoming un-anchored; and, expecting a steeper UST curve for those same reasons.

On the subject of Govvies, actually, yesterday brought another weak-ish Gilt auction here in the UK, with the DMO’s 10-year sale achieving a bid-to-cover of 2.78x, the lowest in a couple of years. While an almost 3x bid-to-cover is still fine, in isolation, the two worrying issues here are – firstly, the direction of travel, with demand waning more and more at each auction; and, secondly, that said lack of demand is now creeping into the belly of the curve, and not just the long-end, making it much harder to explain away as a result of structural factors, and much more a signal of investors ‘voting with their feet’ in terms of the fragile UK fiscal backdrop.

Short long-end Gilts remain my preferred way to play the UK macro backdrop right now, with a fiscal reckoning surely on the horizon, and a test of 6% in the 30-year Gilt plausible. Long SONIA futures, meanwhile, namely the May, Jun and Sep 26 contracts, also still makes a lot of sense to me, given the market’s overly hawkish BoE pricing, and taking into account how almost all risks to the UK outlook tilt firmly to the downside.

LOOK AHEAD – Today would, ordinarily, be ‘Jobs Day’.

However, given the ongoing government shutdown, the September US employment report shan’t be released this afternoon, with the figures delayed until funding resumes on some date as yet unknown. Still, let’s look on the bright side, no NFP print means we can not only get to the pub earlier, but also have no reason to rush back for 1:30pm! Frankly, today has all the makings of a very long lunch being had somewhere.

Of course, if my boss is reading, I shall be glued to my desk for the ISM services survey this afternoon, which could be more of a market-mover than normal, given the lack of official data for the time being. The headline metric is seen sliding a little, to 51.7 from 52.0, though that would still represent a solid pace of expansion in the sector.

One last thing, there’s probably greater potential than normal for gapping risk over the weekend, and into Monday morning, particularly with an OPEC+ meeting set to take place, and of course with talks over government funding continuing in Washington DC.