Moodys warns on US government shutdown

Ratings agency Moody’s has warned that a US government shutdown would have negative implications for US credit ratings as it highlights the country’s institutional and governance weaknesses relative to other top-rated governments. Unless congress can approve a spending bill by the end of this week, non-essential government workers (including contractors) would not be paid after the end of September. If the government shutdown extends beyond 2-3 weeks, it could weigh on consumer spending which is already under pressure from higher interest rates and inflation. An extended shutdown would also mean that statistical agencies may be unable to publish economic data during October, which may limit the Fed’s ability to adjust monetary policy at the November FOMC meeting.  

The German IFO Business Climate survey came in slightly higher than expected for September, and largely unchanged from August at 85.7. There was a decline in the current assessment component but the expectations index showed a slight improvement to 82.9. It remains well off the April high however as higher interest rates, weak global demand and inflation weigh on the economy, and the manufacturing sector in particular. PMI surveys point to a contraction in German GDP in Q3.   

Today’s Economic Data and Events

• 18:00 US new home sales (Aug) forecast 698k
• 18:00 US Conference Board consumer confidence (Sep) forecast 105.5

Fixed Income

• Benchmark government bonds sank at the start of the trading week despite their being no material catalyst to support the move, barring a modest uptick in equities. Yields on the 2yr UST added about 2bps to close at 5.1249% while the 10yr UST yield jumped almost 10bps to 4.5334% and the 30yr yield added almost 13bps to 4.6521%.
• European bonds also closed weaker with bund yields up 6bps at 2.791% and the 10yr gilt yield adding 8bps to 4.316%.
• Credit markets generally closed weaker overnight with the Bloomberg USD EM index down about 0.4% and the high yield index was lower by 0.3%. Turkey 10yr local currency bonds dropped with yields up 18bps to 24.51% and 10yr USD Turkish Eurobonds also fell.
• China’s Evergrande defaulted on a CNY 4bn (USD 547mn) bond, and cancelled meetings with creditors as it seeks to come up with a restructuring plan. Former company officials have been detained by the authorities, according to Bloomberg.
• Fitch upgraded its sovereign rating on Oman to ‘BB+’ and revised its outlook to stable from positive.
• FAB and the Islamic Development Bank have put out mandates for new benchmark USD issuances.  

FX

• EURUSD led currencies lower against the USD overnight even with limited economic data. The pair dropped below the 1.06 level to close at 1.0593, down 0.6%. GBPUSD also fell, down 0.3% at 1.2211 while USDJPY added 0.3% to 148.88. Kazuo Ueda, the Bank of Japan’s governor, said the prospect of hitting 2% inflation had not “come in sight,” keeping a dovish tone to policy from Japan.
• In commodity currencies, USDCAD pulled toward the Loonie, down 0.2% at 1.3454 while AUDUSD weakened by 0.3% to 0.6424. NZDUSD managed to tick higher, up 0.1% at 0.5967.

Equities

• US markets ticked up in Monday’s trade, after closing lower last week. The Dow Jones, the S&P 500, and the NASDAQ gained 0.13%, 0.4%, and 0.5%, respectively.
• In contrast major European equity markets declined on the day, driven by renewed Chinese property market concerns. The Eurostoxx 50 index lost 0.95%, the DAX fell 0.98%, the CAC 40 declined 0.85% and the FTSE 100 fell 0.78%.  
• Locally, the ADX fell 0.09% while the DFM rose 0.32%.

Commodities

• Oil prices were relatively steady at the start of the week with Brent futures heading into expiry later this week. Brent closed at USD 93.29/b, near unchanged, while WTI fell 0.4% to USD 89.68/b.
• Major US oil producers cautioned they wouldn’t be increasing output levels, even with prices in the USD 90-100/b range, according to statements made at a major energy conference in the US.