A nervous beginning to the start of the week

Monday October 22: Five things the markets are talking about

Global equities remain better supported this Monday morning after Chinese stocks surged overnight on senior officials verbal intervention.

The ‘mighty’ U.S dollar has eased a tad along with treasuries, while Italian bonds have rallied.

The EUR had found some early support on the back of a ratings decision by Moody’s Investors Service late last Friday who removed the immediate threat of a downgrade to ‘junk.’ The market now awaits on S&P’s review this Friday.

Nevertheless, risks remain, from tension surrounding the Khashoggi murder and the ongoing Sino-U.S trade showdown to Italian budget fears and President Trump’s unpredictability ahead of U.S midterm elections.

On tap for this week, the Bank of Canada (BoC) is expected to increase its policy rate by +25 bps to +1.75% on Wednesday (Oct 24) despite last Friday’s disappointing inflation and retail sales readings.

Elsewhere, the European Central Bank (ECB) is expected to leave policy unchanged, but questions regarding Italy and its budget issues are expected to be front and center.

In Scandinavia, Sweden’s Riksbank and Norway’s Norges bank take center stage mid-week.

Stateside, earnings season gathers pace with notable highlights including Amazon, Alphabet, Intel, Verizon, Microsoft, Twitter, McDonald’s, and Caterpillar.

1. Stocks in the black

Japan’s Nikkei edged higher, supported by a rally in Chinese stocks on the promise of additional stimulus measures, triggering buying in firms exposed to China. The Nikkei share average rallied +0.37%, moving off a six-week low hit during last Friday’s session. The index is now down around -7.5% since hitting a 27-year high on Oct. 2. The broader Topix edged +0.15% higher.

Down-under, Aussie stocks ended lower on Monday, as political concerns rattled investors after the governing coalition looks set to lose its one-seat majority in parliament following a weekend by-election. The S&P/ASX 200 index closed -0.6% lower. In S. Korea, the Kospi stock index climbed on Monday supported by a strong Chinese market. The index rallied +0.5%.

In China, stocks surged overnight in the wake of coordinated statements of support by senior regulators, and as China prepares to overhaul its income tax law for individuals. The benchmark Shanghai Composite index was +4.2% higher, while the blue-chip CSI300 index jumped +4.4%.

The gains extended to Hong Kong, where the Hang Seng index added +2.3% and the China Enterprises Index ended +2.6% higher.

In Europe, indices trade higher across the board. Italy’s FTSE MIB outperforms after Moody’s cut the countries rating to the lowest investment grade, but put the outlook as stable, helping BTP futures rally.

U.S stocks are set to open in the ‘black’ (+0.1%).

Indices: Stoxx600 +0.22% at 362.02, FTSE +0.26% at 7,066.00, DAX +0.52% at 11,614.01, CAC-40 +0.24% at 5,096.82, IBEX-35 +0.73% at 8,957.30, FTSE MIB +0.66% at 19,205.50, SMI +0.30% at 8,892.50, S&P 500 Futures +0.18%

2. Brent oil back above $80 as Iran sanctions loom

Brent crude oil prices remain better bid as markets are expected to tighten once U.S sanctions against Iran’s crude exports come into effect in November.

Brent crude oil futures are at +$80.26 a barrel, up +48c, or +0.6%, above Friday’s close. U.S West Texas Intermediate (WTI) crude futures are at +$69.60 a barrel, up +48c, or +0.7%.

Note: The U.S sanctions on Iran, the third-largest producer in OPEC, are set to start on Nov. 4.

OPEC agreed in June to boost supply to make up for the expected shortfall in Iranian exports, however, recent data suggests that OPEC is struggling to add barrels as an increase in Saudi supply was offset by declines elsewhere.

Nevertheless, relief may come from the U.S, where offshore drillers added four oilrigs in the week to Oct. 19, bringing the total count to 873, according to Baker Hughes data on Friday. After months of stagnation, U.S crude production is expected to rise.

However, undermining sentiment is weaker China growth data and the ongoing Sino-U.S trade dispute. The full impact of the trade war is expected to hit markets early next year and provide a considerable drag on oil demand.

Ahead of the U.S open, gold prices have edged higher overnight towards their three-month peak hit last week, as the ‘big’ dollar eased and worries over rising political tensions slowing global economic growth lent support to the ‘yellow’ metal. Spot gold is up +0.1% at +$1,226.52 an ounce, while U.S. gold futures are also up +0.1% at +$1,229.50 an ounce.

3. Italian yields drops by most in 4-months on Moody’s decision

Italian sovereign yields dropped across the curve after ratings agency Moody’s kept the country’s sovereign ratings outlook ‘stable’ while delivering an expected downgrade last week. The market was worried that the outlook would be ‘negative.’

Note: S&P’s review is expected this Friday (Oct 26). It now rates the country two notches above junk at BBB.

Italy’s five-year BTP yield dropped -36 bps to a two-week low of +2.63%, while the benchmark 10-year yield was -26.5 bps lower at +3.39%, its biggest daily drop in four-months. The BTP/Bund 10-year yield spread tightened to +284 bps.

Elsewhere, the yield on the U.S 10-year note rose +1 bps to +3.20%, while Germany’s 10-year Bund yield increased + 2bps to +0.48%. In the U.K, the 10-year Gilt yield climbed +1 bps to +1.588%.

4. Dollar quiet across the board

The EUR/USD is a tad lower at €1.1515 after testing a high of €1.1550 overnight on the back of a relief rally in the 10-year BTP/Bund spread. Nevertheless, event risk persists ahead of the deadline for Italy to respond to the E.U Commission’s initial objections over the 2019 budget plan.

Expect Thursday’s ECB meeting to be closely watched, especially Draghi’s press conference, where the market is looking for more color on how the ECB would reinvest maturing QE proceeds post December this year.

GBP/USD is -0.3% lower at £1.3030 as Brexit talks again reached an impasse. However, PM Theresa May believes that +95% of the Brexit withdrawal deal is “now settled.” It’s believed that the PM is facing a rebellion by more than 40 Tory MP’s if she does not back down to fresh demands from Brexiteers’

Note: 48 votes are necessary for a leadership challenge

5. Italy says it’s ready to discuss budget with E.U authorities

The Italian government is ready to sit and discuss its budget targets with E.U, Deputy Prime Minister Luigi Di Maio said this morning, restating that the “populist” coalition had no plan to leave the euro.

Italy has sent a letter to the commission explaining its reasons for sticking to the +2.4% goal, and that the government was ready to “sit at the table”.

Note: Italy wants to hike its budget deficit to +2.4% from this year’s +1.8%. Last week, the E.U Commission labeled Italy’s 2019 draft budget an “unprecedented breach of EU fiscal rules.”

Forex heatmap

US Growth in Q3 to Guide Dollar

The US dollar is mixed on Friday. Investor’s appetite for risk rose and safe haven currencies (JPY and CHF) fell while positive China and Brexit news saw the NZD, EUR, GBP and AUD advance against the USD. The Canadian dollar was dragged down in the last trading day of the week after softer than expected retail sales and inflation data. Next week’s Bank of Canada (BoC) monetary policy meeting is anticipated to bring a 25 basis point rate hike. Despite the miss inflation has been above the central bank’s target and businesses are optimistic about strong sales.

  • BoC expected to hike interest rate to 1.75%
  • German Business Climate to cool down
  • US first estimate of Q3 GDP to confirm solid growth

Euro Caught Between Brexit and Italian Budget

The EUR/USD fell 0.41 percent in the last five days. The single currency is trading at 1.1510 after rising on Friday due to a combination of softer US housing data and positive Brexit News. The gradual pace of rate lifts by the U.S. Federal Reserve had a negative impact on previously owned homes in September.



The euro rallied on Friday after a report that Theresa May’s government is ready to drop the time limit demand on the Irish border. The EU and the UK are said to be close to a deal, 90 percent by the estimate of the EU’s top negotiator, but the final 10 has proven hard to agree on.

Italian budget issues continue to drag on the euro. The threat of a downgrade of Italian debt does not seem to faze local politicians that are ready to square off against Brussels.

The European Central Bank (ECB) will publish its main refinancing rate and host a press conference on Thursday, October 25. No changes are expected, but investors need to be aware of the tone of the press conference as Mario Draghi could push a more dovish rhetoric.

Loonie to get BoC Rate Hike Boost

The USD/CAD fell 0.74 percent in a weekly basis. The currency pair is trading at 1.3117 and will look at the Bank of Canada (BoC) for support. The central bank is highly anticipated to announce a 25 basis points interest rate hike. The central bank has lifted rates twice in 2018 and rising inflation is forcing the hand of the BoC.


Canadian dollar weekly graph October 15, 2018

The rate decision has been priced in for some time, but the fundamental picture has worsened reducing the probabilities of a rate hike while still at near 80 percent. The NAFTA renegotiation was a big risk keeping the BoC awake at night, and with the USMCA some of that risk is lifted.

With inflation data lower than forecasted it now validates the gradual approach of the BoC and unless there is hawkish rhetoric from Governor Poloz, the loonie will continue to underperform against the USD.

Oil Drops as US Weekly Buildup Pressures Prices

West Texas Intermediate lost 0.95 percent this week. WTI is trading at $69.36 after staring a rebound on Friday due to surging Chinese demand. Supply concerns continue to guide daily price action. The US weekly inventories showed a buildup last week and pushed prices lower. Iranian exports have been cut ahead of the start of US sanctions, but there are reports that OPEC and other major producers are already closing the gap.



Saudi Arabia is embroiled in a diplomatic scandal and is quickly losing the goodwill it gained for having engineered price stability with the production cut agreement. The OPEC and major producers agreed to limit output to stop the free fall in energy prices and have extended the agreement to this year.

Trade war concerns eased on Friday as China and the US have agreed to meet during the sidelines of the G20 meeting in Buenos Aires. The leaders of the two nations will fly in a day ahead of the event to try and mend the trade relationship.

Gold Rises for Third Week Straight

Gold rose 0.6 percent last week. The yellow metal is trading at $1,229.40 despite gradual rate hike talk by Fed members and the minutes form the September FOMC. The rebound of the stock market correlated with the rise of the yellow metal. Safe haven appetite in gold holdings has returned and in a market with no shortage of geopolitical risk for the remainder of the year the yellow metal is set to continue on its rise.



Market events to watch this week:

Wednesday, October 24
10:00am CAD BOC Monetary Policy Report
10:00am CAD BOC Rate Statement
10:00am CAD Overnight Rate
11:15am CAD BOC Press Conference
Thursday, October 25
7:45am EUR Main Refinancing Rate
8:30am EUR ECB Press Conference
8:30am USD Core Durable Goods Orders m/m
Friday, October 26
8:30am USD Advance GDP q/q

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

You just know that something good is going to happen

Cloudbusting: you  just know that something good is going to happen

 

US markets

In the span of a mere 24 hours two of my most pressing question may have been answered, correctly, can the anomalously robust US equity market hang on in the face of mounting global risks? And are we entering a period of drawn-out USD selling?

Mind you, with many distractions on the radar, there are two not so subtle, under-the-radar distractions sending global trading floors abuzz this morning. Specifically, the astonishing outperformance in both US equities and emerging markets.

US equities markets soared to their biggest gain in six months following strong earnings and uplifting reports on the economy.

The Labor Department reported that U.S. employers posted the most jobs in two decades in August as expectations around hiring continued to outpace while US industrial pace and the Federal Reserve said output by U.S. factories, mines and utilities climbed in September despite the effects of Hurricane Florence.

Equity investors took their cue from the industrial production report which indicated inflation isn’t picking up, triggering another Goldilocks economy rally. But whatever signal convinces investors the Fed will not move interest rates up quicker than expected will be latched on to the big time especially in the face of robust US data. 

But let’s take this move in context, sure +2 % gain on the S&P is astonishing in anyone’s book, but significant indexes are still broadly lower for the month following last week 2-day meltdown as investors fretted over a fast pace of Fed policy normalisation.

However, it is the best of both worlds for US equity markets, with the economy in full swing but nary a sign of inflation as Goldilocks returns for yet another day. Which is providing a much need diversion from trade tensions and concerns about global growth downtrend. Also, the dollar fell overnight as traders are contemplating the Greenback fate ahead of the US midterm elections.

Nothing like a robust US market and a  USD lacking any momentum to trigger the Asian market into action!

Oil Markets

The American Petroleum Institute figures for the week ended October 12 showed an unexpected 2.1 million barrels per day decline in US crude oil inventories even as stocks at the Cushing, Oklahoma delivery point for NYMEX WTI futures increased by another 1.5 million barrels per day. But the headline did catch momentum speculators wrong-footed who were expecting another build.

Prices were also bolstered by rising US stock market providing a welcome distraction from trade tensions and concerns about global growth as investors are back focusing on tighter global supply due to Iran sanctions. It’s widely expected that Iranian exports, which are already dropping, will fall quite sharply from November onwards, and even if Saudis and other OPEC bodies have compensated the anticipated shortfall to some degree there will undoubtedly be a near-term imbalance which will pressure prompt prices

On a side note regarding a slower global growth narrative or an adverse knock demand side effect from weaker the US emerging market currencies, there’s no definitive, quantifiable data to support this view, as global energy demand remains robust by any demand-side measure.

None the less Brent prices risk is skewed higher as Venezuela, other the Middle East concerns, North and West Africa remain hotspots for supply disruptions in coming months. And with traders all too aware that we are little more than one supply disruption away from a move above $ 85 Brent, prices remain very well supported on pullbacks after reaching four-year highs last week.

Gold Markets

Given the political firestorm igniting around the US Midterms, Italy, and US-Saudi tensions, gold’s upside is looking favourable as a tail hedge against these escalations. The mid-term elections in themselves will provide more than enough political fodder to keep the flames going, not to mention the possible equity market drawdowns from a shift of power in the “house” if a Blue wave takes control.
Gold did back off from intersession highs as US equity markets rallied convincingly, which was triggered by a more robust US Industrial production data. But with inflation absent from the report, it doesn’t shift the Fed dial. This view is significant for Gold prices as it suggests without an uptick in US Inflation for the USD to tether itself to in the run you to the US election, we could see the dollar sell-off as US political headline risk is expected to escalate and should lead to Gold outperformance.

But on a near-term break of the signification $ 1234-1236 zone and given the bearish Hedge Fund compositions and structures on the Comex will come under intense pressure and we could see $1250+ in a heartbeat if these established short positions show signs of buckling.

However, perhaps a hawkish warm-up ahead of tonight’s FOMC minutes San Francisco’s new President Daly said she does think it’s a balance between hiking too fast and getting behind the curve but her remarks on the economy are strong. On inflation, the Fed is “effectively at the 2.0% target.” For potential tailwinds, however, she does name three: financial conditions, global growth, and fiscal stimulus.

Currency markets

The Yuan

The CNH will be closely watched in Asia today after some shifting sentiments were observed in the NY market. But the latest China inflation prints were failing to highlight just how problematic higher prices are for Chinese consumers while only suggesting that producers are unable to pass on higher cost from the weaker Yuan and or tariffs impact.

The US Dollar

Traders will be watch USD housing starts intently, remembering that the housing industry has been the most disappointing segment of US data in 2018.

While the TIC data has taken on a secondary level of importance in recent years, one question mark China’s holding of US Treasuries fell for a third consecutive month in August. I don’t believe there is anything sinister in this trend other than the fact the Pboc could be building their USD war chest to intervene if the Yuan moves too quickly above 7? Or its little more than prudent reserve management policy with the markets expecting the USD to struggle in 2019

We are starting to see signs of a USD capitulation ahead of the US midterms as dollar bulls are becoming increasingly nose-ringed to the US midterms elections.

The Euro
Currency markets are cautiously busy with most of the focus on JPY and EUR in New York, but well-worn ranges held

Little has changed from last week view that was dominated by risk reduction of USD long positions. In the meantime, the EURUSD is struggling to break through a wall of offers between 1.1600 -25. None the less, when EURUSD eventually breaks it’s 1.1450 1.1750 range, it will be through the top of the range, but given the temperament and choppy nature of trading the EURUSD these days, it will require a great deal of patience.

The Japanese Yen
The USDJPY moved convincingly lower on last week US equity led meltdown. Traders are monitoring the scope of the latest US equity market recovery. But on another equity market wobble risks remain more significant to the downside for USDJPY as the midterm US elections near.

The British Pound
Sterling has been weighed down by virtually every conceivable negative Brexit headline, but there is no denying the latest employment report that is signalling ages are now growing faster than prices!! The Pound continues to grind higher even although a Bank of England rate hike is very much dependant on Brexit going through

The Malaysian Ringgit

With China trade headlines mostly absent, regional markets have been much calmer this week. But oil has been sending mixed signals but remains well bid on dips, which should be supportive of the Ringgit, But the focus will be on   the CNH today( see above)

 

The buck cannot find a bid

Tuesday October 16: Five things the markets are talking about

The ‘big’ dollar came under pressure yesterday and is finding it difficult to gain much traction this morning as investors taking profit on U.S assets outweighs concerns about Italy, Brexit and a Sino-U.S trade war. Furthermore, twin U.S deficits and prospects of a halt in Fed’s rate hike cycle are also weighing on the dollar.

Elsewhere, it has been mixed picture across regional stock markets overnight as investors await the next wave of corporate earnings and further developments across the aforementioned geopolitical issues.

Note: Any hint of a slowdown or stronger growth could affect the pace of Fed’s rate hikes.

Oil prices continue to fluctuate within striking distance of recent highs amid tensions between Saudi Arabia and the U.S over the disappearance of Jamal Khashoggi, a prominent journalist with U.S citizenship, while the precious ‘yellow’ metal holds its gains.

On tap: FOMC minutes are due Wednesday (02:00 pm EDT), with investors focused on projections for further interest rate rises.

1. Stocks mixed results

In Japan, the Nikkei rebounded overnight, supported by short covering in index heavyweights (automakers and SoftBank), but retailers came under pressure on worries about domestic personal consumption and slowing demand from China. The Nikkei share average closed +1.3% higher, after tumbling -1.8% yesterday. The broader Topix rallied +0.7%.

Down-under, Aussie shares rebounded overnight, as mining and financials bounced back from Monday’s -1% drop and six-month low, but rising tensions between Saudi Arabia and the West and weaker PPI data in China capped broader market gains. The S&P/ASX 200 index rose +0.6%. In S. Korea, the Kospi stock index closed flat on Tuesday as global uncertainties capped gains during the day.

In China, stocks ended lower overnight, after data showed factory-gate inflation had cooled for a third consecutive month in September amid lean domestic demand. The blue-chip CSI300 index ended -0.8% weaker, while the Shanghai Composite Index also closed -0.8% lower. In Hong Kong, the Hang Seng was up +0.1%.

Note: Chinese inflation was boosted by food while prices were mostly subdued elsewhere. China Sept CPI y/y came in as expected at +2.5% vs. +2.5%e (a seven-month high): PPI y/y was +3.6% vs. +3.5%e.

In Europe, regional bourses trade mostly higher across the board with the Italian FTSE MIB outperforming following the submission of its draft budget to the E.C, while the U.K’s FTSE underperforms on Brexit uncertainty.

U.S stocks are set to open in the ‘black’ (+0.3%).

Indices: Stoxx600 +0.4% at 361, FTSE -0.2% at 7012, DAX +0.2% at 11638, CAC-40 +0.1% at 5099, IBEX-35 +0.9% at 9004, FTSE MIB +1.1% at 19500, SMI +0.3% at 8678, S&P 500 Futures +0.3%

2. Oil dips on expectations of higher U.S stocks, gold unchanged

Oil prices have eased a tad amid expectations of an increase in U.S crude inventories, but signs of a fall in Iranian oil exports for October are limiting losses.

Brent crude for December delivery has fallen -6c, or -0.07%, to +$80.72 per barrel, while U.S West Texas Intermediate (WTI) crude for November delivery is down -14c at +$71.64 a barrel.

U.S crude stockpiles are forecasted to have risen last week for the fourth consecutive week, by about +1.1M barrels, ahead of reports from the API (data is due at 4:30 pm today) and the U.S DoE’s EIA (will be released at 10:30 am EDT tomorrow).

In the first two weeks of October, Iran has exported +1.33M bpd of crude to countries including India, China and Turkey. That is down from +1.6M bpd during the same period in September.

Note: October exports are a sharp drop from the +2.5M bpd in April before President Trump withdrew from a multilateral nuclear deal with Iran. In May Trump ordered the re-imposition of economic sanctions on the country. The sanctions will come into force on Nov. 4.

Also supporting prices is today’s comments from OPEC’s Secretary General Barkindo who said, “global spare oil capacity was shrinking,” adding “producers and companies should increase their production capacities and invest more to meet current demand.”

Ahead of the U.S open, gold prices are holding steady near yesterday’s three-month high as a number of risk-averse investors seek refuge in the metal amid rising political tensions and economic uncertainty.

Spot gold was little changed at +$1,226.71 an ounce - it touched +$1,233.26 yesterday, its highest print since mid July, as global equities slid on rising tensions between the Saudi’s and the West. U.S gold futures are flat at +$1,230.40 an ounce.

3. German Bund yields edge higher

A cautious, risk-on mood currently prevails in eurozone sovereign bond markets so far this morning, with yields of German Bunds and of other core eurozone bonds up, and Italian bond yields down.

This would suggest that market risk sentiment may be improving following last week’s sudden correction, but the balance remains a tad precarious in the current political environment. German 10-year Bund yield has backed up +1.4 bps to +0.51%.

Note: The +0.50% level in Bund yields remains pivotal and with more debt product coming to market today (Germany offers +€4B in the September 2020-dated Schatz) should be able to back up sovereign yields a tad more.

Elsewhere, the yield on 10-year Treasuries has backed up +1 bps to +3.17%, the highest in a week. In the U.K, the 10-year Gilt yield has decreased -1 bps to +1.603%, the lowest in almost two-weeks, while in Italy, the 10-year BTP yield has declined -2 bps to +3.522%.

4. G7 currency pairs are little changed

Major currencies (€, £, ¥ and C$) are relatively unchanged ahead of the U.S open.

Dealers and investors have little technical or fundamental data to work with at current levels. In fact, the market is looking for guidance, which may come in the shape of the U.S Treasury forex report, which is likely to be released this week and where the U.S could name China a currency manipulator.

If the U.S were to name China a currency manipulator it would further pressure China on trade and add to the Sino-U.S trade tensions.

EUR/USD is flat at €1.1579 and other major currency pairs are not moving by much either. GBP/USD is up slightly at £1.3163 as leaders struck a conciliatory tone a day after Brexit negotiations broke down and USD/JPY is up +0.3% at ¥112.07

Elsewhere, the performance of several petro-forex (NOK, CAD, RUB) has been held back due to various unique factors that have not translated into a growth boost for these currencies. The ruble has been driven by U.S sanctions, and the Canadian dollar has been held back by NAFTA re-negotiations.

TRY (-0.20% at $5.7865) has retreated after seven days of gains after the country released U.S pastor Andrew Brunson on Friday.

5. U.K wage growth fastest in a decade

U.K data this morning showed that wage growth quickened over the summer at the fastest pace in almost a decade, adding to signs of inflationary pressure.

The ONS said that average weekly earnings in Britain, ex-bonuses, grew +3.1% in the three-months through August.

The figures will likely reinforce market expectations that the BoE remains on course tighten monetary policy over the next 24-months to keep overall price-growth in check, assuming the U.K.’s exit from the E.U goes well.

Other data showed that U.K unemployment in the three-months through August was unchanged on the previous three-months at +4%, while the number of people in work, +32.4M, remained close to its record high.

Note: The BoE hiked interest rate in August and signalled that they expect to do so again two or more times over the next couple of years to bring inflation back to their +2% annual goal.

A weaker pound since the Brexit referendum has to push up the price of imports, squeezing U.K citizens’ purchasing power.

Forex heatmap

Geopolitical risks and yields dominate proceedings

Monday October 15: Five things the markets are talking about

Following a weekend of warnings on global economic fragility from G10 finance leaders at an IMF meeting in Bali, has global equities starting this new week on the back foot, with regional bourses in Asia and Europe seeing red, while U.S equity futures are pointing to deep declines.

Sovereign yields are lower in this cautious climate, while yen has pushed higher along with gold. Crude oil has advanced as tensions rise between the U.S and Saudi Arabia over a missing journalist.

Politics and data are never a good mix and this week is awash with both.

Italy is to submit its contentious budget to the E.C. Already; the proposed budget has potentially broken specific thresholds, which would require a lot of debating from both parties. Expect Italian BTP yields again to come under pressure, backing up towards the psychological +4%.

The E.U meets on Wednesday and will get an update on the status of negotiations with the U.K’s Brexit. Expect the Irish border to be the ‘hot topic du jour. If there is insufficient progress, the possibility of a special summit next month to finalize an agreement looks dead in the water. Dealers expect the pound to remain volatile in the short-term.

The U.S Treasury report about the international economy and the FX market is to be released Tuesday. To neutral observers, China does not meet the threshold of “manipulation.” However, Trumps interpretation may be very different.

On the data front, the U.S releases retail sales this morning (08:30 am EDT) and FOMC minutes on Wednesday.

Across the pond, the U.K presents its labour report tomorrow, (Oct 16) inflation Wednesday (Oct 17) and retail sales Thursday (Oct 18).

In Canada, Friday’s upcoming data includes retail sales, and CPI – neither of the reports are expected to dissuade the market of pricing in a +25 bps rate hike at next weeks Bank of Canada (BoC) monetary policy decision.

1. Equities see red

In Japan overnight, the Nikkei closed at a two month low as automakers and other manufacturers were hit by news that the Trump administration would seek a provision about currency manipulation in future trade deals. The Nikkei share average ended down -1.8%, the weakest closing point since mid-Aug, while the broader Topix dropped -1.6%, the lowest close in seven-months.

Down-under, the ASX 200 fell to a six-month low overnight, led by the banking sectors growing concerns about the hit to earnings from an inquiry into misconduct. The S&P/ASX 200 index fell -1%. In S. Korea, the Kospi stock index fell -0.77% as institutions cut their exposure to riskier assets. The country’s biggest automaker Hyundai Motor slipped -1.7%, marking its lowest trading level in eight-years.

In China and Hong Kong, stock markets again slipped overnight following last week’s deepest dive in eight-months, as investors await the latest twist in the Sino-U.S trade dispute. The Shanghai Composite index closed lower by -1.5%, while in Hong Kong the Hang Seng closed -1.4% lower.

In Europe, regional bourses trade lower across the board, tracking U.S futures and Asian indices lower. The FTSE and sterling (£1.3140) trade a tad lower after the E.U and U.K paused Brexit talks until after this week’s mini-summit.

U.S stocks are set to open deep in the ‘red’ (-0.8%).

Indices: Stoxx600 -0.6% at 356.8, FTSE -0.3% at 6976, DAX -0.4% at 11474, CAC-40 -0.6% at 5066, IBEX-35 -0.3% at 8876, FTSE MIB -0.2% at 19225, SMI % at -0.8%, S&P 500 Futures -0.8%

2. Oil prices rise on Saudi tensions, gold higher

Oil prices remain bid this Monday morning as tension over the disappearance of a Washington post journalist and Saudi critic, Jamal Khashoggi, fuelled supply worries, although concerns over the long-term demand outlook dragged on sentiment.

Brent crude oil jumped +$1.49 a barrel to a high of +$81.92 before easing to +$81.13, up +70c. U.S crude (WTI) was last up +40c at +$71.74.

Saudi Arabia has been under pressure since Khashoggi, a U.S. resident, disappeared on Oct. 2 after visiting the Saudi consulate in Istanbul.

President Trump has threatened “severe punishment” if it is found that the journalist was killed in the consulate.

On Sunday, the Saudi’s said it would retaliate to any action taken against them over the Khashoggi case. The market is tentatively concerned that the Saudis may use oil as a tool for retaliation.

Despite prices starting the week better bid, there are still lower that last week’s high print.

Also limiting price gains is a report from the IEF last Friday stating that the market looked “adequately supplied for now” and cut its forecasts for world oil demand growth this year and next.

Ahead of the U.S open, gold prices have jumped +1% to hit a three-month high as global stocks resumed their fall and investors wrestled with the impact of the ongoing Sino-U.S. trade war and higher U.S interest rates. Spot gold is up +0.9% at +$1,228.24 an ounce, while U.S gold futures are up +0.8% at +$1,231.80 an ounce.

3. Italian and Portugal yields fall

Portuguese and Italian government bond yields have fallen this morning, with prices outperforming euro zone peers after ratings agency Moody’s upgraded Portugal’s credit rating back to investment grade.

Portugal’s 10-year bond yield fell -4 bps to +2.01% after Moody’s lifted its credit rating to Baa3 on Friday.

The positive periphery sentiment from Portugal has spilled over into Italy’s battered bond market. Italian 10-year BTP yields are down -4.5 bps to +3.53%.

Note: Expect Italian yields to trade rather volatile this week as Italy presents its budget to the E.C.

Elsewhere, the yield on U.S 10’s fell -1 bps to +3.15%. In Germany, the 10-year Bund yield has dipped -1 bps to +0.49%, the lowest in more than a week. In the U.K, the 10-year Gilt yield has eased -2 bps to +1.614%, the lowest in more than a week.

4. Dollar’s safe haven flows ease

Risk aversion flows initially provided a bid for the traditional safe-haven currencies of JPY (¥111.75) and ‘big’ USD, however, market sentiment has eased a tad ahead of the U.S open.

GBP (£1.3147) opened below the psychological £1.31 handle on concerns that a Brexit agreement might be slipping away after the U.K and E.U negotiators were said to have called ‘a pause’ in their Brexit talks and would now wait for the outcome of a summit mid-week (Wed) before any resumption.

TRY ($5.8208) is firmer by over +1% outright for its seventh session gain on optimism that relations between Turkey and U.S would improve following the release of U.S Pastor Brunson.

Bitcoin prices have spiked +6.5% this morning, jumping above +$6,600. While the catalyst behind the move higher is not clear and with few ready to label bitcoin a “true store of value” in turbulent times, BTC has held up better than most of late.

5. Embarrassing losses in Bavarian election shake Merkel’s coalition

Germany’s grand coalition could become even further unstable after coalition members suffered humiliating results in an election in the southern state of Bavaria.

Chancellor Merkel’s Bavarian allies slumped to their worst election results in almost 70 years and her junior coalition partners, the center-left Social Democrats (SPD), saw support in Bavaria halved.

The SPD had hoped that infighting over immigration between Merkel’s Christian Democrats (CDU) and the Bavarian Christian Social Union (CDU) allies would give them a boost in Bavaria.

But instead, the party saw support fall to just under +10%, prompting a discussion over the sustainability of its alliance with Merkel’s conservatives at the national level.

Note: SPD members are still bitter over their leaders’ decision to join a Merkel-led government.

Merkel’s authority may be called into question as soon as in two-weeks in an election in the western state of Hesse - the state is ruled by Merkel’s CDU in a coalition with the Greens, but polls suggest she is losing further support.

Forex heatmap

Asia Market Update :echoes of October past

Asia Markets 

Asia shares are trading lower this morning led my losses on the Nikkei which is down 1.4 % ahead of a supplementary budget but the usual themes are weighing on local sentiment. Concerns over China -U.S. trade tensions, a possible slowdown in the Chinese economy and higher U.S. interest rates continue to sour market views as domestic investors are better sellers than buyers of risk, despite  US market showing signs of stabilizing on Friday. Indeed the fear around US tariff increases due to take effect in January 2019 is factoring. And when compounded by the Bank of Communications suggesting China home prices are likely to fall in the next two quarters will indeed weigh on China markets. Indeed echoes of October pasts are reverberating across global capital markets.

Oil Markets update

After the initial spike higher on Saudis threat to hit back again any sanctions news, markets are settling in as the duelling narratives unfold. The lack of a current fundamental supply deficit in oil markets as supported by International Energy Agency monthly Oil Market Report indicating global demand is lower and terming supplies “adequate for now” Versus the spare production capacity argument especially if the market underestimates the supply crunch from Iran sanctions and Venezuela production. But let’s face it, we are little more than on supply disruption for prices shooting higher over the near term with traders now eyeing Libya after the NOC  warned of a possible closure of Zawiya refinery if security is not shored up.  The markets continue to trade gingerly with a positive bias as the Saudi narrative unfolds with Saudi suggesting $200 per barrel Oil not out of the question.

Gold Markets

Gold remains supported by escalating Geopolitical tensions as smouldering embers in the Middle East are yet set to ignite again on the latest Saudi developments. Adding the mix is the though may consider pausing their widely expected rate hike in December if global equity markets continue to falter. But an abrupt shift in Fed policy will likely lead to a lack of confidence in the worlds most important central bank and could destabilize markets further.

CNH

Focus back in the CNH has Pboc suggests there is plenty of room for monetary policy adjustment amid trade war. But tempered rhetoric by suggesting the currency was near fair value.

Reuters

They Yuan is fixed firmer than expected, however, and the market is not taking USDCNH higher.

Malaysia

China has agreed to purchase 500K tons of palm oil, which should support those local constituents on the Bursa Malaysia. No currency reaction to this news so far.

Brexit

So much for the defining moment in the Brexit negotiations after a tense standoff overnight, PM May sent Brexit Secretary Dominic Raab to Brussels, who then hightailed it home after only 1 hour after meeting with Barnier. The Pound has traded lower but finding tentative support around 1.31 as the Brexit roller coaster continues.

German Politics 

Perhaps flying under the radar Angela Merkel’s sister party has suffered massive losses in Bavaria’s state elections, exit polls suggest, in a blow to the German chancellor. The Euro hasn’t reacted to much to this news as I suspect dealers have bigger fish to fry as Italy’s budget is set to be offered up to the EU committee.

Rethinking it

Echoes of October pasts are reverberating ( OANDA Trading Podcast with BFM89.9)

Join me live discussing this morning Asia open at 12:15 PM SGT on  WATCH FRANCE 24 LIVE

Rethinking it

Rethinking it

Risk sentiment stabilised primarily on the back of reports that the Treasury Department will NOT recommend China be labelled a currency manipulator along with headlines that Trump and Xi will meet on trade seems to be enough reason for the equity sell-off to cool. But indeed never has so much been riding on the contributions of so few. 

Once again market sentiment is being driven by rhetoric from US administration and Trump himself who has been quick to point fingers at just about anyone and everyone. Whether its the Fed has gone crazy, OPEC is causing an oil spike, China at fault for trade tension and declaring his policies are hurting China.  But from my chair, the message is loud and clear,  all designed to stir his support base into a frenzy ahead of the November midterms.

It ain’t over till it’s over

Initially, the market was interpreting higher US rates as a signal to deleverage given that most of the economic expansion was assisted by QE, both in the US and globally. So draining the punch bowl and tightening rates were weighing on sentiment. Ok, we get that! But gradually moving interest rates higher in themselves are not necessarily a bad thing for markets especially coming off historically low rates. Most market participants have never traded a rate hike cycle, and for some of the dinosaurs, it appears they have forgotten what rate hike cycle is. When in fact it’s the moment the Feds shift toward a dovish defensive stance after a period of tightening is the time to worry! Presumably, the Federal Reserve Board tightens when the economy is on hot, and the eases when it’s not.

Maybe and just maybe investors are waking up to the fact that much of this market frothiness is a result of financial engineering aided by the intravenous drip of seemingly endless supplies of cheap money. The result could very end up being a stock market built on a leveraged House of Cards which is about to topple after the US tax cuts have run there course. Indeed, credulousness may be giving way to the facts on the ground.

The possible Fed implication

If the equity markets continue to fall into December, the Fed will most certainly consider pausing raising interest rates. You can imagine what type of signal that will suggest to investors who in the face of soaring equity valuations, escalating global trade tensions and divergence in the whole growth narrative especially now that their fingers are glued to the sell button after last weeks carnage. And while the bar is exceedingly high for the Fed to pause in December, it’s not as high this morning as it was a week ago!

Oil Markets

WTI prices have shot higher at the NYMEX futures open after Saudi Arabia warned Sunday it would respond to any “threats” against it as its stock market plunged following President Donald Trump’s warning of “severe punishment” over the disappearance of Washington Post contributor Jamal Khashoggi.

Given that oil supply is Saudia Arabia ‘s” ace in the hole” The Kingdom has motioned it could use oil supply as leverage against any sanctions.  Another geopolitical hotspot for the US administration to navigate but this one extremely testy given that President Trump has been pressuring Saudi to up supply to counter the US-led Iran oil sanction

Despite oil prices making a fast retreat last week and e global growth downgrades at this week IMF in Bali.  The spare production capacity argument should continue to support oil over the short term. The IEA pegged spare capacity at around 2 million barrels per day. But the markets know these reserves have never been tested raising the questing how much spare capacity can be brought online immediately But in the meantime until additional supplies are made available, that crimp in supply should be enough to support OIl prices until proven otherwise.

Oil Bears came out of hibernation last week even despite falls in Libya’s crude output. But price actions were driven primarily by an Oct. 8 report from the IMF, in which it downgraded global economic growth forecasts for 2018 and 2019 to 3.7 per cent per annum, from 3.9 per cent, which would consequently lower oil demand. Then pandemonium was unleashed across global markets as the worldwide stock markets tanked triggering an exit from riskier assets.  And while the  S &P stabilised well and continued to roll with the punches, but Oil markets were so eager to snap back. Oil prices initially struggled to follow the equity market lead, after the International Energy Agency monthly Market Report adjusted demand lower by 110,000 bpd for both 2018 and 2019, reported an increase of 100,000 bpd in September OPEC production while pointing out OECD data suggest oil stocks are at the highest level since February. While advising the markets are adequate supplies which again highlights uncertainty of supply once the US sanctions on Iran take effect. Lordy Lordy, it’s a noise market

Despite managing to eek out a win on the day, Brent was lagging WTI on Friday highlighting the lack of fundamental deficit in the oil market, with the International Energy Agency monthly Oil Market Report demand lower and terming supplies “adequate for now”.And  WTI could still be drawing support from Hurricane Micheal induced outages.

Drillers added eight oil rigs in the week to Oct. 12  according to Baker Hughes. Mainly attributed to the November 1 Plains All American Pipeline Project which is set to start flowing on Nov 1 and should ease pipeline bottlenecks that have lower crude prices in the Permian Basin. The Sunrise Pipeline has a reported capacity of about 500,000 barrels per day.

Oil COT report 

The Commitment of Traders data, HEDGE FUND net position changes in the week to Oct 9:
Brent -6mn
WTI -37mn

Gold Markets

The precious complex is trading of the intersession highs as one would expect after the larges jump in years. In reflection, the move was a combination of a haven and full short covering. But this would leave the current landscape extremely shaky if both stocks and US rates markets recovered significantly in the days ahead. But with geopolitical noise ratcheting higher in Saudi Arabia

Currency Markets 

EURO
Given all these tectonic shift in market sentiment, currency markets have this air of unpredictability about them, not more so then the EURO as its completely unclear if Friday’s move was confirmation of the downtrend or nothing more than weekend position squaring. Talking to my circle of G-10 traders this morning I get the feeling that more are coming to a conclusion ahead of the US midterms and wobble equity markets, the USD is there for the taking. After the market’s reaction to Nikki Halley resignation when the USD sold off, its probably a sign of things to come as the pendulum swings between the GOP keeping or losing control of Congress

Japanese  Yen

Kuroda and company have been floating trial balloons the IMF conference in an attempt to gauge market sentiment and prepare currency traders for the inevitable rate hike. The BoJ   desperately wants to help Japan’s  banking sector and improve the monetary transmission mechanism channels to allow the banks to raise the cost of borrowing, after a decade of struggling

The Malaysian Ringgit 

Traders are awaiting US Treasury Department’s currency report on Monday/ Tuesday, where it rumored they won’t classify China as a currency manipulator which could avert an EM Asia currency meltdown and would forestall an escalation of the U.S.-China trade war. Oil prices look supportive in early trade but the overhang from fiscal concerns around the upcoming budget should temper any strengthening in the local note.

The IMF Bash in Bali

IMF Managing Director Christine Lagarde doubled down on the messaging.

“Our message was very clear: de-escalate the tensions,” she told Bloomberg Television in an interview, about US-China tensions. But with no hints of a resolution or fixed purpose for that matter, the parties are no closer than they were before the soiree.

 

 

Friday’s relief rally in full swing

Friday October 12: Five things the markets are talking about

Volatility, in particular, for equities, has notched aggressively higher this week, now that sovereign bond yields are beginning to price out cheap money.

Stronger than expected U.S economic data and weak European underlying inflation in key countries is being blamed as the specific trigger for this week’s ‘bearish’ bout.

However, Chinese trade data released earlier this morning showed better-than-expected growth in Chinese exports has, at least temporarily, helped ease investor concerns about the damage to China’s economy from U.S tariffs and other trade friction.

China’s trade surplus with the U.S widened to a record +$34.1B in September as exports to the American market rose by +13% y/y, despite a worsening tariff war.

Global equities have staged a robust recovery; the ‘big’ dollar trades steady, U.S Treasury yields back up and crude oil prices recover while still heading for the biggest weekly drop in three-months.

Nevertheless, a gradual Fed rate increase remains the order of the day, especially after yesterday’s muted U.S CPI data - the market is pricing in a +25 bps move in December.

Since the Fed’s last meeting in September all data has been in line with the Fed’s depiction of an economy in which low unemployment will be coupled with inflation running near +2% for the foreseeable future.

1. Stocks sell off ends in Asia

Chinese stocks, among the biggest losers in a global market selloff this week, rallied overnight, as investors reassessed the impact of the Sino-U.S trade spat on the country’s economy and its markets.

In Japan, the Nikkei ended higher on Friday as investors took heart from gains in Chinese equities on upbeat export data, which generated buying in manufacturers exposed to China. The Nikkei share average gained +0.5%. On Thursday, the index slid -3.9% and for the week the index was down -4.6%, its biggest weekly drop since March. The broader Topix traded flat.

Down-under, Australia’s ASX 200 lagged most of Asia Pacific overnight as the heavily weighted energy and financial sector held the index back. It ended +0.2% higher, but fell -4.7% for the week. In S. Korea, its stock market rebounded from one of its biggest drops in seven-years. The Kospi rallied +1.5%, its first gain this month. The index fell -4.7% for the week.

In China, the main stock indexes bounced higher overnight after suffering massive losses this week, as investors went bargain hunting on the back of stronger Chinese exports data. At the close, the Shanghai Composite index was +0.9% higher, after touching near four-year lows yesterday. The index was down -7.6% for the week, its worst weekly performance in eight months. The blue-chip CSI300 index closed +1.49% higher.

In Europe, regional indices trade higher across the board rebounding from multi-month lows following a rebound in U.S index futures and Asian Indices.

U.S stocks are set to open deep in the ‘black’ (+0.8%).

2. Oil rebounds, but pares gains on adequate supply, gold lower

Oil has rallied overnight; rebounding after two-days of heavy declines, though prices pared gains after an IEA report deemed supply adequate and the outlook for demand weakening.

Brent crude has rallied +76c to +$81.02 a barrel, having dropped by -3.4% yesterday. U.S crude (WTI) has added +71c to +$71.68.

Note: Brent is still on course for a -3.7% decline this week, the biggest weekly fall in about four-months.

Oil found support from data showing that China’s daily crude imports last month hit their highest in four-months and from a rebound in equities.

Gains were pared, after a monthly report by the IEA said the oil market looked “adequately supplied for now” after a big rise in production and trimmed its forecasts for world oil demand growth this year and next. “This is due to a weaker economic outlook, trade concerns, higher oil prices and a revision to Chinese data,” said the IEA.

Ahead of the open, gold prices are under pressure as global equities rally, but the ‘yellow’ metal trades within striking distance of its 10-week high print in yesterday’s session. Spot gold is down -0.4% at +$1,218.86 an ounce, after rallying +2.5%yesterday, as this weeks equity rout sent investors rushing to safe-havens. U.S gold futures are down -0.4% at +$1,222.30 an ounce.

3. Yields back up on relief

Eurozone government bond markets show signs of relief as equity markets rebound. The 10-year Bund yield is trading +2.3 bps higher at +0.54%, pulling the yields of other core and semi-core issuers higher.

Note: Bunds yields are down from five-month highs reached earlier this week at +0.58%.

Eurozone periphery government bond yields trade lower, indicating a lower level of concern, at least for the day. Italy’s 10-year BTP yield is trading -4.5 bps lower at +3.53%.

Note: Italian 10-year bond yields rose to five-year highs earlier this week on tension between Rome and the E.U over Italy’s expansionary budget plans.

Elsewhere, the yield on 10-year Treasuries has backed up +3 bps to +3.18%, the biggest advance in a week. In the U.K, the 10-year Gilt yield has gained +2 bps to +1.694%. In Japan’s 10-year JGB yield has climbed less than +1 bps to +0.15%.

4. Dollar stable, EM pairs rally

USD initially tested multi-week lows as a weak Wall Street soured its recent bullish sentiment. Nevertheless, the greenback is off its worst levels as the equity sell-off has eased.

After jumping to an 11-day high of €1.1611 overnight, the dollar has stabilized and EUR/USD trades slightly higher, last by +0.1% at €1.1593. However, expect Italian fiscal risks and the direction of U.S yields to continue to drive the EUR/USD.

Emerging-market currencies are having another good day after weathering the global equity selloff this week. The South African rand is up +1.1% at $14.483, and the Mexican peso has gained +1.5% at $18.8718. The Turkish lira has paired some of its gains, but its trading +2% at $5.9451 – up +5% on the week.

The PBoC set yuan at weakest level since March 2017, a day after U.S Treasury staff advised Secretary Steven Mnuchin that China was not manipulating its the exchange rate. The midpoint for the dollar was ¥6.9120.

GBP/USD (£1.3215) is trading within striking distance of its three-week highs on hope for a Brexit agreement at the upcoming E.U leader summit next week. There is speculation that PM May is close to an agreement, but obstacles remain, as she requires the DUP Party ally and rebel Tory members support.

5. Eurozone factory output rebounds

Data this morning showed that industrial production in the eurozone rebounded strongly in August, as surges in Italy and the Netherlands offset weakness in Germany to suggest economic growth across the currency bloc continues at a modest pace.

The E.U’s statistics agency said industrial production was +1% higher in August than in July, and up +0.9% on year. The market was looking for a monthly gain of just +0.2%.

It was the first rise in production since May, following two straight months of decline.

Today’s healthy rebound will likely reassure the ECB that the economy is on course to grow more slowly this year than last, but still at a rate that will lead to new jobs being created, thereby pushing wages and inflation higher.

Note: The IMF trimmed its eurozone growth forecast for this year to +2% from +2.2%, noticeably downgrading its growth projection for Germany to +1.9% from +2.2%.

Forex heatmap

Dollar gains pause, but probably not for long

Wednesday October 10: Five things the markets are talking about

U.S treasury yields are largely stable, after declining from their seven-year high print yesterday.

Euro equities are on the back foot after Asia stocks managed to break a multi losing session.

Elsewhere, the ‘big’ dollar has stalled temporarily after U.S President Trump said the Fed should not raise interest rates as fast. However, Trump’s plea is unlikely to alter the broader theme of dollar gains in the short-term.

Dollar ‘bulls’ have yet to have a clear understanding of what the top is for the Fed cycle, and until the Trump administration changes its tune on China and trade, investors will continue to support the USD against emerging markets and pro-growth currencies.

For the dollar ‘bear’s’ next month’s midterm elections have the potential to derail dollar demand, especially where the loss of the House by the GoP would curtail most hopes for fresh fiscal stimulus. However, a month is a long time in politics.

Despite the U.S bond rout easing a tad, +$230B of new U.S debt is coming to the market this week, which should put pressure on dealers to back up yields.

U.S producer and consumer price data is also due in the next two-days and it too will determine where yields go from here.

1. Stocks mixed results

In Japan, the Nikkei edged a tad higher overnight as investors picked up defensive stocks on the dips, while index-heavyweight SoftBank dived on news it was to buy a majority stake in U.S shared office space provider WeWork. The Nikkei share average ended +0.2% higher, while the broader Topix was also up +0.2%.

Down-under, Aussie stocks rallied after its worst 48-hours in six-months. The ASX 200 closed +0.1% higher as the health-care sector rebounded +1.5%, reversing some of yesterday’s -3.9% losses, the biggest drop in seven-years. In S. Korea, the Kospi stock index closed down -1.12% overnight, hitting its lowest close in 18-months after the IMF cut its growth forecast for the country.

In China, stocks were mixed after the close overnight, as gains in utilities and communications led shares higher while losses in the energy sector led shares lower. At the close, the Shanghai composite rallied +0.18%.

In Hong Kong, stocks closed marginally higher earlier this morning, with investors remaining nervous about volatility in the U.S and a weak yuan. The Hang Seng Index edged up +0.08%.

In Europe, regional bourses continue their bearish tone with declines across the board. Sino-U.S trade concerns, coupled with Italian budget and U.K Brexit commentary continue to weigh on markets.

U.S stocks are set to open in the ‘red’ (-0.1%).

Indices: Stoxx600 -0.4% at 371.5, FTSE -0.1% at 7227, DAX -0.6% at 11904, CAC-40 -0.7% at 5283, IBEX-35 -0.6% at 9203, FTSE MIB -0.2% at 20023, SMI 0% at 8960, S&P 500 Futures -0.1%

2. Oil dips as IMF cuts growth outlook; eyes on hurricane

Oil prices have eased a tad after the IMF yesterday lowered its global growth forecasts. Nevertheless, markets are well supported on pullbacks as Hurricane Michael, a category 4, moves toward Florida causing the shutdown of nearly +40% of U.S Gulf of Mexico crude production.

Brent crude is down -20c at +$84.80 a barrel, after a +1.3% gain on yesterday. U.S light crude is down -15c at +$74.81.

Also providing an underlying bid is data showing crude exports from Iran, OPEC’s third-largest producer, are declining before the imposition of new U.S sanctions next month.

According to tanker data, Iran’s crude exports fell further in the first week of October, as buyers sought alternatives ahead of U.S sanctions that are to take effect on Nov. 4. Iran exported +1.1M bpd of crude in the first week of October, down from at least +2.5M bpd in April – before President Trump imposed sanctions.

Yesterday, the IMF cut its global economic growth forecasts for 2018 and 2019, raising concerns that demand for oil may also slump.

Ahead of the U.S open, gold is holding steady in a narrow range overnight, as the ‘big’ dollar pulls back from its seven-week high - support remains strong for the dollar on the back of a strong U.S. economy and expectations of steady interest rate hikes by the Fed. Spot gold is little changed at +$1,189.35 an ounce, moving largely within a +$4 range. U.S. gold futures have rallied +0.1% to +$1,192.60 an ounce.

3. Sovereign yields dip, including Italy’s BTP’s

Italian BTP yields have eased a tad this morning after Italy’s Economy Minister Giovanni Tria confirmed budget forecasts and said that he expected collaboration with the E.U over the budget.

After hitting multi-year highs yesterday, Italian government bond yields fell -2 bps along the curve – the two-year BTP yield fell to +1.70%. The spread of Italy’s 10-year BTP’s over Germany’s has widened +10 bps to +3.026%.

Yesterday, President Trump repeated his displeasure with higher short-term interest rates set by the Fed. Trump believes U.S inflation remains “in check,” which does not warrant a tighter monetary policy, especially at the Fed’s current pace.

The yield on U.S 10’s has eased -1 bps to +3.21%. In Germany, the 10-year Bund yield has decreased -1 bps to +0.54%, while in the U.K, the 10-year Gilt yield has backed up less than +1 bps to +1.719%.

4. Dollar takes a breather

The pound (£1.3160 +0.10%) has advanced to a four-month high against the EUR and a two-week high against the dollar, on signs of momentum in the Brexit negotiations. According to the Times, a group of between 30 and 40 Labour members of parliament will defy Jeremy Corbyn and endorse a less hard-line proposal to prevent a ‘no-deal’ exit from the E.U.

Note: Both the U.K and E.U are said to have made progress in Brexit negotiations over Irish backstop.

Rising Italian bond yields continue to provide some resistance for the EUR (€1.1482), but major falls are not in the cards as long as the ‘single’ unit’s existence is not threatened, and as long as the ECB indicates ‘whatever it takes’ promise is in place.

The USD/JPY (¥113.19) is a tad higher as the yen snapped a four-day winning streak as some safe-haven flows retreated as U.S Treasury rates stabilized.

5. U.K economy picked up in the summer

Data this morning showed that U.K economic growth picked up over the summer, supported by stronger retail sales and house building in response to warmer-than-usual weather.

According to the ONS, economic output in the three-months through August was +0.7% higher than in the three-months through May, equivalent to annualized growth of +2.8%.

However, there were signs that the U.K economy was losing traction towards the end of the period, with output flat in August compared with July.

According to the ONS, “the economy continued to rebound strongly after a weak spring with retail, food and drink production and house building all performing particularly well during the hot summer months.”

Note: The BoE indicated it would follow its two rate rises with a number of further moves over the coming years if the economy continues grow at around its current rate. However, expect the Brexit strategy to determine monetary policy, at least in the short-term.

Other data showed that the U.K’s trade deficit widened in August as its goods deficit deepened to -£11.2B from -£10.4B in July, while its manufacturing output was -0.2% lower in August than in July, a second straight month of decline.

Forex heatmap

Another ominous Yuan fix?

The Yuan
Another ominous signal from this mornings Yuan fix has sent Yuan bears into action. While the counters cyclical mechanism pegged the fix lower than yesterday close, we’re still trading at year highs suggesting the central bank is in no rush to stem the weakening tide. However, this does run contrary to statements from the bank overnight that they will not use the Yuan as a tool in a trade war, but as history reminds us, the Pboc remains very fluid when it comes currency policy.

OANDA Trading podcast: CNH and IDR insights with MONEYFM 89.3

Equity market reaction

The local equity markets, along with global equity index futures markets are not reacting well to traders pushing the Yuan envelope, USDCNH higher. Market continue to underprice the destabilising effect of a weaker Yuan will have on global equity markets.

 

Gold Market
While keeping a close eye on equity sentiment, gold traders gently buying gold in the event the latest markets developments could trigger and downwards spiral on global equities. While I don’t believe this is a significant enough trigger at this stage, but when compounded with the potholed encumbered landscape, it’s worth keeping an eye on

Oil Markets

Batten down the hatches Hurricane Micheal is intensifying, adding some support to prompt contracts

Japanese Yen
Price action can be very deceiving, a ten-pip range in USDJPY but given the heightened level of discussions around Yen and BoJ this morning, something is going to give.

Japan’s economy is alive kicking by any measure but today’s over the top machine orders data that printed 6.8%MoM versus -3.9% expected and the YoY number rose by 12.6% versus 1.8% is a stunner by any stretch of the imagination prompting the Cabinet Office upgraded its assessment of machinery orders, saying they are in recovery.

The markets are still positioning for to a 115-year-end target of USDJPY, but the economic revival along with the weaker Yen of late does suggest the BoJ does have some wiggle room to tack to a more hawkish target.

Australian Dollar
Not to unexpectedly the Australian dollar ran into a wave of interbank offers and has traded off intersession highs.