Turn Around Tuesday?

Overview:  The S&P 500 tumbled for its fourth consecutive, the longest losing streak since February.  The dollar strengthened broadly.  Part of this may be the safe-haven bid the dollar often seems to have, reflecting the unwinding of financial structures when risk assets sell-off hard.  Part of it appeared to be foreign investors liquidating stocks and buying back their hedges.  The dollar topped, and the stock market bottomed into the European close.  The overextended nature of some of the equity markets meant that any spark could start a fire.  It is hard to identify the precise spark, but among the likely candidates would be the Fed's apparent reluctance to provide more support despite its own forecasts not showing a full recovery for three years, the new surge of the virus in several European countries, and what seems to be a further deterioration of Sino-American relations.   Asia Pacific shares were lower, led by a 2.4% decline in South Korea and around a 1% loss in China and Taiwan.  Tokyo markets remain closed today and will re-open tomorrow for the first time this week.  European bourses are faring better, and the Dow Jones Stoxx 600 held yesterday's lows and holding on to modest gains near midday.  Information technology and communication services are among the better performers, while utilities struggled, and financials lagged.  US shares are trading a little changed, and so far holding yesterday's lows.  Benchmark bond yields slipped in the Asia Pacific region and in the European periphery, but core bond yields and the US 10-year Treasury are little changed.  The greenback remains broadly firmer.  It has recovered smartly from the lower end of its range.  Although there were rumors of BOJ intervention yesterday when the dollar recovered quickly and sharply off the JPY104 level, we are skeptical.  The intervention would have taken place while the US market was open, which protocol requires notifying US officials, which would likely have been a deterrence and seemingly skipping the verbal intervention step in the escalation ladder.  Gold held yesterday's low near $1882.50.  Last month's low was nearer $1863.  It is poking above $1900 in  Europe.  November WTI slipped below $39 a barrel yesterday but has remained above there today and is testing the $40 area.   

Asia Pacific

Cross-strait relations are tense.  After crossing the middle of the Taiwanese Straits with more than a dozen aircraft over the weekend, reports suggest that anti-submarine aircraft were seen doing the same thing today.  Although many press reports highlight how China sees Taiwan as a renegade province, the truth of the matter is that so do many other countries, including the US, which for over 40-year has a one-China policy.  Beijing often seems willing to "let sleeping dogs lie," confident that its growing strength and power will win out in the long-run. It has demonstrated a resolve to resist efforts that seek to resolve ambiguous situations in the present.  The US is pressing hard with arms sales and the most high-ranking visits in a few decades.  Beijing will not accept a fait accompli.  Both Xi and Trump are to address the UN today.  

The Deputy Governor of the Reserve Bank of Australia Debelle laid out a range of policy options if needed though committed to none.  Earlier this month, it expanded its Term Funding Facility, which makes loans, which Debelle recognized as similar to QE.  Many suspect that the RBA will move again, and some think as early as next month's meeting (October 5).  The Australian dollar extended yesterday's losses with Debelle's comments and fell to its lowest level in nearly a month (a little below $0.7180) but recovered back above $0.7200 in Europe.  The Reserve Bank of New Zealand will announce its decision first thing tomorrow in Wellington and is widely expected to stand pat. 

The dollar is trading near the upper end of yesterday's range against the yen but has been confined to a narrow band today of a little more than a quarter of a yen. Japanese participants have been on holiday and return tomorrow.  Net-net, the dollar is little changed against the yen from the end of last week just below JPY104.60.  The Australian dollar has pared its earlier losses but needs to push back above the $0.7240-$07.260 area to lift the technical tone.  On the downside, the lows from late last month were near $0.7135.  The PBOC set the dollar's reference rate around 60 bp above, where Bloomberg's survey of bank models suggested.  This partly reflects the greenback's surge, but many see it as a protest against the recent sell-off after reaching levels not seen in 16 months. Nevertheless, the yuan is stronger today, and its 0.3% gain today puts it among the strongest currencies.   

Europe

The UK is fighting on two fronts.  Negotiations with the EU over the future trade agreement continue, but progress seems minor, and time is running out.  Although the standstill period runs until the end of the year, it is widely understood that an agreement is needed around the summit in the middle of next month to ensure members have time for the ratification process.  The other front is the virus, and the UK is encouraging a return to working from home and other social distancing measures, including new restrictions on restaurants and bars.   Bank of England Governor Bailey speaks today amid speculation that it will ease policy as soon as its next meeting (November 5)

The battle in cyberspace is not simply about Chinese apps, which India has also limited, more so than the US, but fissure between the US and Europe is over the protection of personal data.  A preliminary order handed down by a Dublin court last month prevents the transfer of data about European customers to the US over concerns about the government's surveillance of the data.  Facebook has filed a lawsuit challenging the decision as the initial decision was by Ireland's data protection commissioner rather than the Irish parliament.  Last week a judge permitted Facebook's challenge to go forward and froze the commissioner's decisions.  Facebook says that there are some 410 mln EU users, and the companies that use its platform generated 208 bln euros in sales.  Facebook and other companies' strategy is driven by the transfer of data worldwide to target users with advertisements.  

Local elections in Italy saw the Democrat Party win in three of four regions, including Tuscany.  The Five-Star Movement, born out of the Great Financial Crisis and the European sovereign crisis, faltered, slumping to single-digit support.  However, the referendum it backed to reduce the size of parliament appears to have won handily.  The League's Salvini struggled, and his more pragmatic rival (Zaia) may challenge him down the road for leadership of the party.  

The euro is trading nearly three cents lower than when the ECB's economist Lane spoke at the start of the month.  He speaks again today.  The euro posted an outside down day yesterday, and follow-through selling saw it reach $1.1720 before finding a bid.  The $1.1770-$1.1780 area may cap it today.  It probably takes a break of $1.1700 to trigger another round of stop-loss selling.  For the first time in two months, sterling traded below, albeit briefly, the 200-day moving average (~$1.2725).  That area also houses the (61.8%) retracement of the rally Q3 rally.  Sterling recovered, but the $1.2850-$1.2870 area looks like a cap now.  Separately, as widely anticipated, Sweden's Riksbank did not change policy and kept its rate trajectory that does not envision a change in rates before Q3 2023. The dollar extended gains against the krona, though the cross against the euro is within yesterday's ranges.  

America

Powell and Mnuchin speak before Congress today.  The Federal Reserve chief will emphasize that while the early recovery was encouraging, great uncertainty remains, and it will take a few years for the economy to fully recover.  He will continue to press for more fiscal support, which still seems out of reach until after the November election.  

The US reports August's existing-home sales.  The median forecast in the Bloomberg survey sees a 2.4% gain on top of July's nearly 25% surge.  Economists seem to be over-estimating the strength after the initial surge in activity, and the risk appears to be on the downside.  The September Richmond Fed manufacturing survey will also be released today, and a sequentially softer report is expected.  Canada and Mexico's calendars are light.  

The US dollar extended yesterday's gains against the Canadian dollar to almost CAD1.3350, its highest level since August 12.  This is a little shy of the halfway point of the greenback's slump since the end of Q2.  A move above CAD1.3360 could target the next retracement level (61.8%) found around CAD1.3440.  The greenback is finding support near CAD1.3300.   The intraday technicals suggest limited downside, but a recovery in equities could see it near CAD1.3260.  The Mexican peso's six-week rally ended with a bang.  The dollar had bounced from around MXN20.85 at the of last week to MXN21.59 yesterday.  It set today's high (~MXN21.54) in Asia and the low in the European morning (~MXN21.33).  Look for it to track risk-appetites as reflected in US equities today.  Lastly, note that Argentina's dollar bonds, which were recently restructured, have come under strong downside pressure, retreating for the fourth consecutive session yesterday to trade near 40 cents on the dollar.  Stringent capital controls are also biting.  

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