Overview: The start of the new week has not broken the bearish drive
lower in equities. Several Asia Pacific centers were closed, including Japan, Taiwan,
and South Korea. China’s markets re-opened, and the new US sanctions coupled
with the disappointing Caixin service and composite PMI took its toll. The CSI
300 was off 2.2% and the Hang Seng dropped nearly 3%. After falling 1.2% at the
end of last week, Europe’s Stoxx 600 gapped lower today and is off almost 0.5%.
The US bond market is closed, but stocks are open on this federal holiday. The
S&P 500 may open by the pre-weekend low, while the NASDAQ could gap lower. European
10-year bond yields are 3-5 bp lower mostly. UK Gilt yields are higher, despite
the new efforts by the Bank of England, and Italy’s benchmark bond is flat. The
greenback starts the new week in strong fashion. The Australian dollar is off slightly
more than 1% to pace the broad move, while the Norwegian krone ironically appears
to have drawn support from its higher-than-expected CPI (6.9% vs. expectations
for a decline to 6.2% from 6.5%) and is up about 0.25%. Emerging market
currencies are lower, except for the Mexican peso, whose resilience remains remarkable.
Gold is heavier for the fourth consecutive session. It is off about 0.85% at
$1680. The next target may be near $1672. December WTI initially extended last
week’s gains to around $92.25, its best level since late August, but has been
sold since the open and tested the $90.40 area. We see potential toward the
$88.50 area over the next day or two. After losing around 3.2% before the
weekend, US natgas is off almost 1%. Europe’s benchmark tumbled about 12% in
the past two sessions and is off another 1.6% today. Iron ore jumped more than
3%, its biggest rise in a month as China re-opened. Copper has steadied,
gaining about 1.3% today after losing 3.3% last Thursday-Friday. December wheat
has jumped 4% as Ukrainian shipments are in doubt.
Asia Pacific
China’s market re-opened after the week-long national holiday. The
initial economic news was disappointing. The Caixin services and composite PMI
slumped. The services PMI slumped to 49.3 from 55.0, while the composite fell
for the third month, and at 48.5, it is the lowest since May. Early data from
the holiday period shows a decline in passenger rail travel and a decline in
cinema box office sales.
While China was on holiday, the US introduced new restrictions on China’s
access to US semiconductor technology. The US wants to make it more
difficult for China to develop its own chip industry, which among other things,
could enhance is military and surveillance capability. America also added several
more Chinese companies were to its entity list for trade restrictions. Chinese
tech companies that trade in the mainland and in Hong Kong sold-off hard. At
the end of last week, China outmaneuvered the US at the United Nations. The US
sought a larger discussion of recent reports detailing China’s human rights
abuses in Xinjiang. The motion needed a simple majority. China and 18 other
countries voted against the US-sponsored resolution, including Pakistan,
Indonesia, Qatar, UAE, and Kazakhstan that had Muslim majorities. Eleven
countries, including India, which has disputed boarders with China, abstained. The
US proposal won the backing of 17 countries.
Australia reports its reserves in Australian dollars, though most
countries report them in US dollars. It reserves rose to A$83.6 bln from
A$80.6 bln. However, if month-end exchange rates are used, the US dollar value
of the reserves fell by about 3.5% to $53.50 bln from $55.4 bln. As we have
seen elsewhere, the sharp move in the foreign exchange market and in the bond,
markets weighed on the US dollar value of reserves.
Japan was closed for a national holiday today, and the market lifted the
dollar to its best level since last month's intervention. It rose to
slightly below than JPY145.65. The high on September 22 was about JPY145.90. For
the first time since 1998, the dollar has not trade below JPY145.00 today. When
the BOJ intervened, three-month implied volatility was pushing above 13%. It
fell to 11% last week and is slightly firmer now. The Australian dollar
lurched lower to record a new two-year-and-a-half year low below $0.6290. The
lower Bollinger Band is found near $0.6280. The intrasession momentum
indicators over oversold but it still has been unable to sustain even modest
upticks. There is little on the charts until closer to $0.6250. After rallying
4.5% last week, Australian stocks slumped about 1.4%, their biggest loss in two
weeks. The PBOC set the dollar's reference rate at CNY7.0092, again lower
than expected (median in Bloomberg's survey was for CNY7.1231). This top of
the 2% band would allow the dollar to trade up to CNY7.1495. Although the onshore
market respected the cap, the offshore market has pushed the dollar above it,
reaching almost CNH7.1550.
Europe
We had thought the Bank of England could wait for the Financial Policy
Meeting later in the week to address the end of its emergency Gilt buying
operation. Instead, it did so today. It will increase the amount of bonds it
is willing to buy to GBP10 bln. Up until today, it has abought about 1/8 of the
amount it could buy (~GBP4.6 bln vs. GBP40 bln). It will offer a temporary
expanded collateral repo facility until November 10 to enable banks to assist
in sales the of LDI (liability-driven investment) funds. However, what was no
addressed was the how the LDI support impinges on the QT (Gilt sales) that were
postponed until the end of the month. The 20-year Gilt yield is rising for its
fifth consecutive session. It stands near 4.70% and punched above 5% before the
BOE's operation was launched.
The SPD drew a plurality of vote is in Lower Saxony. It has been
governing the state for five years with the CDU but now it may have to any
longer. The Greens, who are part of the national coalition appear to have
secured enough votes to allow as SPD-Green coalition. The question is what to
do about the FDP. They are part of the national coalition, and some will blame
this for the FDP’s poor showing, unable to meet the 5% threshold for the state
parliament. The election outcome may spillover and cause strains on the federal
coalition. Some portray the right-wing populist AfD as the big winner. It did
see its share of the votes nearly double to almost 11%.
Late last week, the London Metals Exchange, owned by HK Exchange and
Clearing Ltd, began a three-week discussion process to consider banning Russia
from using the LME’s global network of warehouses. This may not fully bar
Russia but many of the standard contracts require delivery of the metals to the
approved warehouses. A decision is expected toward the end of the month. Russia
accounts for about 5% of the world’s aluminum supply and there appears to be a
glut in the metal. The prospect the ban saw aluminum prices rally 10% last
week.
Russia went to war with Georgia in 2008, and although there were
sanctions, the world went on pretty much the same. Russia invaded Ukraine
in 2014 and annexed Crimea. There was more head shaking and chin wagging, some
mild sanction, and the world went on pretty much the same. Talk about
non-linearity, this year’s invasion of Ukraine has turned into what is looking
increasing like a world war. The US, and other countries to a less extent, are
supplying weapons and intelligence to Ukraine. Some link the more robust US
response to the need to demonstrate America’s commitment after the ignoble
withdrawal from Afghanistan. That withdrawal may have also been part of Putin’s
calculus. Ukraine has enjoyed some impressive military victories lately. The
attack on the bridge between Crimea and Russia may have been more a
psychological blow than material as the bridge was prized by Putin and appears
to be being repaired. Many see the risk that Russia escalates its efforts. Although
US President Biden played up the “prospects of Armageddon” to the dismay of
French president Macron, who called him out on it, the US Defense Department
said that despite Putin’s threats, there was no sign Russia was preparing to
use nuclear weapons.
The euro is being sold for the fourth consecutive session. It has now
been pushed through the (61.8%) retracement level (~$0.9715) of the bounce off
the two-decade low set on September 28 near $0.9535. It reached almost $0.9680.
There appears little standing in the way of the retest of that low. That said,
the euro is oversold on an intraday basis and is finding a bid in the European
morning. Look sellers to re-emerge ahead of $0.9750. Sterling has a
three-day decline in tow and is struggling to sustain uptick today. It fell
to a seven-day low today near $1.1025 in late Asia/early Europe. A break
of that area could signal a move toward $1.0920, the (50%) retracement of it
bounce from the historic low near $1.0350. The $1.1100 area offers the nearby
cap.
America
The different headline in the weekend Wall Street Journal and Financial
Times caught out attention. The Wall Street Journal declared, “Jobs Data
Show Some Cooling Signs.” The headline of the Financial Times was “Jobless rate
signals big Fed rate rise.” Both are correct, of course. The glass is
both half full and half empty. Yes, job growth slowed sequentially, but at 263k
is still a solid. The unemployment fell back to the cyclical low of 3.5%. Average
hourly earnings rose by 0.3% for a year-over-year rate 5.0%. In the Q4 21,
average hourly earnings rose by an average of 0.5%. The base effect suggests
the year-over-year pace could slow below 4.5% by year-end. The slower payroll
growth and steady hours worked means that the aggregate hours rose by 0.2% in
September after 0.3% in August. With growth being the product of hours works
times productivity, the jobs report is consistent relatively robust growth
after two quarters of contraction. In fact, ahead of the weekend, the Atlanta
Fed’s GDP tracker sees Q3 growth at 2.9%, the highest in the quarterly cycle.
The market’s confidence of a 75 bp Fed hike next month was running high
before the data and edged up a little more. The combination of the data and
persistent hawkish official comments have encouraged the participants to begin
taking more seriously the possibility that the terminal Fed funds rate may be
4.75% rather than 4.50%. However, the talk about frontloading means that the
peak may still be Q1, but the Fed funds futures show market expectations
creeping of the peak creeping into Q2. What did not change was market’s
assessment that of the odds of a Fed cut late next year. The implied yield of
the December Fed funds futures remained 15 bp below the implied yield of the
September contract, unchanged after the data.
Disclaimer
Reviewed by Marc Chandler
on
October 10, 2022
Rating:
