Nervous Calm Hangs over the Markets

Overview: A nervous calm hangs over the markets as the US goes to the polls. The proximity of the presidential contest warns that the results may not been known as soon as people hope. Indeed, many fear the voting simply begins the next phase of the contest, with premature declarations of victory and disputes over votes. The dollar is in mostly narrow ranges today, but the Antipodeans and Scandis are the strongest, and the Reserve Bank of Australia kept rates on hold and signaled that inflation may not be sustainably back to target until 2026. Emerging market currencies are mostly firmer, but there are a couple from Asia Pacific and central Europe that are softer, as if the Mexican peso. 

Equities are firm. All the large markets in Asia Pacific, but South Korea and Australia advanced. Hong Kong and China led the rally with more than 2% gains. Europe's Stoxx 600 is up slightly. It was unable to hold on to yesterday's early gains and lost 0.33%. US index futures are also enjoying a firmer bias. Benchmark 10-year yields are firm. European yields are 3-5 bp higher. While the UK10-year Gilt yield peaked last Thursday near 4.53%, it remains firm and is pushing against 4.50%. The US 10-year yields is up nearly two basis points to 4.30%. Gold slipped to a six-day low near $2725 but has recovered to slightly higher on the day near $2739. Yesterday's high was a little above $2748. OPEC+ decision to postpone again the output increase and Iranian threats to strike Israel (as early as today) have helped December WTI recover fully after gapping lower at the start of last week. It traded above $72 today for the first time since October 24. A move above $72.20 could spur a move toward $73.50-$74.25. 

Asia Pacific

The Reserve Bank of Australia stood pat as it had tipped, and the market expected. The central bank updated its forecasts. The growth projections were shaved, and the RBA does not expect inflation to return to target until 2026. Governor Bullock suggested that the trajectory of the cash rate implied by the market was "as good as any." Hence, there was little reaction in the swaps and interest rate markets. Separately, the final October services and composite PMI were reported. The services PMI has held above 50 since January. The final October reading was 51.0, in line, up from the preliminary estimate 50.6 and better than September (50.5). Dragged down by manufacturing, the composite PMI stands at 50.2, up from the 49.8 initial estimate and ends a two-month period of sub-50 readings. China's Caixin services and composite PMI were also reported. They both rose smartly up from 50.3 in September. The services PMI rose to 52.0 from 50.3 and the composite rose to 51.9 from 50.3. The National People's Congress is now in session, and there is some speculation that a multi-year fiscal initiative will be unveiled, perhaps at the end of the week. Trade and reserve figures are due in the coming days, and then the CPI and PPI on Friday. Japan sees its final services and composite PMI tomorrow and labor cash earnings Thursday. Meanwhile, the market is considering the policy implications of the DPP's support for the LDP. It could mean a smaller supplemental budget, but also an increase in the tax threshold of income (from JPY1.03 mln, ~$6.7k to JPY1.78 mln), which would ease the pressure on part-time employees. The measure could cost the government JPY7-8 trillion in revenue, which is around 10% of annual receipts.

The dollar made a marginal new low against the yen yesterday in early North American turnover, slightly below JPY151.55, to scratch the 200-day moving average. It recovered into the JPY152.20 area. It is holding above JPY152 in consolidative activity. There are $1 bln in options struck at JPY152.50 that expire today. The US 10-year yield, which bottomed near 4.26%, traded at new session highs above 4.32% in the North American afternoon, perhaps helped by the tailing of the $58 bln three-year note sale. The Australian dollar set a five-session high in the local session yesterday near $0.6620 and it is being frayed in late European morning turnover.  A move above the $0.6630-50 would lift the tone, and target $0.6700. The greenback recovered from a three-week low near CNH7.0870 to near CNH7.1130. As the dollar is consolidating in a narrow range at the upper end of yesterday's range against the yen, so to against the offshore yuan. So far today, the dollar is in a roughly CNH7.1045-CNH7.1175 range. The PBOC set the dollar's reference rate at CNY7.1016 (CNY7.1203 yesterday). 

Europe

The UK final October services and composite PMI are sandwiched between last week's budget and Thursday Bank of England meeting. The final reading confirmed the second consecutive slowing in the services PMI to 52.0 (51.8 flash), it is the lowest since last November. The composite PMI also slowed for the second month in a row. It too stands at 51.8, which is the lowest since November 2023. The market remains confident that the BOE will deliver its second cut in the cycle on Thursday, which would bring the base rate to 4.75%. The odds of a December cut have been pared from about 57% a week ago to about 26% now. The swaps market has about 76 bp of cuts discounted between now and the end of H1 25. Before the budget announcement, the market was pricing in a little more than 100 bp of cuts. Sweden reported its October composite PMI. After dipping below 50 in September for the first time since April, it resurfaced it in October. It soared to 53.0 from 49.6 in September. Last October, it was at 48.3. Tomorrow, Sweden reports October CPI. The headline and core likely remained well below 2%. The Riksbank is widely expected to accelerate its rate cuts with a half-point move (to 2.75%) Thursday after delivering three quarter-point cuts so far this year. The swaps market has the odds of a 50 bp move near 80%, down from 85% yesterday. Norway's central bank also meets Thursday. It will stand pat, leaving its deposit rate at 4.50%. Its October CPI will be reported next week. In September, the headline rate was 3% and the underlying rate, which excludes energy and adjusts for tax changes, was at 3.1%. The swaps market has the Norges Bank's first cut fully discounted in early Q2 25. 

The euro peaked yesterday in early North American turnover near $1.0915, its best level since October 15. Late longs seemed disappointed by the lack of new buying from US accounts and moved to the sidelines, and pushing the euro slightly through $1.0880. Recall, it settled last week closer to $1.0830. The euro has been confined to about a quarter of a cent below $1.09 so far today. Sterling rose to within 1/100 of a cent of the $1.30 level yesterday, where options for GBP800 mln expired. There is another set for about GBP555 mln that expire there today. The 20-day moving average is also near $1.30 and sterling has not settled above it since October 2. Not only did $1.30 hold yesterday, but sterling also settled (~$1.2955) below where it opened (~$1.2965). Still, it is firm today and in about a 35-pip range (~$1.2950-$1.2985). Last week's range was put in place last Wednesday and Thursday roughly $1.2845 and $1.3045.

America

The election dominates. Today's data may have little impact. We already know that the advanced goods deficit blew out by almost 15% to $108.23 bln in September. That is the largest shortfall since March 2022 and the re-opening of supply chains and easing of port congestion. Economists project the overall trade deficit may widen by nearly 20% to a little over $84 bln. The services ISM (October) is also due. After jumping to 54.9 in September (from 51.5 in August), its highest reading since February 2023, it is seen snapping a three-month advance to fall toward 53.8. Canada reports its September merchandise trade balance today. It has been recording monthly deficit since February. The average deficit this is about C$530 mln. In the first eight months of 2023, the average deficit was almost C$600 mln. Canada services and composite PMI are due. Apart from May, Canada's composite PMI has been below 50 since May 2023. It was at 47.0 in September. A year ago, it stood at 46.7. The record from the Bank of Canada meeting that resulted in a 50 bp cut will be scrutinized as market participants assess the likelihood of another half-point cut at the next meeting in December. Ahead of Friday's jobs report, the swap market has discounted slightly more than 55% chance of a 50 bp cut, which would bring the target rate to 3.25%. 

The US dollar reached new two-year highs before the weekend near CAD1.3960 but as part of its broader pullback, fell to CAD1.3875 yesterday, a six-day low. It met the (38.2%) retracement of the leg up from the October 17 low near CAD1.3745. It is in a range of about CAD1.3880-CAD1.3905 today. There are options at CAD1.3905 for almost $470 mln that expire today. Meanwhile, labor disputes at two of Canada's three largest ports will disrupt trade (though grain longshoring will continue) in both British Colombia and Montreal. Half of its container terminals have been shut intermittently in the past few weeks over a dispute involving a separate union. For the third consecutive session, the US dollar was bought on dips below MXN20.00. The unwinding of some of the "Trump-trade" saw the dollar fall slightly below MXN19.96 after settling last week near MXN20.2840. That was seen in the North American morning before the greenback recovered to MXN20.16. Still, the greenback is firm today in a MXN20.0960-MXN20.1875 range. Latam currencies accounted for three of the top four performing emerging market currencies yesterday. The Brazilian real was the strongest, gaining 1.7%, ostensibly helped by speculation that a package of spending cuts will be announced shortly. The Chilean and Mexican pesos rose by about 0.8%. The South African rand joint the trio from Latam, gaining around 0.85%. Fitch said it may upgrade South Africa's credit rating if it sticks to the budget path and an improvement in growth would also support fiscal consolidation. Fitch sees South Africa as a BB- credit with a neutral rating. 

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