Mixed Start to Busy Week

Market Overview: Holidays in Japan, China, South Korea, and Taiwan made for a slow start to the last week of Q3 18.  The US dollar is mixed, gaining against the dollar-bloc currencies, yen and Swiss franc, slipping against the European complex.  With China formally canceling trade talks with the US as the next round of tariffs kick-in (10% on $200 bln of Chinese goods, which rises to 25% at the start of next year, as well as a threat of new tariffs on $267 bln of Chinese goods) and this appears to be a factor weighing on equities today.  Asian currencies are trading heavily, with India, Indonesia, and the Philippines the weakest, while the liquid emerging market currencies, like Turkey, Russia, South Africa are firmer.  The Philippines and Indonesia are expected to raise rates this week.  Hong Kong is expected to follow the Federal Reserve's rate hike.  One-month HIBOR for the Hong Kong dollar rose to nearly 2.17% today, the highest level since 2008.  

Equities:  The holidays in Asia mean that participants should not put much emphasis on the fact that the MSCI Asia Pacific Index snapped a four-day advance today with a 0.6% loss.  Hong Kong markets are closed tomorrow.  Chinese shares that trade in Hong Kong (H-shares) were off 1.8%, while the Hang Seng fell 1.6%.   European bourses are modestly lower, with the Dow Jones Stoxx 600 off 0.25%, led by consumer staples, materials, and healthcare.  Two sectors, energy and real estate are posting small gains.   Note that the Dow Jones Stoxx 600 was up six consecutive sessions coming into today, and it is consolidating within the pre-weekend range.  The S&P 500 is set to open lower.   How it trades around the gap (~2912.35-2919.75) left from the higher opening on September 20  may offer technical insight into the near-term outlook.  Note that end of the last week marked the expiration of stocks options and futures.  S&P Dow Jones indices have been re-jigged their telecoms sector, and MSCI will make similar moves in November.  

German IFO:  The news stream is light and the main feature today has been the German IFO survey. Although a sequential decline was reported, it was better than expected.  The overall business climate was 103.7 compared with 103.9 in August, which was revised from 103.8.  The expectations component slipped to 101.0 from 101.3 (revised from 101.2), while the current assessment ticked down to 106.4 from106.5 (106.4 originally).  

Italy: Italian stocks and bonds are underperforming today.  The FTSE-Milan is off 0.55% near midday.  It had risen for the past six sessions, the longest streak in five months, during which time it gains about 3.25%.  Note that it rallied for the three consecutive weeks (~6%+) coming into this week.  The 10-year bond yield has also declined (~40 bp) over the past three weeks but has risen about five basis points today.  This is an important week for Italy.  Finance Minister Tria is expected to outline the fiscal and economic projections before submitting the full budget next week.  The recent optimism will be tested.  There is a hypothesis that a centrist bloc of the President (Mattarella), Prime Minister (Conte), and the Finance Minister (Tria) are tempering the demands by the League ( for a flat tax (two brackets) and the Five-Star Movement's sponsored new transfer payment program (to help the poor and pensioners). 

Brexit:  Renewed prospects of the EU and UK being unable to reach an agreement dragged sterling lower ahead of the weekend  The EC did not mince any words.  There are several areas, like the Irish border, for which little progress has been made.  May's Chequers plan is under threat, and Johnson and Davis are advocating a Canada-style agreement.  May gives a speech to the Tory Party Conference next week, and there is talk of a leadership challenge shortly thereafter.  There is also speculation that a snap election could be held in November.  The Labor Party conference is held this week, and there seems to be momentum within its ranks for a second referendum.  

Oil: Oil prices are moving higher after OPEC did not seem to be in a hurry to boost output as the US wants to help offset the loss of output given embargo against Iran.  The oil embargo does not formally begin until November, but it has begun to be implemented.  Three months ago, OPEC agreed that output should be boosted by one million barrels a day, but is reportedly only halfway toward meeting the objective.  It may take it the rest of the year to meet the June output goal.   Brent for November delivery is up 1.8% (~$80.20) as it approaches this May high near $80.50.  November light sweet crude is up 1.5% (~$71.80), is at new four-year highs.   Recall that US oil inventories have fallen for five consecutive weeks for an average drawdown of 4 mln barrels to sit at five-year lows.   

Dollar Index:  Support was found ahead of 93.80 in the second half of last week.  The low from early July was set a bit lower (~93.70), and 93.65 corresponds to a 38.2% retracement of the run-up since the February lows.  A break would leave little chart support ahead of 93.00. 

Euro and Sterling: The euro initially extended its pre-weekend retreat and found support near $1.1725.  There is a 689 mln euro option at $1.1750 that will be cut today.  Last week's high was set near $1.1800.  Short-term participants may be reluctant to push it much higher ahead of the FOMC meeting.  Sterling was unable to extend its pre-weekend losses, and a consolidative tone has emerged.  Look for the upside to be challenged by offers in the $1.3150-$1.3170 area.  There is an option for almost GBP260 mln at $1.3125 that expires today.  

Yen:  The dollar is edging higher against the yen for a third consecutive session.  Last week's high was set a little above JPY112.85.  The high from mid-July about JPY113.15.  The market may be reluctant to take the dollar much higher today, waiting for leadership to from the Japanese market to return.  

Dollar-bloc:  The Australian dollar declined one session last week and one session in the week before.  It is marginally lower today and is threatening its first back-to-back loss this month.  Offers are seen in the $0.7280 area.  The US dollar's downside momentum eased against the Canadian dollar as the CAD1.2880 area was approached last week.  This area held in late August. The US dollar is trading at three-day highs today.  Immediate resistance is pegged in the CAD1.2950-CAD1.2975 area.    

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