No Fright on This Halloween

Overview: After sliding hard this month, equities continue to stabilize into month-end.  All of the equity markets in Asia-Pacific rallied with the help of a solid close in the US.  European bourses are higher too as the Dow Jones Stoxx 600 tries to extend the recovery for a third consecutive session, led by energy, materials, and information technology.  US equities are trading firmly, and the S&P 500 may snap one of the longest streaks since the Great Depression without back-to-back gains.  Recovering equity markets are sapping the safe-haven bid for bonds, and 10-year benchmark yields are mostly a couple of basis points higher, though Italy is showing greater resilience and the 10-year BTP yield is off five-six basis points.  Against the majors and emerging market currencies, the dollar is mostly firmer.  

Asia-Pacific

As widely expected, the BOJ did not change monetary policy, and the two newest board members Harada and Kataoka dissented.  However, rather than do more as they argued, the BOJ downgraded its inflation outlook.  Meanwhile, the BOJ continues to tweak its bond-buying operation to be the least disruptive.  It will enter the market to buy one-to-five year bonds while increasing the amount it could purchase. The BOJ widened the band for the 10-year JGB yield back in July and provided global yields continue to trend higher, allowing a further rise in Japanese long-term rates and a steeper curve seems likely in the coming months.  Separately, the steeper than expected slide in Japanese industrial output in September (-1.1%) was distorted by the natural disasters and will a recovery in Q4 is likely.  

The dollar managed to marginally extend yesterday' s gains against the yen before stalling in front of a retracement objective near JPY113.35.  An $800 mln JPY113.30 option expires today as does a $735 mln option at JPY113.10.  Firm yields and equities in the US could see the market push the dollar higher provided immediate support near JPY112.80 holds. 

China's economy is slowing, and the trade tensions are aggravating the situation.  The manufacturing PMI fell to 50.2 in October, the lowest in more than two years.  It was at 50.8 in September and expected to slip to 50.6.  Importantly, new export orders fell to 46.9 from 48.0.  The non-manufacturing PMI slowed to 52.9 from 54.9.  Domestic and external demand weakened.  Although Chinese shares gains, the yuan eased for the third day to new lows for the move against the dollar.  It is maybe shrugged off as month-end pressures, but the surge in Chinese overnight rates and the announcement that the PBOC will sell yuan T-bills in Hong Kong next week warns of heightened risk that officials may try to arrest the yuan's slide.  

There were two other notable developments in the region.  First, Australia reported soft inflation data.  The Q3 CPI rose 1.9% year-over-year.  In Q2, the pace was 2.1%.  The slight miss keeps the Australian dollar on the defense as it underscores that the central bank is on hold.  Some suspect the next move will be a cut.  The Australian dollar is consolidating inside yesterday's ranges, and there is an almost A$620 mln option at $0.7070 that expires today, which is in play.  Second, South Korea reported abysmal September industrial output figures.  The 2.5% monthly decline in September (five times more than expected) was the worst in nine years.  It reinforces ideas that the economy has lost momentum and that a rate hike next month is increasingly unlikely.  The won edged lower, and while Korean shares rallied (Kospi +0.75%), offshore investors continue to divest. 

Europe

S&P warned yesterday that the chances of the UK leaving the EU without a formal agreement has risen, though the base case is still that a deal is struck.  It warned that a four or five quarter contraction was a likely consequence and that unemployment would jump to 7% from 4%.  Under that scenario, even in 2021 when the economy recovered, the output would still be around 5.5% lower than would be likely with an agreement.   The budget unveiled by Hammond at the start of the week earmarked GBP500 mln for preparing for the failure of negotiators.   Sterling is consolidating against the dollar in the lower end of yesterday's range.  It caught a bid in late Asia that carried it to around $1.2750 in the European morning, shy of the $1.2780 high seen in the US yesterday, before stalling.   There is a $1.2750 option for nearly GBP620 mln that expires today.  Meanwhile, the euro's five-day advance against sterling may be ending today as the air got thin above GBP0.8930.

The eurozone reported weaker than expected Q3 GDP yesterday and today report firm preliminary October CPI.  The headline pace rose to 2.2% from 2.1%, but half the gain in food and energy.  The core rate rose to 1.1% from 0.9%.  This may very well prove to the direction of the staff economic forecast update in December.  Tweak up inflation and shave growth.  Germany, which the Bundesbank warns, may have stagnated in Q3, reported poor retail sales data.  After falling 0.1% in August, German shoppers were expected to have lifted retail sales by 0.5%.  Instead, the August slump was revised to a decline of 0.3%, and the September recovery was miserly at 0.1%.  Year-over-year, Europe's largest economy has experienced a 2.5% fall in retail sales.  

The euro was unable to sustain minor upticks to $1.1360 in the European morning.   The news stream, especially if the stabilizing equities continue to allow US rates to recover, is dollar-friendly and euro negative, though as we have noted, the technical indicators are stretched.  The market has its sights on the low for the year set on August 15 near $1.13, where a 1.6 bln euro expiring option is struck today.  Another 1.1 bln euros are struck at $1.1350 that also expires today.  However, for the rest of the week, including on Friday with the US jobs data, there are large options at $1.14 that are expiring (~3.9 bln euros tomorrow and 2.1 bln on Friday).

North America

The ADP private sector jobs estimate (~180k vs. 230k in September) and the employment cost index keeps the focus on the US labor market ahead of the non-farm payroll report on Friday.  The Chicago PMI appears to have lost of its market-impact recently.  Canada reports August GDP.  A flat report would still translate into 2.4% year-over-year growth.  For the fourth consecutive session, the US dollar is knocking on the CAD1.3150 area.  The bulls are absorbing offers, and the consolidation pattern looks bullish.  Here too the technicals are looking stretched for the greenback, which suggests some interest may be seen to fade what could be a spike higher.    The Dollar Index is making new highs for the year today, pushing above 97.00.  The next important technical target is seen a little below 98.00.  It is a retracement level of last year's decline.  

There will be interest today in the EIA weekly energy figures and its monthly report.  API estimated a  build of almost 5.7 mln barrels.  The market is looking for the EIA to confirm a little more than half as much.  However, it would extend the accumulation for the sixth consecutive week, the longest streak of the year.  US output may have risen faster than the EIA forecast.  Light sweet crude oil for December delivery has been carving out a shelf near $65 a barrel.  The 100-day moving average is just below there. The upper end of the near-term range is around $67.50.    

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