Volatility Snaps Near-Term Conviction

Overview:  The markets seem to lack conviction today. Stocks in the Asian Pacific region advanced. Europe’s Stoxx 600 is giving up its earlier advance, and US futures are heavier. Australian and New Zealand bonds played catch-up after the rise in the US and Europe yesterday. Their benchmark yield rose 14 bp and 10 bp, respectively. The US 10-year Treasury yield is firm near 3.77%, while European bonds are narrowly mixed, though Gilts are under pressure. The 10-year yield is up 10 bp to 4.12%. The dollar is mixed with the dollar-bloc currencies, sterling and the Norwegian krone on the weaker side. Those G10 currencies like the euro, Swedish krona, and Swiss franc are barely holding on to gains. Gold snapped a six-day rally yesterday and is a little lower today. It still looks poised to retest $1700. December WTI is little changed against rallying more than 10% in the first three sessions this week. It is near $86.70 after settling last week slightly below $78.75. US natgas is rising for the third consecutive session. Its 1.4% gain follows a 7% increase in the past two sessions. Europe’s natgas benchmark is off 3.1% to offset a good part of yesterday’s 3.5% gain. Iron ore rose for the third consecutive session, but it is flat on the week. December copper is also rising for a third session, but it is up about 3.5% this week. December wheat is extending its slide into a fourth session. It is off about 3% this week after rising 7% over the past two weeks.  

Asia Pacific

Australia reported a smaller than expected trade surplus for August. Exports rose 3% after a 10% fall in July, while imports rose 4% after a 0.5% increase previously. Economists in Blomberg's survey had expected a small decline in imports. The surplus of A$8.3 bln missed the median forecast for a $10 bln surplus and was smaller than July’s nearly A$9 bln surplus. Still, in the first eight months of the year, the average monthly surplus was A$11.1 bln compared with A$10.2 bln in the same period last year. In Jan-Aug period in 2019, the average monthly trade surplus was A$5.7 bln.

Japan weekly portfolio flow data showed that into the end of the fiscal half year, Japanese investors continued to divest foreign bonds. Japanese investors some JPY886 bln of foreign bonds. This bring brings the four-week total JPY3.3 trillion (~$23 bln). Japanese investors bought foreign equities for the third consecutive week for a cumulative total of JPY876 bln (~$6.1 bln). Meanwhile, foreign investors continued to be significant sellers of Japanese bonds. They sold JPY1.56 trillion in the last week of September to bring the four-week total to a whopping JPY6.4 trillion (~$45 bln). This appears to be a record outflow. Foreign investors were net sellers of Japanese stocks for the sixth consecutive week. Over the past four-weeks, they sold JPY2.6 trillion ($1.8 bln), the most in six months.

The US dollar recovered from yesterday's seven-day low against the yen (~JPY143.55) to JPY144.70. It remains firm, though in a narrow range and has not traded much below JPY144.40. Market participants continue to seem uncomfortable buying dollars above JPY145.00. The Australian dollar tried to extended yesterday's recovery off the $0.6415 area and made it $0.6540 before being turned lower. It traded to around $0.6480 in the European morning and could slip a little more. There are options for almost A$600 mln at $0.6475 that expire today. We assume they have been neutralized. The intraday momentum is oversold, suggesting a better tone is possible in North America. The base around $0.6400 looks firm. China's mainland markets remain closed for the Golden Week holiday. The US dollar fell to almost CNH7.0125 yesterday and has steadied today, remaining within in yesterday's range. Recall that it settled September (the last day mainland markets were open) near CNH7.1420. 

Europe

German factory goods fell 2.4% in August, more than three-times more than expected. On the other hand, the July series was revised sharply higher (+1.9% from -1.1%) on the back of large aerospace orders, according to the government, which looked like foreign orders. Domestic orders fell 3.4% in August after dropping 3.7% in July. Foreign orders fell 1.7% in August but rose 6.0% in July. Orders from the eurozone rose 4.5% in July and fell 3.8% in August. Separately, the construction PMI fell to 41.8 from 42.6. It has not been above the 50 boom/bust level since March. Tomorrow, Germany reports August retail sales (median in the Bloomberg survey calls for a 1.2% decline) and industrial output (expected to fall by 0.5% after a 0.3% drop in July. Note that the eurozone's aggregate retail sales were reported today. While the 0.3% decline was expected July's 0.3% gain was revised to a 0.4% decline.

A week ago, S&P lowered the outlook of its AA UK rating. However, this seemed to be catch-up as both Fitch and Moody's had the credit as the equivalent of AA-. Today, Fitch puts cut its outlook to negative, reflected the unfunded tax cuts. We await today's report, but on Tuesday and Wednesday the. BOE did not buy any bonds. This emergency program to address what had appeared as a threat to financial stability is to conclude at the end of next week. The concern is what is going to happen afterwards. The BOE's program aimed at the long-end of the curve. The UK's 30-year bond yield was around 3.5% in the middle of September. The yield jumped to almost 5.0% on September 27 as the market reeled from the mini-budget and the forced liquidation. The BOE stepped in and at the end of last week, the 30-year Gilt yield was about 3.82%. However, it has risen each session this week and now stands a little above 4.25%. Many expect the BOE to address this may either a new permanent facility and/or some other measures, including, perhaps, delaying further when it intends to sell bonds that it bought during the pandemic.

Parity capped the euro over the past two sessions. The euro was sold to $0.9835 yesterday and has recovered to trade in about a quarter-cent range on both sides of $0.9900. While the range can extend in North America, we suspect that the proximity of tomorrow's US jobs data is conducive to a consolidative tone. The $0.9950 area may offer a nearby cap. Similarly, sterling encountered strong resistance near $1.15 and was sold to almost $1.1225 yesterday. It recovered to a bit more than $1.1350 yesterday in North America and extended it a bit further today (~$1.1385). It retreated a cent by early European trading and found support near $1.1280. The intrasession momentum indicator is turning ahead of the North American open.

America

Yesterday's data prompted the Atlanta Fed's GDPNow to lift its Q3 estimate to 2.7%, the highest so far in the quarterly cycle. The strong dollar is expected to hurt US exports, but real (adjusted for inflation) have been strong. In August, real exports rose by about $2.8 bln while real imports fell by $1.4 bln. Net exports could contribute 2-3 percentage points to Q3 GDP. A combination of factors drove this, and it probably will not be repeated in Q4.

It seems rich for many observers to say that OPEC+ decision to cut output is a snub against the US. The Federal Reserve's monetary policy is making it more difficult for many countries but few of the OPEC+ critics want the Federal Reserve to sacrifice its domestic mandate,  The OPEC+ decision may be short-sighted, as the White House claims,  these countries pursuing what they think is their national interest. A few years ago, many of these critics thought OPEC was dead. Moreover, actions by the US and Europe, such as the embargo on Russian oil and cap on prices, impacts the oil market. The US official comment that the yesterday's decision shows OPEC is aligning with Russia shows a masterful grasp of the obvious. OPEC+ is set to continue through 2024. OPEC was struggling to be the swing producer, partly because of the rise of US production. The answer for the cartel to the competitive challenge was to increase its market share by forming the alliance. Some pundits suggest the US should stop selling weapons to Saudi Arabia and others in OPEC. Yet, what is missing is the understanding that the US does not assist in the defense of the Saudi Arabia or oil pipelines out of a sense of altruism, but because it is understood to be in the US national interest. Should the US really take on the position of Gandhi's mother who would fast (punish herself) when her prodigious son disappointed?  Implicit in Biden's threat yesterday will be to reanimate the NOPEC bill that has been in Congress for some time that would allow lawsuits against OPEC members for manipulated the energy market.

The US reports weekly jobless claims and the Challenger jobs cuts. In the last week in September, weekly jobless claims fell to five-month lows. The JOLTS data, earlier this week (August) disappointed, and tomorrow the national September figures will be reported. The median forecast in Bloomberg's survey calls for an increase of 260k after a 315k increase in August. Today, five Fed officials speak (Kashkari and Mester twice). These Fed officials' views are well known, and indeed, everyone seems to be singing from the same hymn sheet. The market recognizes this, and the implied yield of the December Fed funds futures contract is rising today for the sixth consecutive session.

The US dollar found a bottom against the Canadian dollar in the past two sessions near CAD1.3500. It recovered yesterday and closed above CAD1.3600. It initially pulled back in Asia, as US stocks were bid. It found support near CAD1.3565. The greenback has recovered in the European morning to reach the session high around CAD1.3665. Yesterday's high was just shy of CAD1.37. While taking cues from US equities, note that intraday momentum for the greenback overextended against the Canadian dollar. After a push to almost MXN20.60 in late September, the US dollar has returned to the MXN19.80-MXN20.20 range that has dominated since mid-August. It is in a narrow range (~MXN20.0175-MXN20.1050) today. It appears to have scope to test yesterday's high near MXN20.15. 

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