Markets are getting cautious


Overview: After a few risk-taking sessions, investors are taking a break today. Stocks are mostly down today after the S&P 500’s six-day lead nearly took it to its all-time high, while the NASDAQ streak was halted at five sessions. The Nikkei’s nearly 1.8% drop set the pace for the Asia-Pacific session, where most stock markets fell. Europe’s Dow Jones Stoxx 600 is down around 0.15% around noon after rising around 0.65% in the past two sessions. US futures indicate a lower opening. The US 10-year rate is slightly lower, around 1.64%, while European rates have increased slightly. The dollar is stronger against most currencies, with the Antipodes and the Norwegian krone recording the biggest losses, while the yen is the most resilient. The dollar stalled yesterday in Asia near 114.70 JPY and trended lower to 113.90 JPY just before the European markets opened. Emerging market currencies are also under pressure today, notably the South African Rand and Turkish Lira. Turkey’s central bank is expected to cut its key repo rate significantly today. Gold is firm and near the middle of the day’s range (~ $ 1,780- $ 1,790). December’s WTI set a new high at just under $ 84 before retreating and is now below $ 83. Copper is down around 2% which, if held up, would be the biggest loss this month. Other industrial metals are also trading strongly. The CRB index hit new highs yesterday and is up 5% on the month, the seventh consecutive monthly increase.

Asia Pacific

Japan’s weekly portfolio flows show that two trends remain intact. First, Japanese investors buy foreign bonds. The JPY 1.2 trillion bought last week was the highest in six months. Purchases have been on the rise since the end of August. Second, foreign investors buy Japanese stocks. They bought JPY960 billion last week after JPY1.01 billion the week before. That’s the most in two weeks in two and a half years. Tomorrow, Japan will release the September CPI, and the base rate, which excludes fresh food, is expected to be above zero for the first draw since March 2020. Separately, the October flash PMI will also be released. It has not passed the expansion / recession level of 50 since January 2020.

Evergrande has ended its efforts to sell a 50.1% stake in its listed property management subsidiary. He renewed anxiety about a messy blemish. A few other real estate developers are also struggling. News yesterday of falling urban housing prices weighs on sentiment. Separately, SWIFT said the yuan represented 2.19% of its volume last month. It is slightly higher than the share of 2.15% in August but lower than the high of the year set in March at nearly 2.50%.

The dollar’s advance against the Japanese yen, which brought it to JPY 114.70, stalled. It broke a four day rally yesterday and is around a quarter of 1% hovering near 114.00 JPY. Immediate support is seen around JPY113.80. The steep trendline of the September 22 and early October lows is today around JPY 113.25. Australian dollar retreats after hitting near $ 0.7550, highest level since early July. It sold for around $ 0.7380 in Europe. A breakout and close below yesterday’s low (~ $ 0.7365) would warn of a deeper correction after it rose more than three cents this month. PBOC set dollar benchmark rate above expectations (6.3890 CNY vs. 6.3876 CNY). The central bank strengthened its liquidity provisions for the second session. The sharp drop in money market rates (overnight repo -41bp to 1.67% and 7-day repo -19bp to 2.02%) could help strengthen the signal for a decline in the yuan. For the first time this month, the dollar edged up against the yuan for the second consecutive session.

Europe

The EU’s enlargement strategy, encouraged by the UK, had been to broaden, not to deepen. Nothing fails like success, and the cost of Britain’s strategy has been the gradual shift to qualified majority voting, which has eroded the London veto. With the disappearance of the British counterweight and the changing stakes, the emphasis seems to be placed more on deepening or strengthening common values. A crisis has been brewing for some time between the Polish and Hungarian governments and the EC and many individual members on the other. The Polish government challenges the primacy of EU rules, in particular with regard to the independence of the judiciary. The primacy of European law is enshrined in the treaties by virtue of which Warsaw and Budapest joined the EU. The EC, encouraged by the European Parliament, could soon trigger the “conditionality mechanism” which would allow budget payments and stimulus funds (tens of billions of euros) to be withheld until democratic standards are met. Poland and Hungary are challenging the legality of the “conditionality mechanism” before the European Court of Justice.

The Bitcoin record and the launch of an ETF based on Bitcoin futures contracts capture the imagination, while there has been an evolution in France that may be just as, if not more important. Using an IBM-based system and in partnership with the largest financial market institutions, including Euroclear, the Banque de France has embarked on a ten-month experiment with a digital currency and a blockchain. It has been successfully tested in issuing new bonds, conducting pensions, paying coupons and facilitating redemptions. The Federal Reserve’s report on its digital currency investigation is expected overnight. If not before, maybe President Powell will be asked about it at the next press conference following the FOMC meeting on November 3. Meanwhile, Bloomberg recently told the story of the Chinese city of Zhengzhou, one of the early adapters of Internet payment networks. When a recent flood resulted in a power outage, including the internet, people were unable to contact first responders, connect with family / friends, or access their (digital) money. It should be noted that the report mentions some use of barter, but no mention of gold.

Turkey’s central bank is expected to cut rates today. The market is tilting towards a decline of 100bp, corresponding to the movement of the last month. However, that would put the central bank in a corner. The governor shifted attention from the headline inflation rate (19.58% in September) to the base rate (16.98%). He has promised to keep real rates positive, and the one-week repo rate is currently at 18%, and a 100bp cut would exhaust his room for maneuver. If, strategically, the central bank wants to cut rates, it tactically seems that a 50bp move would be preferable. That would still deliver the rate cut the president insists on while lengthening the process. The pound has fallen more than 6% since last month’s rate cut, which, if held up, will further exacerbate the inflation problem.

The euro initially approached this week’s high, slightly below $ 1.1670 in Asia, and was pushed back. It fell below $ 1.1640 in early European revenue before leveling off. It remains within the range set on Tuesday, where the low was close to $ 1.1610. The five-day moving average broke the 20-day average for the first time since mid-September, but it did not signal any new buys. Continued consolidation looks the most likely scenario ahead of tomorrow’s October preliminary PMI. For the third session in a row, the British pound hit resistance in the $ 1.3835 area, just ahead of the 200-day moving average (~ $ 1.3850). It was pushed back to around $ 1.3785 in Europe. Initial support extends to around $ 1.3760, and a break out of yesterday’s lows (~ $ 1.3740) would be a negative move.

America

The United States reports weekly unemployment claims, and the week covers the survey period for the monthly non-farm wage report. Recall that weekly claims fell to the pandemic low of 293,000 during the week ending October 8. This week’s report could be affected by the partial vacation last Monday. The advance appeal anticipates an increase of nearly 400,000 in non-farm payrolls in October after a disappointing 194,000 increase in September. Today, the United States also publishes the leading economic indicator (expected 0.4% after 0.9% in August). Existing home sales in September are expected to rebound from the previous decline of 2%. The overall pace is still strong and among the best since the Great Financial Crisis. The Philadelphia Fed survey is expected to have moderated in October (25.0) compared to September (30.7). The Beige Book, published yesterday, dampened growth slightly, noted strong demand for labor, and companies able to pass on higher costs.

Canada yesterday reported slightly higher than expected headline and core inflation. Nonetheless, the implied return on the June 2022 BA futures contracts declined by four basis points, which seemed corrective in nature. The swap market continues to anticipate a tightening of around 75bp over the next 12 months. Canada reports August retail sales tomorrow, and a recovery is expected after falling 0.6% in July. Mexico is reporting its August retail sales today. They are expected to have declined (~ -0.5%) for the third consecutive month.

The US dollar was sold at a new four-month low against the Canadian dollar in Asia, just below CAD 1.2290. However, that appears to have exhausted the move, and the greenback quickly returned to CAD 1.2345, where it has been consolidating for the past few hours. A potential bullish hammer candlestick could be forged today, and a move above yesterday’s high (almost CAD 1.2370) would be favorable development for the US dollar. The US dollar is also recovering against the Mexican peso after briefly crossing the 200-day moving average yesterday (~ 20.1675 MXN). It traded above yesterday’s high (~ 20.2810) MXN, and a close above that level would raise the dollar’s tone. Remember that since October 12, the greenback has fallen by about 3.5% against the peso. Finally, the US dollar closed at its best level against the Brazilian real since mid-April yesterday, slightly below BRL 5.60. The sense of risk aversion signals further gains today. There is a $ 300 million option at BRL5.6230 which expires today.

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