Risk aversion is the main theme in the financial markets today and all major global stock indices are in deep red. DOW futures are also down more than -400 pts at the time of writing. However, Sterling defies gravity and is trading as the strongest together with Japanese Yen today. The Pound is lifted by news that EU may offer UK a lifeline in the Brexit negotiations. Australian and Canadian Dollar are trading as the weakest ones. Euro is mixed as markets are awaiting European Commission’s verdicts on Italy’s reply regarding its budget.
Technically, it’s looking more likely that USD/JPY’s recovery from 111.62 has completed at 112.88 already. And a focus will be on 111.94 minor support today. Break will likely resume the fall from 114.54 through 111.62 low. Meanwhile, Sterling is a bit mixed as while it rebounds, there is no confirmation of near term reversal against Dollar, Euro and Yen yet. Gold breached key resistance zone between 126.99/1238.62 and sustained break will pave the way to 1286.97 fibonacci level.
On other markets, at the time of writing, FTSE is down -1.00%, DAX down -1.85% CAC down -1.15%. Italian 10 year yield is down -0.006 at 3.473, German 10 year yield is down -0.023 at 0.428. Earlier today, Nikkei closed down -2.67% to 22010.78. Hong Kong HSI dropped -3.08% to 25346.55. Singapore Strait Times dropped -1.52% to 3031.39. China Shanghai SSE dropped -2.26% to 2594.83.
Sterling rebounds as EU may offer a UK-wide customs union
Sterling rebounds strongly on an RTE news report that EU is going to offer the a UK-wide customs union as a way to work around the Irish backstop deadlock. And, the way to handle it is that in the Brexit Withdrawal Agreement, there will be a specific commitment to a UK wide customs arrangement. However, a formal EU-UK customs union will require a separate agreement. By offering that, EU will still insist on a backstop to be in place.
The details of the idea are remain to be seen. For now, it’s being viewed as a rumor. And it’s uncertain whether UK Prime Minister Theresa May will accept it. Nor is it clear whether there is any technical issues overlooked. But for now Sterling is enjoying a notable rebound as seen in GBP/USD.
Italy may adjust budget plan if markets react negatively
Italian newspaper Il Messaggero reported today that the coalition government is prepared to adjust its budget plan should markets react negatively. For now, the government is sticking to its deficit target of 2.4% of GDP in 2019. And there could be a plan B for the government including redefining the key elements of the expansive budget. Those adjustments could even include retirements and basic income for the poor.
However, Italian Prime Minister Giuseppe Conte said today that he will not accept changes to the substance of the budget. And he repeated the pledge that 2.4% is a ceiling that won’t be exceeded.
European Commissions will discuss today what’s next regarding Italy, after formally getting its reply. It’s generally expected that the Commission will reject the budget and demand resubmission from Italy.
Japan Cabinet Office: Economy recovering at a moderate pace but exports almost flat
In Japanese Cabinet Office’s monthly report, general economic assessment was held unchanged. That is, the economy is “recovering at a moderate pace”. It also maintained that “private consumption is picking up”, “business investment is increasing”, “industrial production is increasing moderately”, “corporate profits are improving”, “employment situation is improving steadily”, and “consumer prices are rising at a slower tempo recently”.
However, exports are somewhat downgraded from “pausing recently” to “almost flat”. The report maintained the urged that “attention should be given to the effects of situations over trade issues on the world economy, the uncertainty in overseas economies and the effects of fluctuations in the financial and capital markets. ”
On prices, the report noted “the Government expects the Bank of Japan to achieve the price stability target of two percent in light of economic activity and prices. ”
USD/JPY Mid-Day Outlook
Daily Pivots: (S1) 112.49; (P) 112.68; (R1) 113.02; More..
USD/JPY’s fall from 112.88 extended lower today and focus is now on 111.94 minor support. Break should confirm that corrective rise from 111.62 has completed and larger fall from 114.54 is resuming. Intraday bias will be turned to the downside for 38.2% retracement of 104.62 to 114.54 at 110.75. As such decline is viewed as part of medium term correction, we’ll look for bottoming signal above 109.76 key support in that case. On the upside, above 112.88 will target 61.8% retracement of 114.54 to 111.62 at 113.42 instead.
In the bigger picture, corrective fall from 118.65 (2016 high) should have completed with three waves down to 104.62. Decisive break of 114.73 resistance will likely resume whole rally from 98.97 (2016 low) to 100% projection of 98.97 to 118.65 from 104.62 at 124.30, which is reasonably close to 125.85 (2015 high). This will stay as the preferred case as long as 109.76 support holds. However, decisive break of 109.76 will dampen this bullish view and turns outlook mixed again.
Economic Indicators Update
| GMT | Ccy | Events | Actual | Forecast | Previous | Revised |
|---|---|---|---|---|---|---|
| 6:00 | EUR | German PPI M/M Sep | 0.50% | 0.20% | 0.30% | |
| 6:00 | EUR | German PPI Y/Y Sep | 3.20% | 2.90% | 3.10% | |
| 10:00 | GBP | CBI Trends Total Orders Oct | -6 | -1 | -1 | |
| 14:00 | EUR | Eurozone Consumer Confidence Oct A | -3 | -3 |
