Tuesday October 3: Five things the markets are talking about
Ahead of the U.S open, investors appear to be taking a breather after the themes of tighter U.S monetary policy, a potentially more ‘hawkish’ Fed chief and stronger U.S data helped to drive recent gains for both the ‘mighty’ dollar and equities.
The EUR (€1.1737) is facing ongoing pressure from Spain’s biggest constitutional crisis in decades, after last weekends violent ‘illegal’ independence referendum in Catalonia may have opened the door for the region to move for separation as early as this week.
In the U.K, GBP (£1.3247) continues to trade under pressure in the midst of this week’s U.K Conservative Party’s annual conference where there could be challenges to PM Theresa May’s leadership. Boris Johnston, Davis, Rudd and Fox are all scheduled to speak today – U.K’s foreign minister Johnston in particular could cause a ripple effect for the pound.
Weaker U.K construction PMI this morning (see below) is also providing the pound some problems and in mainland Europe some E.U officials have reiterated their views of insufficient progress in Brexit talks.
U.S. data this week include trade, durable goods and Friday’s September non-farm payroll (NFP) report, which may be distorted from hurricanes that hit stateside from late August.
1. Stocks mostly in the ‘black’
Stateside Monday, all three major indexes posting record-high closes after the ISM index of U.S manufacturing surged to just shy of a four-year high in September.
In Japan, the Nikkei stock index ended up +1.1% as a tailwind from a weaker yen (¥113.00) helped power it to its highest levels in two-years. The broader Topix gained +0.7%, also the highest closing level since mid August 2015.
Note: Markets in China, S. Korea and Germany are closed for holidays.
In Hong Kong, the blue-chip Hang Seng index rallied +1.9% as trading resumed following a public holiday on Monday, led by mainland banks and insurers after the People’s Bank of China (PBoC) cut reserve ratios (RRR) over the weekend to encourage lending. The Hong Kong China Enterprises Index rallied +3.2%.
Down-under, Australia’s S&P/ASX 200 slipped -0.5%, pressured by financial and energy shares.
Note: As widely expected, the Reserve Bank of Australia (RBA) kept interest rates on hold at a record low of +1.5%. The RBA said a stronger AUD (A$0.7800) would slow the economy and restrain price pressures.
In Europe, regional bourses have opened higher and continue to trade in positive territory. Materials are underperforming on drop in commodities, while energy is also under pressure from oil price. Uncertainty over Catalonia continues to weigh on risk sentiment and especially Spanish stocks.
U.S equities are set to open little changed.
Indices: Stoxx50 +0.1% at 3,599, FTSE +0.1% at 7,433, DAX closed, CAC-40 +0.2% at 5,359, IBEX-35 -0.1% at 10,245, FTSE MIB -0.2% at 22,777, SMI +0.2% at 9,258, S&P 500 Futures -0.05%
2. Oil prices fall on oversupply concerns, gold at seven week low
Oil futures have extended their losses after tumbling yesterday, as a rise in U.S drilling and higher OPEC output stalls the recent rally and rekindled concerns about oversupply.
Brent crude has slipped -0.4% to +$55.90 a barrel, after marking a third-quarter gain of about +20%, while U.S light crude (WTI) has fallen -0.3% to +$50.42.
Note: Iraq indicated yesterday that exports rose slightly last month from its southern oilfields, while a Reuters survey indicated that OPEC boosted output in the month.
Expect investors to take their cues from this week’s inventory reports.
Ahead of the U.S open, gold trades atop of its seven-week low, as equities and the dollar remain somewhat buoyed by upbeat U.S economic data and stronger treasury yields. Spot gold is down -0.1% at +$1,269.71 an ounce.
3. Sovereign yields back up
Firming expectations that the Fed will hike rates in December coupled with domestic data pointing to steady growth in the U.S and talk of a potentially more hawkish successor to Fed Chair Janet Yellen is helping to push U.S yields higher.
Ten-year yields are trading atop of +2.35%; it’s highest yield since mid-July, which has also pushed the dollar higher against G10 currencies.
Note: Speculation that President Trump could choose former Fed Governor Kevin Warsh, who is considered more ‘hawkish’ than Yellen, to replace her as head of the Fed.
Elsewhere, Germany’s 10-year Bund yield has rallied +2 bps to +0.47%, while the U.K’s 10-year Gilt yield has climbed +3 bps to +1.359%.
Note: The BoE has sent repeated signals that it is readying its first interest-rate increase in more than a decade as the U.K.’s looming departure from the E.U weighs on the economy. Fixed income dealers are pricing in a November hike.
4. Dollar remains better bid on rate differentials
A higher U.S yield again is providing support for the ‘mighty’ dollar across the board. Dealers are pricing in +70% odds that the Fed would resume rate hikes in December following a recent spat of stronger U.S data.
The EUR (€1.1742) trades atop of this week’s lows, as divergence trades between the Fed and ECB remain intact. The pair had some technical resistance just above the psychological €1.2000 print last month, while short-term support is featured around €1.1700.
In the U.K, Sept PMI Construction data (see below) slipped into contraction territory for the first-time in 13-months and is providing some additional headwind for the pound (£1.3245).
Down-under, AUD is trading atop of its two-month low outright (A$0.7800) after the Reserve Bank of Australia (RBA) left interest rates unchanged and gave a cautious assessment of the local economy
5. UK construction PMI falls
There was more downbeat news on the U.K economy this morning as the purchasing managers’ index on U.K. construction activity fell below the 50 level in September, marking contraction rather than expansion for the first time in 13-months.
The index dropped to 48.1 last month, from 51.1 in August. The market had expected the reading to remain above 50.
The headline fall is being attributed to a drop in new orders, with respondents reporting “fragile confidence and subdued risk appetite among clients, especially in the commercial building sector.”
Note: A lower construction PMI, which follows yesterday’s smaller U.K manufacturing PMI, highlights concerns about a weakening U.K economy just as the BoE is expected to raise interest rates in November.
