New Week, but same Old Stocks (Heavier) and Dollar (Stronger)

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Marc Chandler
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Overview: The start of the new week has not broken the bearish drive lower in equities. Several Asia Pacific centers were closed, including Japan, Taiwan, and South Korea. China’s markets re-opened, and the new US sanctions coupled with the disappointing Caixin service and composite PMI took its toll. The CSI 300 was off 2.2% and the Hang Seng dropped nearly 3%. After falling 1.2% at the end of last week, Europe’s Stoxx 600 gapped lower today and is off almost 0.5%. The US bond market is closed, but stocks are open on this federal holiday. The S&P 500 may open by the pre-weekend low, while the NASDAQ could gap lower. European 10-year bond yields are 3-5 bp lower mostly. UK Gilt yields are higher, despite the new efforts by the Bank of England, and Italy’s benchmark bond is flat. The greenback starts the new week in strong fashion. The Australian dollar is off slightly more than 1% to pace the broad move, while the Norwegian krone ironically appears to have drawn support from its higher-than-expected CPI (6.9% vs. expectations for a decline to 6.2% from 6.5%) and is up about 0.25%. Emerging market currencies are lower, except for the Mexican peso, whose resilience remains remarkable. Gold is heavier for the fourth consecutive session. It is off about 0.85% at $1680. The next target may be near $1672. December WTI initially extended last week’s gains to around $92.25, its best level since late August, but has been sold since the open and tested the $90.40 area. We see potential toward the $88.50 area over the next day or two. After losing around 3.2% before the weekend, US natgas is off almost 1%. Europe’s benchmark tumbled about 12% in the past two sessions and is off another 1.6% today. Iron ore jumped more than 3%, its biggest rise in a month as China re-opened. Copper has steadied, gaining about 1.3% today after losing 3.3% last Thursday-Friday. December wheat has jumped 4% as Ukrainian shipments are in doubt.

Asia Pacific

China’s market re-opened after the week-long national holiday. The initial economic news was disappointing. The Caixin services and composite PMI slumped. The services PMI slumped to 49.3 from 55.0, while the composite fell for the third month, and at 48.5, it is the lowest since May. Early data from the holiday period shows a decline in passenger rail travel and a decline in cinema box office sales.

While China was on holiday, the US introduced new restrictions on China’s access to US semiconductor technology. The US wants to make it more difficult for China to develop its own chip industry, which among other things, could enhance is military and surveillance capability. America also added several more Chinese companies were to its entity list for trade restrictions. Chinese tech companies that trade in the mainland and in Hong Kong sold-off hard. At the end of last week, China outmaneuvered the US at the United Nations. The US sought a larger discussion of recent reports detailing China’s human rights abuses in Xinjiang. The motion needed a simple majority. China and 18 other countries voted against the US-sponsored resolution, including Pakistan, Indonesia, Qatar, UAE, and Kazakhstan that had Muslim majorities. Eleven countries, including India, which has disputed boarders with China, abstained. The US proposal won the backing of 17 countries. 

Australia reports its reserves in Australian dollars, though most countries report them in US dollars. It reserves rose to A$83.6 bln from A$80.6 bln. However, if month-end exchange rates are used, the US dollar value of the reserves fell by about 3.5% to $53.50 bln from $55.4 bln. As we have seen elsewhere, the sharp move in the foreign exchange market and in the bond, markets weighed on the US dollar value of reserves.

Japan was closed for a national holiday today, and the market lifted the dollar to its best level since last month's intervention. It rose to slightly below than JPY145.65. The high on September 22 was about JPY145.90. For the first time since 1998, the dollar has not trade below JPY145.00 today. When the BOJ intervened, three-month implied volatility was pushing above 13%. It fell to 11% last week and is slightly firmer now. The Australian dollar lurched lower to record a new two-year-and-a-half year low below $0.6290. The lower Bollinger Band is found near $0.6280. The intrasession momentum indicators over oversold but it still has been unable to sustain even modest upticks. There is little on the charts until closer to $0.6250. After rallying 4.5% last week, Australian stocks slumped about 1.4%, their biggest loss in two weeks. The PBOC set the dollar's reference rate at CNY7.0092, again lower than expected (median in Bloomberg's survey was for CNY7.1231). This top of the 2% band would allow the dollar to trade up to CNY7.1495. Although the onshore market respected the cap, the offshore market has pushed the dollar above it, reaching almost CNH7.1550. 

Europe

We had thought the Bank of England could wait for the Financial Policy Meeting later in the week to address the end of its emergency Gilt buying operation. Instead, it did so today. It will increase the amount of bonds it is willing to buy to GBP10 bln. Up until today, it has abought about 1/8 of the amount it could buy (~GBP4.6 bln vs. GBP40 bln). It will offer a temporary expanded collateral repo facility until November 10 to enable banks to assist in sales the of LDI (liability-driven investment) funds. However, what was no addressed was the how the LDI support impinges on the QT (Gilt sales) that were postponed until the end of the month. The 20-year Gilt yield is rising for its fifth consecutive session. It stands near 4.70% and punched above 5% before the BOE's operation was launched. 

The SPD drew a plurality of vote is in Lower Saxony. It has been governing the state for five years with the CDU but now it may have to any longer. The Greens, who are part of the national coalition appear to have secured enough votes to allow as SPD-Green coalition. The question is what to do about the FDP. They are part of the national coalition, and some will blame this for the FDP’s poor showing, unable to meet the 5% threshold for the state parliament. The election outcome may spillover and cause strains on the federal coalition. Some portray the right-wing populist AfD as the big winner. It did see its share of the votes nearly double to almost 11%. 

Late last week, the London Metals Exchange, owned by HK Exchange and Clearing Ltd, began a three-week discussion process to consider banning Russia from using the LME’s global network of warehouses. This may not fully bar Russia but many of the standard contracts require delivery of the metals to the approved warehouses. A decision is expected toward the end of the month. Russia accounts for about 5% of the world’s aluminum supply and there appears to be a glut in the metal. The prospect the ban saw aluminum prices rally 10% last week. 

Russia went to war with Georgia in 2008, and although there were sanctions, the world went on pretty much the same. Russia invaded Ukraine in 2014 and annexed Crimea. There was more head shaking and chin wagging, some mild sanction, and the world went on pretty much the same. Talk about non-linearity, this year’s invasion of Ukraine has turned into what is looking increasing like a world war. The US, and other countries to a less extent, are supplying weapons and intelligence to Ukraine. Some link the more robust US response to the need to demonstrate America’s commitment after the ignoble withdrawal from Afghanistan. That withdrawal may have also been part of Putin’s calculus. Ukraine has enjoyed some impressive military victories lately. The attack on the bridge between Crimea and Russia may have been more a psychological blow than material as the bridge was prized by Putin and appears to be being repaired. Many see the risk that Russia escalates its efforts. Although US President Biden played up the “prospects of Armageddon” to the dismay of French president Macron, who called him out on it, the US Defense Department said that despite Putin’s threats, there was no sign Russia was preparing to use nuclear weapons.

The euro is being sold for the fourth consecutive session. It has now been pushed through the (61.8%) retracement level (~$0.9715) of the bounce off the two-decade low set on September 28 near $0.9535. It reached almost $0.9680. There appears little standing in the way of the retest of that low. That said, the euro is oversold on an intraday basis and is finding a bid in the European morning. Look sellers to re-emerge ahead of $0.9750. Sterling has a three-day decline in tow and is struggling to sustain uptick today. It fell to a seven-day low today near $1.1025 in late Asia/early Europe. A break of that area could signal a move toward $1.0920, the (50%) retracement of it bounce from the historic low near $1.0350. The $1.1100 area offers the nearby cap.

America

The different headline in the weekend Wall Street Journal and Financial Times caught out attention. The Wall Street Journal declared, “Jobs Data Show Some Cooling Signs.” The headline of the Financial Times was “Jobless rate signals big Fed rate rise.”  Both are correct, of course. The glass is both half full and half empty. Yes, job growth slowed sequentially, but at 263k is still a solid. The unemployment fell back to the cyclical low of 3.5%. Average hourly earnings rose by 0.3% for a year-over-year rate 5.0%. In the Q4 21, average hourly earnings rose by an average of 0.5%. The base effect suggests the year-over-year pace could slow below 4.5% by year-end. The slower payroll growth and steady hours worked means that the aggregate hours rose by 0.2% in September after 0.3% in August. With growth being the product of hours works times productivity, the jobs report is consistent relatively robust growth after two quarters of contraction. In fact, ahead of the weekend, the Atlanta Fed’s GDP tracker sees Q3 growth at 2.9%, the highest in the quarterly cycle. 

The market’s confidence of a 75 bp Fed hike next month was running high before the data and edged up a little more. The combination of the data and persistent hawkish official comments have encouraged the participants to begin taking more seriously the possibility that the terminal Fed funds rate may be 4.75% rather than 4.50%. However, the talk about frontloading means that the peak may still be Q1, but the Fed funds futures show market expectations creeping of the peak creeping into Q2. What did not change was market’s assessment that of the odds of a Fed cut late next year. The implied yield of the December Fed funds futures remained 15 bp below the implied yield of the September contract, unchanged after the data. 

After hawkish comments by Bank of Canada Governor Macklem, the market upgraded the risks that unlike the Reserve Bank of Australia, it will not dial back when it meets on October 26. The market now is pricing in a little less than a 30% chance of a 75 bp hike, which would match the September move after the 100 bp surprise in July. However, the risk-off mood, reflected in slumping stocks continues exert its pull. The US dollar is trading quietly inside the pre-weekend range (~CAD1.3695-CAD1.3760). The recent highs were a little above CAD1.38, and without stocks stabilizing the risk is that the greenback pushes higher. The Mexican peso remains impressively resilient. It is little changed and slightly firmer against the greenback today. The dollar traded roughly between MXN19.94 and MXN20.16 last week. It is hovering around MXN20.00 in the European morning. The stability of the peso supports carry trade trades.