What a barn burner of a week!! Fixed income took centre stage, but the lingering odour from risk aversion and choppy intraday moves will continue to challenge traders at every twist and turn.
With US yields remaining at multi-year highs and breakneck price action triggering a massive uptick in volatility, now what possibly could go wrong!!
Let’s look at some dynamics in play next week, as traders will be tasked to decide if these moves can be sustained.
China returns from Golden Week, and it will be exciting to see how they review this week’s market evolutions and dynamics on Monday. Baring in mind that short sellers were reloading on the HSI as bears have returned en masse to target Hong Kong’s equities after being bushwhacked in a painful short squeeze last month. Traders are sensitive to relatively minor adjustments in the short-term economic data — last weeks drop was in part due to the weaker China PMI release, negative impact of Typhoon Mongkut, while a pale came over Fridays markets as China headline overload which spooked investors as ” Spy -Chip” and US electoral process tampering was all over the headlines
It’s important to keep a broad view in mind while cementing overall opinions. The US administration is loaded with policy hawks and if there is concrete evidence China is meddling in the US midterms through a campaign of disinformation, spies, tariffs or bullying measures. It will trigger a swift and uncompromising reprisal and would sound the alarm bells across global markets.
As well, things are hotting up in the South China Sea on the cusp of my annual 6-day deep sea fishing trip 15 hours of the coast of Sarawak !!, yes in the very same South China Sea where the US Navy is contemplating a show of strength to warn China against playing bully in the region.
But besides elevated risk around US-China political tensions, look out for Chinese data (trade balance, Caixin PMIs) and Singapore’s rate decision.
North American Markets
North America will have to wait until Tuesday to find out China’s reaction, with the Columbus Day holiday in the US, Canadian Thanksgiving and a Japanese holiday all falling on Monday. There’s plenty of Fedspeak to keep the headline reels rocking But after hearing from Powell last week, who made the FOMC ‘s intentions clear and in no uncertain manner, The speeches won’t have a huge impact. But in the absence of a heavy slate of tier one economic data, there is nothing to keep the US market tethered to fundamentals if headline overload kicks in. The dollar does tend to waffle in the absence of US data so that the focus will fall on external divers like Italy and China.
EU economic data prints would take a back seat to the ongoing Italian political opera. While in the UK Brexit will continue to top the market charts as progress is expected ahead of EU October summit later in the month. While there’s probably a decent Sterling view lost in this nose, frankly I think traders are entirely fed up riding the Brexit rollercoaster
. The heightened US-China tension around Spy -Chip should weigh on tech stocks, but the equities/fixed income rotation dynamic could accelerate next week if US yields remain firm or could accelerate if the US yields somehow manage to punch higher.
Besides the outsized focus on Iran sanction. This week’s large US inventory build has threatened to derail the Oil rally and weighted down WTI. So next week data will be in the discussion, and despite the fact, the industry is entering fall refinery maintenance season. Inventory builds are common as refineries aren’t taking in as much crude. None the less a froth disappeared quickly so oil bulls will be looking for a catalyst early in the week especially with Brent closing just above the psychological $84 level.
With US stock markets falling hedgers are gingerly stepping back into the markets. But in the absence of an equity markets freefall, there’s not enough interest to push prices significantly higher. Next week look for the DXY-USD correlation to guide the markets.
After flip-flopping its way through September, the greenback is starting to reassert itself supported by a significant fair wind from the US rates markets with 10-Year UST holding north of 3.15 %. It is difficult to envision gold tracking any which way but down.
Currencies in focus
BoJ has not intervened in the ten years yet but the central bank kept the size of buying in super-long JGBs unchanged from the previous operation, offering to buy JPY180bn in 10-25y maturities and JPY50bn in 25-40y notes.
USDJPY trades around the 113.75 level and the price of JGB futures has not changed much after the announcement. But it does seem like the BoJ is signalling a widening of the YCC 10 years mechanism. This move if indeed true should take some wind out of USDJPY sails
The Australian Dollar
With China celebrating Golden week the AUDUSD was trading as a G10 go to proxy of ASEAN EM weakness this week. And with a little reprieve on the US rates front, it was a tough week for the Aussie. China returns to action next week an how US/China tensions will be a considerable focus early next week. With the Aussie getting battered and bruised from every angle, it’s not difficult to envision the Aussie testing the key AUDUSD 70 after closing precariously perched above the potentially pivotal .7050 level. But even if the USD gets parked in neutral or weakness a touch next week, traders will continue to express a bearish Aussie view, but likely through the Euro in such a case.
The Canadian Dollar
Ratification of the new trade deal poses the most significant tail risk to the Canadian dollar. The probability of getting the revised trade deal through remains anyone’s guess, and with US administration expending all their political energy towards the Nov 6 midterm elections, this deal will be drawn out even further which could skew towards CAD weakness, especially with the BOC next rate hike fully baked in
The external environment isn’t at all amicable for EM Asia currency US rates, tepid growth outside of the US markets, and the escalation of US-China tensions it’s near impossible to hold even the slightest of bullish conviction. Demand for MYR has been tepid at best but yesterday warning shot across the bow from the world bank has dented sentiment even more after they r downgraded Malaysia growth forecast. With the upcoming budget in focus, it puts a lot of pressure on the Malaysia government to deliver a fiscally prudent measure. While terms of trade do remain favourably due to oil prices, waning growth could be a real negative for the MYR as it could trigger a dovish response from the BNM.
The Indian Rupee
The RBI disappointed the market by keeping rates unchanged. This lack of urgency was a big dovish surprise, as only 9 out of 49 analysts surveyed by Bloomberg had called for no change. The vote was not even close too – the MPC voted 5-1 to keep rates unchanged with one dissent.
No matter which view you take on this all things lead to 75 USDINR.
1) The RBI realised there were between a rock and a hard place due to domestic credit concern
2) The RBI recognised the futility of putting interest rates higher is effectively doing little more than putting a bandage on a broken leg in the face of surging oil prices
3) The RBI is not concerned about INR weakness
It’s not too much of a stretch to conclude that the RBI has just opened the door to more currency pain.
There was a high level of concern that the markets got ahead of themselves with US bond yields ripping higher coupled with an insatiable demand for USD triggered by astronomical US data, mainly this week’s ISM made for a very compelling storyline.
But going into the data, nothing else really mattered other than wages.
Overall, this data print is far from a pivotal moment, for markets – An in-line AHE isn’t much of a letdown, and despite the NFP headline going into the tanks, it’s hardly a signal that the US economy is also. But with USD positions oversubscribed there was always going to be a bit of leakage on a headline miss.