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STOCKS

Most indices gained sharply contrary to expectations but could soon test resistance levels from where some rejection is possible.

Dow (22557.60, +0.68%) shot up after the ISM Manufacturing index soared to 60.8 in September, the highest since 2004. Dow is headed towards 22600-22750 levels from where a rejection is expected which could push back the index towards 22430-22400 levels n the medium term.

Dax (12902.65, +0.58%) has indeed tested 12900 as expected and looks strongly bullish just now. The index could soon test the previous high of 12951 seen in Jun’17. In case a break above 12951 is seen, we may expect a test of 13000 in the near term. Trend looks potentially bullish.

Nikkei (20560.79, +0.78%) has broken above the previous high of 20481, contrary to our expectation and could be headed towards 20700 in the coming sessions from where some rejection is possible. While Dollar Yen is headed towards 113.50-114.00 levels, Nikkei could remain bullish in the near term.

Shanghai (3348.94, +0.28%) is almost stable within 3360-3325 region and could trade sideways for a few more sessions before resuming the uptrend.

Nifty (9788.60, +0.20%) has fair chances of testing 9875-9900 while above 9700. 9900 could act as a decent near term resistance which could push the index back towards 9700 or lower in the coming sessions.

COMMODITIES

Overall commodities look bearish for the coming sessions.

Gold (1270.22) is coming off as expected. 1260 is the immediate downside from where a slight bounce could occur. In the longer run we could see a test of 1250. Near to medium term looks bearish.

Silver (16.55) could come off to 16.25 in the near term. Maximum upside of 16.75 is seen in the next few sessions. Near term looks bearish. .

Brent (55.89) has been falling since the last few sessions and could find some support near 55 while WTI (50.42) fell sharply yesterday from 51.67 to 50.08. WTI looks bearish now and could now target 49.50-49.00 in the near term before bouncing back from there.

Copper (2.9350) came off from 3.00 and could re-test support at 2.90. Consolidation in the 2.90-3.00 region is possible for a few sessions.

FOREX

Good strength in the Dollar yesterday (Monday), with the Dollar Index (93.87) coming close to 94.00 enroute 94.51; the Euro (1.1707) breaking below last week's low of 1.1716 and Dollar-Yen (113.10) rising again after having dipped to 112.09 last week.

With this, Dollar-Yen (113.10) could test crucial Resistance at 113.50-60 this week, and the Euro-Yen (132.44) may find immediate Support at 132.00, the 21-day MA, reducing the chances of falling towards 131.00.

For the Euro (1.1707), it seems the market has decided to push it lower towards 1.1665. With Resistance at 94.51 on the Dollar Index, the Euro too might find Support near 1.1665.

The Pound (1.3249) also fell sharply yesterday, in line with our view that the upmove since 1.1985 (Jan '17) may have ended. Medium term target can be 1.30, with immediate Supports seen near 1.32 and 1.3150.

A low of 0.7781 has been seen on the Aussie (0.7820) yesterday, which might turn out to be a Support for the week. Else, there may be room down to 0.7750-00. We have to see how it behaves today.

Dollar-Yuan (6.6532) saw a high of 6.6819, a little short of our target of 6.70, and has come off a bit. This now suggests chances of sideways consolidation between 6.62-6.70 over the next couple of weeks. Dollar-Rupee had closed at 65.29 on Friday, but is trading higher near 65.50 on the NDF just now. Support is seen at 65.20-10-00 now.

INTEREST RATES

US Yields (5Yr 1.93%, 10Yr 2.34% and 30Yr 2.88%) trade marginally higher than Friday. As mentioned, the 10Yr (2.34%) may rise towards 2.50%, while the 30Yr (2.88%) may rise towards 3.00%.

The US Yield Curve has dipped a bit though, contrary to expectation, with the 30-10 (0.54%) down a bit from 0.56% and 0.60% earlier, and the 30-5 (0.95%) down from 0.96% and 0.99%. But, Supports should be available near 0.54% and 0.90% respectively.

The RBI policy is due today. It is reported that most players expect the RBI to do nothing and keep rates on hold today. The 10Yr GOI (6.6632%) remains below 6.70% now and we anticipate a dip towards 6.60% over the coming days/ weeks.

Contrary to our expectation of resistance near 2.24%, the US-Japan 10Yr Spread (2.26%) could be breaking to the upside, supporting the rise in Dollar-Yen (113.10).

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

Conditions in the global economy have improved. Labour markets have tightened and above-trend growth is expected in a number of advanced economies, although uncertainties remain. Growth in the Chinese economy is being supported by increased spending on infrastructure and property construction, with the high level of debt continuing to present a medium-term risk. Australia's terms of trade are expected to decline in the period ahead but remain at relatively high levels.

Wage growth remains low in most countries, as does core inflation. Headline inflation rates are generally lower than at the start of the year, largely reflecting the earlier decline in oil prices. In the United States, the Federal Reserve has indicated that it will begin the process of balance sheet normalisation in October and that it expects to increase interest rates further. In the other major economies, there is no longer an expectation of additional monetary easing. Financial markets have been functioning effectively and volatility remains low.

The Australian economy expanded by 0.8 per cent in the June quarter. This outcome and other recent data are consistent with the Bank's expectation that growth in the Australian economy will gradually pick up over the coming year.

Over recent months there have been more consistent signs that non-mining business investment is picking up. A consolidation of this trend would be a welcome development. Business conditions as reported in surveys are at a high level and capacity utilisation has risen. A large pipeline of infrastructure investment is also supporting the outlook. Against this, slow growth in real wages and high levels of household debt are likely to constrain growth in household spending.

Employment has continued to grow strongly over recent months. Employment has increased in all states and has been accompanied by a rise in labour force participation. The various forward-looking indicators point to solid growth in employment over the period ahead, although the unemployment rate is expected to decline only gradually over the next couple of years.

Wage growth remains low. This is likely to continue for a while yet, although the stronger conditions in the labour market should see some lift in wage growth over time. Inflation also remains low and is expected to pick up gradually as the economy strengthens.

The Australian dollar has appreciated since mid year, partly reflecting a lower US dollar. The higher exchange rate is expected to contribute to continued subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.

Growth in housing debt has been outpacing the slow growth in household incomes for some time. To address the medium-term risks associated with high and rising household indebtedness, APRA has introduced a number of supervisory measures. Following some tightening in credit conditions, growth in borrowing by investors has slowed a little recently. In the housing market, conditions continue to vary considerably around the country. Housing prices have been rising briskly in some markets, while in others they have been declining. In Sydney, where prices have increased significantly, there have been further signs that conditions are easing. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases remain low in most cities.

The low level of interest rates is continuing to support the Australian economy. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Work disruptions due to Hurricanes Harvey and Irma are likely to knock down payroll growth substantially in September. We expect payrolls to rise only 55,000 and for the unemployment rate to edge up temporarily.

Will September Snap the Payroll Streak?

September is set to be a wild month for payroll employment following the landfall of Hurricanes Harvey and Irma. It bears the potential to interrupt the 83 consecutive months of employment growth. The payroll figures stand to be negatively impacted via two channels. First, payrolls are likely to be depressed by work disruptions having delayed routine hiring. Second, employees who didn't get paid because they weren't able to work during the pay period covering September 12 will not show up on payrolls. This would have the biggest impact on the one-third of firms with weekly pay periods, particularly in Florida where Irma made landfall during the survey week. The extent to which typically employed workers were not able to work during this period will be illustrated in the household survey (top chart) and leads up to expect a temporary uptick in the unemployment rate to 4.5 percent.

Lessons from Mesdames Katrina and Rita

To get a sense of how big a blow the storms may deal payrolls, we revisit the impact of Hurricanes Katrina and Rita in 2005. The timing of the two storms was similar to that of Harvey and Irma, with Katrina making landfall in late August and Rita coming ashore in September. From a business cycle perspective, Katrina and Rita also struck well into the economy's expansion, whereas Superstorm Sandy was earlier in the expansion and later in the year.

Following Hurricanes Katrina and Rita, payroll employment was initially reported to have contracted by 35,000 jobs. That marked a 120 percent drop, or 204,000 jobs, from the average over the prior three months. A similar sized drop relative to the current three-month average would result in a decline of 35,000 jobs in September. Applying the more modest 75 percent hit from the revised data for the period equates to payrolls slowing to a gain of 46,000 (middle chart).

Initial jobless claims therefore provide an additional guidepost. Initial claims in September have thus far averaged 278,000 which is 17 percent above August's average. That compares to a 21 percent rise in September 2005 (bottom chart).

Recent events do not perfectly follow those of 2005. While Houston was never fully evacuated like New Orleans, the metro area hosts a population five times larger. And whereas Rita struck after the survey week in 2005, Irma arrived right at the start of the survey week. Using the initial claims print for the survey week in our usual monthly payrolls model points to a gain of about 152,000 jobs in September. However, after adjusting for hiring delays and some employees not working at any point over the survey week pay period, we have penciled in a 55,000 rise. Of course, payrolls are notoriously difficult to predict in even a typical month, so our forecast comes with a wider confidence interval than usual.

Sombre Start

Finding the desire to discuss forex markets this morning in the wake of the worst mass shooting in US history is a challenge.

But with heavy hearts, the global markets trudge on searching for opportunities realising these tragedies are becoming all too commonplace. And as cynical as that may seem, that is the reality we've come to accept.

Markets

Peering at the screens this morning, it's apparent that US yields are providing the primary catalyst for the USD revival.

But the deep-seated tension in Spain is certainly weighing on the view that European political risk has faded, by all accounts anti-establishment populism is alive and well.

While the market is likely to sidestep the restlessness in Catalan, the short-term picture for EU risk remains clouded.Expect short-term EUR bulls to take the sidelines limiting top side appeal ahead of this weeks ECB meeting.Speaking of which, the ECB could present some challenges for them as the central bank is apt to show some concern about the EURO's recent strength.

And while the footings are solid to anchor the USD ( US tax reforms, a new Fed governor, Hawkish Fed) if price action is telling us anything, the dollar bulls remain tentative and appear almost uncomfortable to hold long positioning. Even a juicy good ISM manufacturing print overnight failed to get a rise form dollar bulls.

Indeed, the markets ingrained scepticism regarding Fed policy along with political challenges in Washington continues to temper expectations. But the reality is the Fed rate hikes( 2017-2018) remain underpriced as speculation continues to swirl around the shift to a Hawkish Fed Chair.

The Reserve Bank of Australia is on tap later today but it would be out of the ordinary if they lit off any hawkish fireworks. Recent RBA rhetoric runs counter to interest rate normalisation.Governor Lowe has continued to dampen any market expectation that more hawkish stance by global central banks does not necessarily have pass through implication in Australia. With CPI still below RBA target, there's not much risk for the RBA to nudge rates higher anytime soon.

IN the Asia FX space we should expect currency markets to remain in flux until global yields stabilise and regional equities see increased inflows. Mainland holiday thinned-trading conditions are also weighing on sentiment. Overall the market remains nervous on the INR and KRW but are showing some small pockets of interest int CNH and MYR at current levels

Views

USD: Longs remain uncomfortable awaiting the next bullish signal.It's difficult to read too much in this weeks NFP given the expected hurricane effect, but an aggressive top side surprise could send the dollar bulls into a frenzy

EUR: Expect limited fallout from the chaos in Catalan, but this weeks ECB risk will contain any rally

JPY: Tough trade gave the Japanese election risk and as you can tell traders are respecting current ranges

AUD: Remains extremely susceptible the to a dovish RBA

Stronger US PMI Data and Geopolitics overshadowed Loonie

The Canadian dollar began the week under pressure against the US dollar. The lonnie failed to appreciate versus the greenback despite a strong manufacturing sector report in September. The Markit Canada Manufacturing Purchasing Managers index (PMI) rose to 55 from a previous 54.6 in August. Released half an hour later the US Institute for Supply Management PMI jump to 60.8, the fasted pace in 13 years. The leading indicator boosted the USD as a strong pace of growth would lead to a third interest rate hike by the U.S. Federal Reserve.

Following a mixed third round of NAFTA talks in Ottawa last week the US is back to business by filing a trade complaint over the sale of Canadian wine in retail shops. The US Commerce department also slapped a 200 percent tariff on Bombardier CSeries jets. The actions taken into context have almost eroded any possibility of NAFTA negotiations finishing this year. The US and Mexico want to avoid the matter from dragging into 2018 as it is an election year (presidential in Mexico and primaries in the US).

The CAD got little support from oil prices on Monday. Energy prices tumbled more than 2 percent with reports of higher output from Iraq and Lybia at the same time US drillers and refineries recovered from the tropical storms.

The USD/CAD gained 0.263 on Monday. The currency pair is trading at 1.2504 after the US currency appreciated on the back of rising anticipation of a third interest rate hike this year. Geopolitics were a major factor over the weekend as the Catalunya referendum is reducing confidence in the EUR after the Spanish government cracked down on voters. The single currency has survived two close calls after the French and German elections, but stability of the region is once again in question after this weekend’s events.

U.S. Federal Reserve and Federal Open Market Committee (FOMC) voting member Neil Kashkari continues to be a dove. He has dissented from raising rates in the last two votes and in his view the current monetary policy tightening is keeping inflation down. He would rather wait for inflation to pick up to the 2 percent target before pulling the trigger on another interest rate hike. Dallas Fed President Robert Kaplan was more moderate and is willing to be convinced by upcoming indicators if he is to vote for a rate hike in December. Kaplan did mention that while the Fed has room to raise rates, it might not be as much as people might think.

Energy prices fell 2.055 percent in the last 24 hours. West Texas Intermediate is trading at 50.24 after news of higher supply from Organization of the Petroleum Exporting Countries (OPEC) and US based operations. The disruptions due to tropical storms in the US are slowly working themselves out and the geopolitical situation in Northern Iraq has not affected global supply. Iraq in fact announced a rise in exports in September. Risks remain that the situation could escalate as the Kurdish region has voted for independence but lacks the recognition of the central government.

Market events to watch this week:

Tuesday, October 3
4:30 am GBP Construction PMI

Wednesday, October 4
4:30 am GBP Services PMI
8:15 am USD ADP Non-Farm Employment Change
10:00 am USD ISM Non-Manufacturing PMI
10:30 am USD Crude Oil Inventories
3:15pm USD Fed Chair Yellen Speaks
8:30 pm AUD Retail Sales m/m
8:30 pm AUD Trade Balance

Thursday, October 5
8:30 am CAD Trade Balance
8:30 am USD Unemployment Claims

Friday, October 6
8:30 am CAD Employment Change
8:30 am CAD Unemployment Rate
8:30 am USD Average Hourly Earnings m/m
8:30 am USD Non-Farm Employment Change
8:30 am USD Unemployment Rate

Gold has posted slight losses in the Monday session. In North American trade, the spot price for an ounce of gold is $1275.52, down 0.34% on the day. On the release front, ISM Manufacturing PMI accelerated to 60.8, beating the forecast of 57.9. This marked the indicator’s highest level since April 2011.

The US manufacturing sector remains strong, as a stronger global economy has led to increased demand for US goods. The primary gauge of manufacturing activity, ISM Manufacturing PMI, accelerated in September to 60.8, indicating sharp expansion. The strong reading increased has sent gold prices lower on Monday. September was a rough month for gold, which declined 3.2 percent. With the North Korean conflict again on the back burner and the US continuing to post strong numbers, investors have a renewed appetite for riskier assets, which has weighed on safe-haven gold.

The US dollar gained some ground last week from an unexpected source – President Donald Trump. Trump has all but given up on his health care proposal, as the plan lacks enough support from Republican lawmakers. Next on the Trump Express is tax reform, which was a key campaign plank. Last week, Trump proposed a major overhaul of the US tax code, which includes reducing the corporate tax rate from 35 percent to 20 percent, as well as a 25 percent tax rate for small businesses, such as partnerships. Like other Trump proposals, the tax plan was sketchy on details, including how the tax plan would be paid for. With Democrats and some Republicans wary of Trump’s tax agenda, it’s likely his that tax reform proposal will face a stiff battle in Congress. Still, the markets like the idea of lower taxes, and this has helped the dollar gain ground against gold.

The British pound has recorded considerable losses in the Monday session. In North American trade, GBP/USD is trading at 1.3267, down 0.97% on the day. On the release front, British Manufacturing PMI slowed to 55.9, but still fell short of the forecast of 56.3 points. There was better news in the US, as ISM Manufacturing PMI accelerated to 60.8, beating the forecast of 57.9. This was the indicator's highest level since April 2011. On Tuesday, the UK releases Construction PMI, which is expected at 51.2 points. As well, the BoE will release the minutes of the quarterly Financial Policy Committee meeting.

With investors keeping a nervous glance on the slow pace of the Brexit negotiations, any key British indicators which fall short of expectations could send the pound sharply lower. This was the case on Monday, as British Manufacturing PMI softened and missed the forecast. Although the reading of 55.9 indicates respectable expansion in the manufacturing sector, perception is key in the markets, and negative sentiment about the British economy could spell trouble for the pound.

Prime Minister Theresa May is putting on a brave face, and said in a weekend BBC interview that the Conservative party is united behind her leadership. However, there are reports that May is facing increasing unrest in the party, and could be gone as leader within 12 months. The Conservatives are gathered this week in Manchester for a party gathering. May has been widely blamed for the Conservative's poor showing in the June election, and has failed to present a consistent line in the Brexit negotiations with the European Union. The Brexit talks have been tortuous until now, with little progress to report after several rounds of negotiations. Key sticking points include the amount that Britain will pay upon leaving, whether the European High Court will have jurisdiction over EU citizens living in Britain, and the border with Ireland.

The US dollar continues to gain ground against the pound, as GBP/USD has dropped to its lowest level since September 14th. Trump has all but given up on his health care proposal, as the plan lacks enough support from Republican lawmakers. Next on the Trump Express is tax reform, which was a key campaign plank. Last week, Trump proposed a major overhaul of the US tax code, which includes reducing the corporate tax rate from 35 percent to 20 percent, as well as a 25 percent tax rate for small businesses, such as partnerships. Like other Trump proposals, the tax plan was sketchy on details, including how the tax plan would be paid for. With Democrats and some Republicans wary of Trump's tax agenda, it's likely his that tax reform proposal will face a stiff battle in Congress. Still, the markets like the idea of lower taxes, and the US dollar posted back-to-back weekly gains.

Manufacturing activity picked up in September with the ISM index notching its highest reading this cycle. Some of the gain can be traced to the effects of recent storms, but details suggest more fundamental strength.

Longer Delivery Times Support New Cycle High for the ISM

The ISM manufacturing index backed up a solid report in August with another standout reading in September. The composite index rose to a cycle high of 60.8. The gain in part looks to reflect some of the fallout of Hurricanes Harvey and Irma, but the breadth of strength suggests factory activity remains solid.

Among the composite's sub-indices, supplier deliveries posted the largest gain, jumping 7.3 points to 64.4. Disruptions from the Gulf area storms have caused delivery times to lengthen. The bottle necks have extended beyond the chemicals industry, with respondents from the paper products and food, beverage & tobacco industries also reporting storm-related supply issues.

That said, supplier deliveries have been lengthening over the year, consistent with improving manufacturing activity. The production index notched its fourth consecutive month of above-60 readings, rising to 62.2. Moreover, the new orders index improved to 64.6 and suggests strength is set to continue over at least the next couple of months.

Manufacturers have been adding to inventories to meet growing demand. The inventory index came in at 52.5, closely in line with its average for the quarter. As we have been noting, inventories look set to provide a sizeable boost to third quarter GDP. Although much of the "hard" data on inventories has yet to come available, the ISM signals the strongest quarter of inventory building at the nation's factories in more than two years. Moreover, the buildup appears intentional, as customer inventories were reported as too low for a third consecutive month.

One area where hurricane effects were clear was in prices. The prices paid index jumped to 71.5 in September with multiple respondents specifically citing higher input costs due to the recent storms.

Factory Hiring Remains Solid

Hiring in the manufacturing sector has been solid this year as the industry has shaken off last year's commodity slump, the dollar has weakened and global growth has strengthened. Manufacturing payrolls have risen by an average of 17,100 jobs per month.

The ISM employment index points to continued strength for September. The hiring index edged up from an already elevated reading to 60.3. The solid pace of hiring in recent months suggests that longer supplier delivery times are not solely due to temporary weather disruptions. We look for the factory sector to add to payroll growth in Friday's employment report, but note that hiring disruptions due to the recent hurricanes generate the potential for readings that may not be indicative of the underlying trend in factory hiring.

The Institute for Supply Management (ISM) manufacturing index rose 2 points to 60.8 in September, the thirteenth consecutive monthly expansion and achieving a cycle high. Market consensus expected a pullback to 58.1.

All components except inventories (-3 points to 52.5) and imports (-0.5 to 54) advanced in the month. The biggest gains were recorded in prices paid (+9.5 to 71.5), supplier deliveries (+7.3 to 64.4), and new orders (+4.3 to 64.6).

Growth in new orders coupled with decline in inventories results in the spread between the two - useful as a leading indicator of activity - rising to 12.1 (+7 points). This suggests that activity could hold or strengthen in coming months.

Seventeen of the eighteen manufacturing industries reported expansion in September, with textile mills, machinery, and nonmetallic mineral products registering the strongest expansions on the month. The furniture and related products industry recorded a contraction in September.

Key Implications

For the second consecutive month, the U.S. manufacturing sector has beaten expectations, bolstered by strength across 9 of 11 categories. The surge in prices is likely a temporary phenomenon, and appears to be largely driven by supply chain disruptions in the aftermath of hurricane Harvey.

Rebuilding from hurricanes is likely to support manufacturing activity in the next few months, suggesting that there may be some inertia in components such as new orders and production before we see the index pull-back to more sustainable levels. Nevertheless, this report sends a strong positive signal that the U.S. manufacturing sector continues to prove resilient, supported by strong foreign demand that is helping to offset domestic concerns about policy uncertainty, dollar movements, or natural disasters.

The market's attention today was on the referendum in Catalonia where most of the voters supported independence of the region from Spain. The Spanish government claimed the referendum as illegal and as a result of attempts by authorities to restrict people from voting, more than 800 people have been injured. In case of a continuation of this political crisis, the euro may weaken against other major currencies. Further pressure for EUR/USD bulls came from the final manufacturing PMI in the US that declined to 58.1 in September, 0.1 less than the previous figure. The unemployment rate in the Eurozone stayed at 9.1% in August against the forecasted decline to 9.0%.

We may see volatility grow for the AUD/USD after the RBA's monetary policy statement due to be published at 03:30 GMT tomorrow. Most analysts are not expecting any changes in monetary policy settings, but the rhetoric of the central bank's officials may influence the mood of traders. In previous statements, GDP was slated to grow by 3.0% in 2018 and positive forecasts were made for the labour market. The course of trading may also be affected by reports on new home sales at 00:00 GMT and building approvals in Australia at 00:30 GMT.

Oil prices are falling on the background of rising drilling activity in the US where the number of active oil rigs, according to Baker Hughes, increased by 6 to 750 during the last week. At the same time, oil production growth in Iraq and Libya resulted in crude oil production growth within OPEC to 32.86 million barrels per day in September, and that is also negative for the oil bulls.

EUR/USD

The single currency is trying to restore some of the previously lost positions and is currently above 1.1750. Fixing below this figure may become a trigger for continued price drops to 1.1620 and 1.1550. On the other hand, potential growth within the correction may be restricted by resistance at 1.1825. Crossing the zero point by the MACD signal line may provide additional stimulus for growth.

AUD/USD

The AUD/USD price rebounded from the support at 0.7800 and in case of saving the positive momentum we may see the quotes returning to the resistance range of 0.7850-0.7870. In case of continued falls within the limits of the channel, immediate targets will be located at 0.7740 and 0.7700. The recent crossing of the zero point by the MACD signal line may stimulate the bulls to push the price higher today.

USD/WTI

The American crude oil benchmark WTI demonstrated a confident descending movement where it may test the strong support at 50.00. Breaking through this psychologically important mark may become a trigger for further falls to 48.50 and 47.75. On the other hand, the RSI on the 15-minute chart is in the oversold zone that points to an increased possibility of a price rebound with the first target at 51.00.