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Gold opened Wednesday’s session gently up after finding fresh buying interest around the 1,660 level.

There is a ray of hope that market sentiment may improve as the RSI and the MACD are trying to change direction to the upside.

Yet, some caution is still required as the 1,670 zone seems to have resumed its resistance role. The 20-period simple moving average (SMA), which ceased bullish pressures last week, is also within breathing distance. Should the recovery continue above the 50- and 200-period SMAs currently both at 1,690, the price will head for the 1,700 round level and then for the 1,712 barrier.

In case the 1,660 floor collapses, the bearish wave could see a continuation towards the 1,653 area. A steeper decline could halt near 1,640, while lower, sellers will attempt to re-activate the 2022 downtrend below the 1,620-1,614 base.

Summarizing, the precious metal is not out of the woods yet despite pausing its latest bearish correction. Perhaps a close above the 20-period SMA could raise buying confidence, though whether the price will re-activate its short-term uptrend above the 1,729 peak remains to be seen.

Stock markets are recovering slightly on Wednesday after another volatile start to the week.

It's clear this week that investors have one eye on the US, with Fed minutes this evening, US inflation data tomorrow and the start of earnings season likely to be the primary drivers into Friday's close.

Any hope of a helping hand from the Fed minutes may not be forthcoming, with the commentary to an extent outdated at this point and policymakers seemingly unified in their goal of defeating inflation. Even a good CPI number tomorrow may do little to change that in the near-term.

Sterling jumps on BoE reports

The FT has reported that the BoE could extend its emergency bond-buying measures beyond Friday in order to ensure continued stability in the market which has lifted the pound in early trade. While Governor Bailey's warnings to pension funds this week gave the impression there's no turning back, it would appear that isn't entirely true.

And that shouldn't be as surprising as it seemingly is. While the hope within the central bank will be that its emergency measures have allowed pension funds to recalibrate and address the vulnerability in the bond market, if that doesn't prove to be the case it would be ridiculous to pull the rug from under it rather than extend the measures until the end of the month when we get the full budget.

Still, at a time when investors are living in fear of what's around the corner, perhaps the mindset of "prepare for the worst and hope for the best" is behind it. It does go to show how huge the Chancellor's budget is in three weeks and the carnage that another misstep could cause. The BoE can buy the government time for now but it isn't a permanent solution.

UK may already be in recession after GDP miss

The rebound in sterling held even as we received some pretty bleak GDP data for August that suggests the UK may already be in recession. I mean, most people already agree that the country is in recession but we're just waiting for the data to technically confirm it. The numbers weren't good though, with a 1.6% manufacturing slump driving a 1.8% decline in production. Meanwhile, consumer-facing services fell sharply by 1.8%, with overall services dropping by 0.1%.

All in all, the numbers are pretty grim and I don't see much scope for improvement in the near future, particularly on the consumer side. Perhaps the minor reaction is a reflection of the fact that most already believe the economy to be in recession and the data just confirms that, despite falling short of analyst expectations.

BoK end game in sight

The Bank of Korea hiked interest rates by 50 basis points overnight, taking the Base Rate to 3% and not far below what it believes to be the terminal rate of around 3.5%. The move was widely expected, with the central bank still concerned about external conditions and a weaker won. Time will tell whether the central bank will indeed start to ease off the brake but today's comments suggest that, much like the RBA, the end game is now in sight.

Edging higher but growth concerns remain

Oil prices are nudging higher after paring recent gains so far this week. There are two dominant forces in the oil market at the moment; the economic outlook being the primary downside risk and OPEC+ the upside. The latter reasserted itself last week with the two million barrel per day cut (much less in reality, of course) but growth fears are still dominating in the markets which may stop the price from taking off. We could also see further coordinated action from consuming countries on the SPR after a frustrated response - to put it mildly - to the alliance's output cut.

Paring losses but optimism running thin

Gold is edging higher amid a slight softening in the dollar and marginally lower yields. I'm not sure anyone is getting too excited by today's rebound but coming after a week of declines, we may just be seeing some profit-taking ahead of the Fed minutes and inflation data. They will be the core focus for gold traders over the next 36 hours and given the response in the markets over the last week, they don't appear overly optimistic.

Remains in consolidation

Bitcoin is seeing small gains on Wednesday, with the cryptocurrency up less than 1% and still holding above $19,000. While the overall trend in recent days has been lower, the moves have been relatively mild and look more consolidatory than anything more worrying. The longer trend of consolidation around $20,000 remains intact which is the most important thing. Whether that will be the case at the end of the week, much like elsewhere, will depend on the Fed minutes and inflation data.

The current chart of the USDJPY pair shows the formation of a global impulse trend, which consists of cycle waves. In the last section of the chart, we see how confidently it creeps up in the cycle wave V, more precisely in its final part.

Wave V, apparently, takes the form of a 5-wave impulse ①-②-③-④-⑤ of the primary degree. In the specified impulse, the first four parts are finished.

Currently, we can expect the construction of the primary fifth wave, which takes the form of an intermediate impulse (1)-(2)-(3)-(4)-(5). The price in the final primary wave ⑤ may rise to 150.91.

At that price level, minor wave 5 will be at 76.4% of impulse 3.

An alternative scenario shows that the cycle wave V has already ended in the form of a primary impulse.

Thus, in the next coming trading weeks, we can expect a fall in the exchange rate and the formation of a new bearish trend.

It is assumed that a bearish impulse Ⓐ may form on the market in the near future, which will mark the beginning of a new 3-wave zigzag.

The upcoming decline may reach the area of 140.38, that is, the previous minimum of fluctuations, and then even lower.

Markets

US (bond) investors returning from a long weekend didn’t help to restore a more constructive narrative on global markets. Eco data were few, with Thursday’s US September CPI release still the first important data reference on the agenda. Recession risk (IMF downgrading global economic outlook for 2023) only suggested more difficult times ahead for risk/growth sensitive assets. US equities closed from little changed (Dow) to additional losses of 1.1% (Nasdaq), with the latter touching a new cycle low, breaking below the 10.500 support area. The Eurostoxx50 lost 0.5%. The index stays above recent lows, but the picture remains worrisome too. Bad news still isn’t good news for bond investors either. Both US and German/EMU yields continue testing the cycle peak levels. The US and German 30-year yields even closed at new cycle top levels (respectively at 3.92% and 2.32%). The US curve steepened with yields closing little changed (2-y) to 6.6 bps (10-y) higher, as they still had some catching up to do. German yields eased between 2.5 bps (30-y) and 7.6 bps (5-y). At least for now markets didn’t build on Monday’s rumours that Germany/the EMU would consider additional funding on a EU level. Monday’s narrowing in intra-EMU spreads was partially reversed (10-y Italia/German spread + 8 bps). On FX markets, the dollar remains the by ‘default’ preferred haven even as gains yesterday remained modest. DXY closed at 113.22. EUR/USD finished little changed just north of 0.97. USD/JPY is drifting north of last month’s MOF intervention levels (USD/JPY this morning 146.25).

In the UK, the Bank of England is still facing an almost impossible balancing act. The Bank yesterday widened the scope of its emergency bond buying to inflation-linked gilts as the Bank saw pressure building in that segment of the market, too. BoE governor Bailey yesterday indicated the Bank still intends to stop the program as scheduled at the end of this week. However, overnight the Financial Times suggested that the BoE in contacts with banks left to door open for a prolongation. After a sharp decline late yesterday, sterling this morning is looking for a bottom (EUR/GBP 0.8827, Cable 1.1015). Even so, the extremely difficult BoE balancing act between policy normalization and preserving financial stability probably suggests more volatility ahead for UK markets.

This morning, Asian equity markets still mostly trade with modest additional losses, with Hong Kong underperforming. South Korea outperforms (0.3%). Later today, the eco calendar is thin (US PPI) on both sides of the Atlantic. Several ECB and BoE members will speak today. Markets will also keep a close eye at the Minutes of the September Fed meeting, even as Fed governors recently were quite unisono on the need for substantial further tightening. We expect core yields and the dollar to hold near recent elevated levels, further counting down to tomorrow’s US CPI release. In the UK, August monthly GDP (0.3%) and production data (IP -1.8% M/M) were substantially weaker than expected. The direct impact of the report might be limited, but it doesn’t help to provide comfort for UK bonds and/or sterling.

News Headlines

The Bank of Korea raised its policy rate as expected by 50 bps, from 2.5% to 3%, the highest level since 2012. Two board members voted against the decision as growth momentum fades and with the property market under pressure. The Board sees continued rate hikes as warranted as inflation is expected to remain high and substantially above target. The BoK is also concerned about the weakness of the currency which adds to inflation woes. The won remains near lowest levels on record at USD/KRW 1430. Governor Rhee added that there’s a lot of disagreement over the pace of the November hike though.

US President Biden commented on recent OPEC+ production cuts in a CNN interview. He warned that there’s going to be some consequences for what they’ve done together with Russia. The so-called NOPEC bill which would allow US lawsuits against countries in the oil cartel for manipulating energy markets is one possible route. Halting US arm sales to Saudi Arabia for one year is another one. Any possible actions aren’t expected ahead of next month’s mid-term elections, but the President vowed to rethink the strategic relationship with Saudi Arabia.

WTI softens as China ramps up Covid control in major cities. The rally above the psychological level of 90.00 has briefly lifted the optimism. But the origin (93.50) of the late August sell-off is a tough level to crack. The bulls are looking to consolidate their gains and 87.00 off the recent bullish breakout is the first area to gauge the strength of follow-up demand. If the bid gets hit, more profit-taking would follow and a correction may push the price towards 84.00 in the congestion area that sits over the 30-day moving average.

The pound slips as Britain’s pension funds scramble to meet margin calls amid bond firesale. Breaks below 1.1300 and 1.1100 prompted short-term buyers to take profit. As overall sentiment remains downbeat, the lack of support suggests that the bulls might be wary of catching a falling knife. 1.0770 is the next level to see if new buyers would emerge, or Sterling could drift to the base of the recent rebound at 1.0550. 1.1180 is the first hurdle and the bulls will need to clear 1.1380 before a recovery could gain traction.

The Swiss franc bounced after SNB Chairman Thomas Jordan insisted on pursuing the tightening. Following a break above the double top at 0.9870, a bullish MA cross on the daily chart indicates an acceleration to the upside. Strong buying interest has pushed the greenback back to parity. Last June’s high at 1.0040 is sellers’ last stronghold and its breach could resume the uptrend towards 1.0200. The RSI’s overbought condition caused a pullback and the former resistance at 0.9870 is the first level for accumulation.

We are only Wednesday, and the Bank of England (BoE) already intervened twice this week, to cool down the unbearable negative pressure on the British sovereign bonds.

Monday, the BoE announced it would buy more bonds until the end of this week in an attempt to give a boost to the market before it stopped purchases. But the latter didn’t prevent inflation-linked papers from recording a historic dive in the UK.

So, Tuesday, the BoE announced to buy inflation-linked sovereign bonds, as well. For a while, it looked like the latest measures helped pouring water on the burning hot British sovereign space.

But then… the BoE Governor said that UK bond investors should finish winding up positions that they can’t maintain as the BoE will halt its operations by the end of this week.

And puff.

All the BoE efforts have gone up in smoke. What Bailey did was certainly one of the biggest communication mistakes that a central banker could make. And it really came at an unfortunate time.

The gilt yields remain at alarming high levels, the UK’s gilt market remains extremely slippery, the BoE says it will just leave the mess as it is, by the end of next week and sterling is in a bad shape, because Cable slipped below 1.10 following Bailey’s comments.

Investors clearly brace for a deeper dive in UK sovereigns and the pound. But the FTSE 100 could benefit from falling sterling, as it has a high exposure to energy and mining stocks, and the crumbling sterling makes the profitable British oil companies, for example, more affordable for international investors. This is certainly why the FTSE remained more resilient compared to the S&P500. The FTSE 100 is down by less than 8% since the start of this year, whereas the S&P500 lost more than 25% since the January peak.

FOMC minutes and US inflation data

All eyes are on FOMC minutes and the US inflation data.

Today, the minutes from the FOMC’s latest meeting will reveal if some Federal Reserve (Fed) members are concerned about going ‘too fast’ in terms of rate hikes. But we will certainly not hear anything more dovish than ‘the Fed will continue monitoring economic data, especially inflation’.

Also, today, US will also reveal the latest producer price index for the month of September. The US factory-gate prices are expected to have slowed from 8.7% to around 8.4%.

Then tomorrow, we will have a better insight about the situation in consumer prices. The headline CPI is expected to have slowed from 8.3% to 8.1%, but core inflation may have spiked higher, which is bad news for those praying for the Fed to slow down the pace of its rate tightening.

One important ingredient in Fed’s decision making is the inflation expectations. Unfortunately, after two months of sharp drop in inflation expectations, we had a mixed picture at yesterday’s release. The one-year inflation expectations kept falling, which is good news, but the three-year expectations ticked higher. And both are still above the Fed’s 2% policy target.

Investors, and the world, desperately want a soft US inflation data to convince the Fed to soften its tone. Otherwise, the markets will continue being battered, jobs being lost, and economy being squeezed.

IMF cuts global growth forecast

The IMF cut its global growth forecast for next year to 2.7%, from 2.9% in July, and from 3.8% in January, and said that there’s 25% probability that growth will slow to less than 2%. In the euro area, the GDP could rise just 0.5% next year.

The EURUSD remains under a decent pressure of the strong dollar, and only a soft inflation data from the US could help the euro bears take a pause.

In Japan, things are not necessarily better. The USDJPY spiked above the 146 level for the first time in 24 years. Not only that the effect of the Bank of Japan’s (BoJ) direct intervention in the FX markets didn’t last long, but Japan’s sovereign market is also going through a historic time, because investors could no longer trade the 10-year JGBs for three days, because the BoJ broke the system by buying just too much of the 10-year bonds to conduct a yield curve control strategy.

Swap traders are now betting that the BoJ can’t carry on with abnormally low interest rates for so long, and will be forced to hike its rates at some point. Otherwise, the yen will continue losing value and even direct interventions won’t stop the bleeding in yen.

Market movers today

This morning we get euro area industrial production for August. After a big drop in July of 2.3% m/m it is expected to recover somewhat in the August reading.

US PPI for September may grab some attention ahead of the important US CPI release tomorrow. Import prices have declined for the past four months, which puts downward pressure on PPI. High wage growth works in the other direction, though. Consensus is for a rise in core PPI of 0.3% m/m down from 0.4% m/m in August.

FOMC minutes tonight will give some insights to the thinking behind the Fed raising the dot plot to a peak of around 4.6% (in line with current market pricing).

In the Nordics, we get Swedish Prospera Inflation expectations.

Developments in the Russia/Ukraine war will also continue to be in focus.

The 60 second overview

The temporary QE from Bank of England continues to rattle markets. Yesterday, BoE Governor Baily urged investors to unwind any positions that are not sustainable when the temporary QE ends on Friday. However, a lobby group that represents UK pension funds has urged the BoE to continue the QE as investors need more time to unwind positions. Hence, the uncertainty/volatility remains in the UK market and with the possible spill-over effects to other markets as we have seen so far.

Yesterday, at their biannual meeting the IMF cut its growth forecast for the world economy in 2022-23 to the weakest level since 2001 (if we exclude the global financial crisis). The main drivers of the growth downgrade are the headwinds from the energy crisis and global financial tightening amid the sharp upward move in central bank rates across the world. At the same time, the IMF sees a risk that the outlook will turn worse before it turns better. The institution downgraded the economic outlook mainly for western economies, notably the euro area with Germany and Italy seeing the biggest growth downgrades. In general, despite the downward growth revisions, the IMF is still slightly more upbeat than us, especially on the US outlook in 2023.

However, the Fed's Mester continues to argue for more tightening of US monetary policy despite the risk of a recession, and we saw a test of the 4% level for 10Y US government bond yields before the it fell back and is trading at 3.92% this morning in Asian trade.

Germany and the Netherlands are expected to put forward a proposal to bring down EU energy costs as EU energy ministers will meet in Prague today. They are also expected to keep open the proposal of capping gas prices used to generate electricity. We have more speakers from both Federal Reserve and ECB today.

Equities: Equities lower yesterday for the fifth day in a row but yesterday with the group of defensive industries doing better and ending the day higher. This also means indices were dragged lower by cyclicals and over the last five days, cyclicals have underperformed defensives by 3%. VIX continued higher yesterday, closing shy of 34. We very often see vol spiking due to one single event but the elevated VIX level right now tells a story of combined uncertainty ranging from macro to monetary policy, politics and geopolitics that investors are struggling with at the moment. In US yesterday Dow +0.1%, S&P 500 -0.7%, Nasdaq -1.1% and Russell 2000 +0.1%. Asian markets are mixed this morning. European futures are lower while US futures are showing some solid gains this morning.

FI: 10Y US Treasuries tested the 4%-level yesterday ahead of the US CPI data later this week as well as the comments from Federal Reserve's Mester that the Federal Reserve cannot be complacent regarding inflation and need to keep tightening monetary policy. However, US government bond yields ended a bit lower.

Bank of England is going to end their temporary QE on Friday and urged investors to unwind positions before BoE ends QE. However, today the BoE added UK linkers to the QE and yields declined on both nominal and inflation-linked UK government bonds.

In the European market, there was plenty of long-end supply from Germany and EU. The 30Y German syndicated deal was weak with a modest bid-to-cover as well as a large retention from the German Debt Agency, while the bid-to-cover at the EU dual tranche, where they sold 7Y and 20Y benchmarks was solid. However, there was also a solid new issue premium in the 20Y deal.

FX: USD roughly unchanged on the day. SEK continues to weaken whereas NOK has found some support in higher short-end rates. Big swings in GBP related to policy remarks, where the near-term fate of GBP is tightly connected to BoE's intervention plans in the Gilt market.

Credit: The negative sentiment in the credit market reversed at the last hours of trading yesterday. ITraxx Main tightened 0.5bp to 134bp and Xover tightened 5.9bp to 642bp. The primary markets continue to show life-signs with Vattenfall being able to print a multi-tranche EUR benchmark deal yesterday.

Nordic macro

In Sweden, the October money market inflation expectations are due in the coming week. Over the past couple of months CPIF expectations (which excludes the inflationary impact from Riksbank pushing mortgage rates higher) have turned lower on all horizons. We expect to see another leg down this month.

UK GDP contracted -0.3% mom in August, worst than expectation of 0.1% mom expansion. In the three months to August, compared with the three months, GDP contracted by -0.3%, with -1.5% fall in production, -0.1% fall in services and flat growth in construction.

Production fell by -1.8% mom, and was the main contributor to the decline in GDP. Growth was negative in three of the four sectors. Services dropped -0.1% mom. Construction rose 0.4% mom.

Also released, industrial production came in at -1.8% mom, -5.2% yoy, versus expectation of -0.2% mom, 0.6% yoy. Manufacturing production came in at -1.6% mom, -6.7% yoy, versus expectation of 0.0% mom, 0.7% yoy. Goods trade deficit widened to GBP -19.3B, but smaller than expectation of GBP -20.5B.

Full GDP release here.