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Market movers today

Markets will keep a close eye on Theresa May's speech on Brexit in Florence this afternoon, where she will outline the details of the UK's negotiating stance after the UK formally leaves the EU at the end of March 2019. Yesterday, parts of May's speech was already leaked and among other things it was confirmed that May will propose a two-year transition period after Brexit takes effect, see Bloomberg for more.

Today, we have a busy data calendar, not least with PMI figures released in Germany, France and the euro area. We expect euro area manufacturing PMI to remain strong, but moderate slight ly to 57.2 in September, as the euro appreciation is bound to drag on export orders eventually, despite activity so far remaining strong. We look for a similar decline in the Service PMI due to weaker signals from the new orders component in the last reading, and forecast service PMI at 54.2 in September.

The market will also have plenty of ECB speeches to digest as Mario Draghi, Benoît Coeuré and Vítor Constâncio are all scheduled to speak.

In the US, Markit PMI manufacturing is due to be released, which we estimate will show a further increase given the recent large disparity between ISM manufacturing and Markit PMI manufacturing (58.8 versus 52.8). Again, however, numbers might be somewhat skewed due to the impact of the recent hurricanes.

Selected market news

Risk sentiment took a small hit yesterday as tensions with North Korea increased again. Equit ies as well as bond yields declined and the JPY st rengthened.

The North Korean leader responded to US President Donald Trump's speech in UN where Trump threatened to dest roy North Korea totally. Kim Jong-un called T rump ‘mentally deranged' in a rare statement rare directly from the North Korean leader , and vowed to make Trump pay dearly. He said Trump's comment s had confirmed his nuclear programme was the ‘correct path' and also st at ed t hat ‘we will consider with seriousness the exercising of a corresponding, highest level of hard-line count ermeasure in hist ory', see South China Morning Post. Kim's foreign minister said t o report ers t hat t hese measures could include t esting a hydrogen bomb in the pacific. Yesterday, Trump announced new financial sanctions targeting North Korea. Trump also said that Chinese President Xi Jinping had ordered Chinese banks to cease conduct ing business with North Korean entities. Trump praised Xi, calling t he move ‘very bold' and ‘somewhat unexpected'.

Yesterday, the US Philadelphia Fed manufacturing index pointed to continued strength in US manufacturing. The index increased from 18.9 in August to 23.8 in September (consensus 17.1). Details showed a decent rise in the orders index as well.

USD/JPY - 112.02

Most recent candlesticks pattern   : N/A

Trend                      : Up

Tenkan-Sen level              : 112.11

Kijun-Sen level                  : 112.19

Ichimoku cloud top             : 112.13

Ichimoku cloud bottom      : 111.88

Original strategy  :

Bought at 111.70, Target: 112.70, Stop: 111.35

Position :  - Long at 111.70

Target :  - 112.70

Stop : - 111.35

New strategy  :

Hold long entered at 111.70, Target: 112.70, Stop: 111.60

Position :  - Long at 111.70

Target :  - 112.70

Stop : - 111.60

Although the greenback retreated after rising to 112.72 yesterday and consolidation below said resistance would be seen initially, reckon 111.65 would contained downside and bring another rise later towards said resistance but only break there would confirm recent upmove has resumed and extend further gain to 112.90-00, then towards 113.25-30 (1.236 times projection of 107.32-111.04 measuring from 109.55), having said that, previous chart resistance at 113.58 would hold from here, bring retreat later.

In view of this, we are holding on to our long position entered at 111.70. Below said support at 111.65 would risk weakness to 111.40-45 but break there is needed to signal a temporary top has been formed at 112.72, bring retracement of recent rise towards support at 111.11 first.

Asia Summary

Asian equity markets opened mixed, in line with Thursday’s NY trading session. Rio Tinto opened higher by over 1%, after announcing an additional $2.5B stock buyback. Shares of Taiwan’s HTC have risen over 9% following the transaction with Google.

On the geopolitical front, President Trump announced an executive order for additional US sanctions on North Korea, which may include shipping and trade networks. North Korea later responded and said it would consider the ‘highest level of countermeasure.’

Later, a South Korean press report (citing North Korea’s Foreign Minister) suggesting that North Korea could conduct an H-bomb test has since weighed on markets.

Amid the North Korea headline, AUD/JPY has declined over 0.4%. Also, China’s metals, including iron ore, have traded lower by over 2%, following reports that the Shanghai Metals Exchange raised trading fees.

South Korean steelmakers have traded sharply lower (Posco -4.1%) amid press speculation that the US could increase tariffs.

In corporate issuance, China Postal Savings Bank announced plans to issue $7.25B in perpetual preference shares in order to strengthen additional Tier 1 capital. On the sovereign front, S&P downgraded Hong Kong from AAA, while China criticized its own recent downgrade by the ratings agency.

S&P also issued its Banking Industry Country Risk Assessment (BIRCA) on Japan, in which it revised the trend for the country’s economic risk to stable from negative. It also revised the view of the trend for banking industry risk to negative from stable.

Looking ahead, comments are expected out of ECB (Draghi, Coeure, Constancio) and Fed officials (Williams, Kaplan)

In US corporate news, there has been press speculation that Hewlett Packard Enterprise is said to be planning to cut ~5,000 jobs, which equals about 10% of its total workforce.

Speakers and Press

China

(HK) S&P downgrades Hong Kong sovereign rating to AA+ from AAA (follows recent downgrade of China); Outlook revised to Stable from Negative; cites potential for spillover risks.

(CN) China MOF: S&P sovereign rating cut of China is 'wrong decision'; The ratings agency's inclusion of local government debt financing vehicles into local government debt does not have legal foundation.

(CN) S&P Tan: Says local government financing vehicles (LGFVs) still a key source of China credit growth.

Other

(KR) North Korea countermeasure may mean H-bomb test in Pacific - South Korean Press; Cites North Korea Foreign Minister.

(KR) North Korea leader Kim Jong Un: President Trump's UN speech was rude nonsense, he is mentally unstable; Trump should select his words prudently; Says to mull highest level of countermeasure.

(JP) S&P publishes latest Banking Industry Country Risk Assessment (BIRCA) on Japan; revised 'trend for Japan's economic risk to stable from negative'; revised view of trend for banking industry risk to negative from stable

(JP) Japan Defense Min: North Korea Foreign Min comments about hydrogen bomb test in Pacific Ocean are 'absolutely unacceptable'; Says North Korea Foreign Minister remarks are personal, but should take them seriously.

(JP) Japan Chief Cabinet Spokesman Suga: Plans to hold extraordinary Diet session on Sept 28th

(JP) Japan Finance Min Aso: Government has not decided to delay budget balancing; not yet sure if 2020 primary surplus target can be hit

(JP) Japan Economic Revitalization Min Motegi: Maintains primary balance surplus target; will reassess target in next years mid-term review

(JP) Japan PM Abe to speak to press on Monday afternoon – US financial press

(KR) US Dept of Commerce said to have included South Korea on list for sanctions of steel imports - South Korea Press; The report says an announcement could come at the end Sept.

Asian Equity Indices/Futures (00:30ET)

Nikkei -0.3%, Hang Seng -0.9%, Shanghai Composite -0.5%, ASX200 +0.3%, Kospi -0.7%

Equity Futures: S&P500 -0.3% ; Nasdaq -0.5% , Dax -0.2% , FTSE100 -0.2%

FX ranges/Commodities/Fixed Income (00:30ET)

EUR 1.1938-1.1959; JPY 111.66-112.56; AUD 0.7909-0.7934; NZD 0.7282-0.7313

Aug Gold +0.5% at 1,300/oz; Aug Crude Oil +0.1% at $50.62/brl; Sept Copper -0.9% at $2.911/lb

GLD SPDR Gold Trust ETF daily holdings up 6.21 tons to 852.2 tons

(CN) China PBOC sets yuan reference rate at 6.5861 v 6.5867 prior

(CN) PBOC OMO: To inject CNY120B in 7 and 28-day reverse repos v injected CNY60B in 7 and 28-day reverse repo prior; Weekly net injection CNY450B v CNY260B injection prior

(AU) Australia sells A$800M in 2.25% May 2028 bonds, avg yield 2.8368, bid to cover: 3.7X

Equities notable movers

Australia

Seven West Media, SWM.AU Did not reach merger agreement with Prime Media; +1.7%

Tatts Group, TTS.AU Received gambling regulatory approvals for planned merger with Tabcorp ; +2.7%

Hong Kong/China

Logan Property Holdings, 3380.HK Denied that it was planning share placement ; -7%

US markets on close: Dow -0.2%, S&P500 -0.3%, Nasdaq -0.5%, Russell flat

Best Sector in S&P500: Industrials +0.3%

Worst Sector in S&P500: Consumer Staples -1%

At the close: VIX 9.67 (-0.11pts); Treasuries: 2-yr 1.44% (flat), 10-yr 2.278% (flat), 30-yr 2.805% (-2bps)

US Market Summary

US equity markets drifted lower despite some better than expected data in the August Leading Indicators and the September Philly Fed. Heads of state continued consultations in NY and President Trump emerged with an announcement that the US, Japan and South Korea would further tighten sanctions on the regime in Pyongyang. WTI crude managed to rally off of early lows to close up 0.1%, while natural gas tanked 4.3% after the EIA posted a larger than expected build in gas inventories. Bond yields continued to creep higher, with the 10-year stretching above 2.8%.

Daily Pivots: (S1) 0.7888; (P) 0.7961; (R1) 0.8007; More...

At this point, AUD/USD is still bounded in range of 0.7807/8124. Intraday bias remains neutral for more consolidative trading. Deeper fall cannot be ruled out. But still, with 0.7807 support intact, near term outlook stays bearish and another rise is expected. Break of 0.8124 will turn bias to the upside and target 100% projection of 0.6826 to 0.7833 from 0.7328 at 0.8335 next. However, considering bearish divergence condition in 4 hour MACD, firm break of 0.7807 will indicate near term reversal and turn bias back to the downside for 0.7328 key support.

In the bigger picture, rise from 0.6826 medium term bottom is still in progress. At this point, there is no confirmation of trend reversal yet and we'll continue to treat such rebound as a corrective pattern. But in any case, break of 55 month EMA (now at 0.8090) will target 38.2% retracement of 1.1079 to 0.6826 at 0.8451. Break of 0.7807 support is needed to to be the first sign of completion of the rebound. Otherwise, further rise is now in favor.

Daily Pivots: (S1) 1.2308; (P) 1.2338; (R1) 1.2356; More....

USD/CAD is still bounded in corrective trading from 1.2061 and intraday bias remains neutral first. On the one hand, we'd remain cautious on strong support from 1.2049 key fibonacci level to bring sustainable rebound. On the other hand, break of 1.2412 support turned resistance is needed to be the first sign of trend reversal. Otherwise, outlook will remain bearish. Firm break of 1.2049 key fibonacci level will pave the way to next fibonacci level at 1.1424.

In the bigger picture, current downside acceleration is raising the chance that whole long term rise from 0.9406 (2011 low), and that from 0.9056 (2007 low) is completed at 1.4689. Focus is now on 50% retracement of 0.9406 to 1.4869 at 1.2048. As long as this level holds, we'd still favor that case that fall from 1.4689 is a correction. However, firm break of 1.2048 will indicate that fall fro 1.4689 is at least a medium term down trend and should target 61.8% retracement at 1.1424 and below.

Daily Pivots: (S1) 1.1886; (P) 1.1919 (R1) 1.1974; More...

Intraday bias in EUR/USD remains neutral at this point as it's still bounded in range of 1.1822/2091. Considering bearish divergence condition in 4 hour and daily MACD, break of 1.1822 should confirm near term reversal. In the case, intraday bias will be turned back to the downside through 1.1661 support. EUR/USD should then correct whole rise from 1.0569 and target 38.2% retracement of 1.0569 to 1.2091 at 1.1510. However, rebound from 1.1822/1837 and break of 1.2029 will resume the larger up trend to next key fibonacci level at 1.2516.

In the bigger picture, rise from medium term bottom at 1.0339 is still in progress for 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516. However, it should be noted that there is no confirmation of trend reversal yet. That is, such rebound from 1.0399 could be a correction. And the long term fall fro 1.6039 (2008 high) could resume. Hence, we'd be cautious on strong resistance from 1.2516 to limit upside. But after all, break of 1.1661 is needed to indicate medium term topping. Otherwise, outlook will remain bullish in case of pull back.

Daily Pivots: (S1) 1.3505; (P) 1.3546; (R1) 1.3621; More....

GBP/USD is staying in consolidation below 1.3651 temporary top. Intraday bias remains neutral first. In case of deeper fall, downside should be contained by 38.2% retracement of 1.2773 to 1.3651 at 1.3316 and bring rise resumption. Above 1.3651 will turn bias back to the upside for 1.3835 support turned resistance next. Break there will target 55 month EMA (now at 1.4405).

In the bigger picture, the strong break of 1.3444 key resistance now argues that the long term trend in GBP/USD has reversed. That is a key bottom was formed back in 1.1946 on bullish convergence condition in monthly MACD. Current rise from 1.1946 will target 38.2% retracement of 2.1161 (2007 high) to 1.1946 (2016 low) at 1.5466 next. In any case, medium term outlook will now stay bullish as long as 1.2773 support holds.

Daily Pivots: (S1) 0.9617; (P) 0.9667; (R1) 0.9747; More....

With 4 hour MACD crossed below signal line, intraday bias in USD/CHF is turned neutral first. On the upside decisive break of 0.9772 resistance will suggest that whole down trend form 1.0342 has completed. In that case, near term outlook will be turned bullish for 0.9860/1.0099 resistance zone. Nonetheless, with 0.9772 resistance intact, outlook remains bearish. Below 0.9587 minor support will turn bias back to the downside for 0.9420 low.

In the bigger picture, current development suggests that 0.9443 key support (2016 low) could be taken out firmly as down trend form 1.0342 extends. There are various interpretation of the price actions. But in any case, medium term outlook will stay bearish as long as 0.9772 resistance holds. Current down trend could extend to 38.2% retracement of 0.7065 (2011 low) to 1.0342 (2016 high) at 0.9090. However, break of 0.9772 will indicate that USD/CHF has successfully defended 0.9443 again and turn outlook bullish for 1.0099 resistance.

Daily Pivots: (S1) 112.17; (P) 112.44; (R1) 112.75; More...

USD/JPY's retreat suggests that a temporary top is in place at 112.71. Intraday bias is turned neutral first. Further rally is in favor as long as 111.07 support holds. Sustained break of medium term channel resistance (now at 113.03) will argue that whole correction from 118.65 has completed too. In that case, further rise should be seen to 114.49 resistance for confirmation. However, break of 111.07 minor support will raise the risk of rejection from channel resistance and turn bias back to the downside for 55 day EMA (now at 110.58).

In the bigger picture, rise from 98.97 (2016 low) is seen as the second leg of the corrective pattern from 125.85 (2015 high). It's unclear whether this this second leg has completed at 118.65 or not. But medium term outlook will be mildly bearish as long as 114.49 resistance holds. And, there is prospect of breaking 98.97 ahead. Meanwhile, break of 114.49 will bring retest of 125.85 high. But even in that case, we don't expect a break there on first attempt.

Yen recovers broadly today while Asian equities are trading generally lower as geopolitics is back haunting the markets. Tensions between North Korea and the US escalated again this week after US President Donald Trump's threat of "total destruction". This was followed by an executive order by Trump to forcefully push through trade embargo with North Korea. Then, North Korea responded by pledging to strike back with with countermeasures, including the use of hydrogen bomb. Dollar is mixed today as the boost from FOMC faded. Aussie and Kiwi are under much pressure. Aussie is still feeling heavy after China rate downgrade. Kiwi is cautious ahead of election in the weekend. On the other hand, Euro is staying firm ahead of Germany election on Sunday. Sterling is mixed a UK Prime Minister Theresa May's high profile Brexit speech is awaited.

North Korea threatens countermeaure on mentally deranged Trump

North Korea leader Kim Jong-Un issued a rate 500 word statement, striking back at Trump's speech at the United Nations. Kim called Trump a "mentally deranged U.S. dotard" who is "arousing worldwide concern." And, "after taking office Trump has rendered the world restless through threats and blackmail against all countries in the world." Kim further criticized Trump is "unfit to hold the prerogative of supreme command of a country, and he is surely a rogue and a gangster fond of playing with fire, rather than a politician." Kim warned of the "highest level of hard-line countermeasure in history". And this counter measures is seen by many as a sign of launching a hydrogen bomb in the Pacific Ocean.

Trump to unilaterally force through trade embargo on North Korea

Trump issued a new executive order yesterday targeting North Korea. The Treasury Department is granted authority to penalize any company or person doing business with North Korea. Their access to the US financial system could be cut off and assets could be freezed. The executive order now open the door for the US to unilaterally enforce a trade embargo against North Korea, and force any country in the world to join it. But it remains to be seen whether this would be implemented equally, or just selectively. China is known to have a blind eye of smuggling between itself and North Korea. And Trump has been relatively very quiet on trade between Russia and North Korea. Trump said that "North Korea's nuclear program is a grave threat to peace and security in our world, and it is unacceptable that others financially support this criminal, rogue regime."  Trump also said that the Chinese central bank has requested banks to immediately stop doing business with North Korea too.

WTI steady at around 50 as oil producers meet

WTI Crude oil is steady at around 50 as OPEC and some non-OPEC producers, including Russia and Oman, are meeting today. The market hoped that they would discuss potential extension of the output cut deal. The existing deal aiming at curbing production of 1.2M bpd would end in March 31. Compliance of the current deal would also be assessed. According to Kuwaiti Oil Minister Essam al-Marzouq, the compliance was improving and was above 100%. Meanwhile, a technical committee of OPEC and non-OPEC indicated that the compliance in August was 116% (meaning producers cut output more than required), up from 94% in July.

The producers are, however, divided in whether the deal extension would be discussed. Russian Energy Minister Alexander Novak noted that it is "still too early to talk about concrete timing of extending". However, Algerian Energy Minister Mustapha Guitouni indicated in an interview by a state-run press service that they would discuss the matter, while Iraq's Oil Minister Jabbar Al-Luaibi had also noted earlier this week that some members were discussing.

S&P downgraded China to A+

Yesterday, S&P's announced that it has cut China's sovereign rating, for the first time since 1999, by one notch to A+. The credit rating agency stated that "China's prolonged period of strong credit growth has increased its economic and financial risks". Although "this credit growth had contributed to strong real gross domestic product growth and higher asset prices, we believe it has also diminished financial stability to some extent". Back in May, another top-tiered rating agency, Moody's downgraded the country's sovereign rating to A1 from Aa3 amidst rising default risks. The top 3 agencies now have the same sovereign rating for China, as Fitch's had put it at that level already in 2013. S&P's decision has big repercussion on Australian dollar which slumped to a 3-week low against US dollar and a one-month low against New Zealand dollar. As Australia's biggest trading partner, China has been importing most of Australia's raw materials, in particular iron ores.

On the data front

Eurozone PMIs are the main focuses in European session. Later in the data, Canadian data will take center stage with CPI and retail sales featured. Also, UK Prime Minister Theresa May will deliver her high profile Brexit speech in Italy.

In the weekend - New Zealand and Germany elections

The upcoming New Zealand election would be a tight race between the incumbent National Party and Labor Party. Opinion polls suggest that supports for both parties are at around 40%. As such none of them would be able to a form government without entering coalition with smaller parties. This is such uncertainty that has increased the volatility of New Zealand dollar of late. Maintaining the status quo – a minority government led by Nationals- would be the most NZD-favorable while a Labor + Green+ NZ First trio would lead to an immediate, but short-term selloff in the currency. More in New Zealand Election: Change in Government is NZD-Negative in Near-Term

Although Chancellor Angela Merkel's Christian Democratic Union (CDU) and its sister party, the Christian Socialist Union (CSU), have been comfortably leading in polls. There still are a number of uncertainties in the upcoming German election. While Merkel is on the way to be the Chancellor for a fourth, and the last, term, her party is unlikely to form a government without forming coalition with other party(ies). While the Grand Coalition (CDU/CSU+SPD as the junior partner), just like the one we have had since 2013 and between 2005-2009, is the most favorable to the economy and the financial markets, it cannot be seen as a done deal. Meanwhile, rising supports for the populist Alternative for Germany (AfD) signal that a far-right party would enter the parliament for the first time since WWII. AfD has pledged to promote its anti-EU and anti-immigrants rhetoric in the parliament as it might probably become the biggest opposition party in case of a Grand Coalition. Moreover, the parliament is prone to be more fragmented with six parties in 2017-term, compared with four previously. More in German Election: Not as Boring as You Think

USD/JPY Daily Outlook

Daily Pivots: (S1) 112.17; (P) 112.44; (R1) 112.75; More...

USD/JPY's retreat suggests that a temporary top is in place at 112.71. Intraday bias is turned neutral first. Further rally is in favor as long as 111.07 support holds. Sustained break of medium term channel resistance (now at 113.03) will argue that whole correction from 118.65 has completed too. In that case, further rise should be seen to 114.49 resistance for confirmation. However, break of 111.07 minor support will raise the risk of rejection from channel resistance and turn bias back to the downside for 55 day EMA (now at 110.58).

In the bigger picture, rise from 98.97 (2016 low) is seen as the second leg of the corrective pattern from 125.85 (2015 high). It's unclear whether this this second leg has completed at 118.65 or not. But medium term outlook will be mildly bearish as long as 114.49 resistance holds. And, there is prospect of breaking 98.97 ahead. Meanwhile, break of 114.49 will bring retest of 125.85 high. But even in that case, we don't expect a break there on first attempt.

Economic Indicators Update