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Markets

Markets whipsawed yesterday, lacking guidance from mixed economic data in Germany (ZEW) and the US (industrial production strong but tumbling NAHB housing market confidence). Stocks finished in the green (about +1%) but were well below intraday highs. Energy prices extended their recent decline. Brent oil closed just above $90/b and Dutch gas futures (€113/MWh) fell to the lowest level since June as high inventory levels ease concerns for a winter shortfall. Core bonds traded choppy in the neighborhood of recent cycle highs. US yields edged no more than 1.4 bps lower. The 10y yield held above 4% for a third day straight. Minneapolis Fed Kashkari in an after-market speech said he sees no reason why the Fed should stop at 4.5 or 4.75% in early 2023 if core inflation by then showed no material progress. German rates added between 1 to 2.8 bps across the curve with the belly outperforming the wings. European swap yields, in contrast, fell 3.4-4.8 bps in the 2y-10y segment. Gilt yields fell a few bps too with the very long end (30y, -7 bps) outperforming. The Bank of England dismissed an FT article reporting a further delay (beyond October) in the start of UK gilt sales. However, for Q4, the central bank will refrain from selling bonds with a maturity longer than 20 years. Any shortfall in the £80bn sales target as a result of the earlier postponement will be incorporated into sales in subsequent quarters. The US dollar’s performance improved from soft to mixed during US dealings. EUR/USD capped gains to 0.986 and the trade-weighted index (close above 112) avoided an actual test of the lower bound of the upward sloping channel. USD/JPY defied all verbal warnings and grinded higher towards 150. Sterling fell. EUR/GBP finished north of 0.87.

Kashkari’s after-market comments yesterday help US yields a tad higher this morning. The 10y (+2.1 bps) inches further north of 4%. Germany’s Bund future drifts south. Oil prices rise marginally even as the US said it is prepared for significant releases from its strategic reserves this winter if needed (see below). Sentiment is mixed. Chinese stocks underperform regional peers in quiet trading. The Federal Reserve kicks off its monetary cycle with the publication of the Beige Book later today. We doubt it’ll have any impact on financial markets though. The waiting game is in full play this week and that probably won’t change. Core bonds and (EUR/)USD are stuck in a sideways trading range for the time being with daily swings defined by general sentiment/earnings season. Economic data today included a higher-than-expected UK September CPI print. Prices rose 10.1% y/y, up from 9.9%. Core inflation accelerated from 6.3% to 6.5% (6.4% expected). The pound sterling in a first reaction loses marginal ground.

News Headlines

Later today, US president Biden is expected to announce to release of a last tranche of 15 mln barrels of oil from the US strategic reserves from a total of $ 180 mln that was announced in March as the US government tries to ease higher oil prices for US consumers going into the mid-term elections. At the same time, according to sources, the US president may indicate that he is prepared to do more during the winter if this would be necessary. The White House also said it intends to restore the reserves, buying oil when the price of WTI is at or below the $67 to $72 p/b range. Both WTI and Brent oil this morning are trading up from yesterday’s intraday low with Brent oil hovering near $90.5 p/b.

Czech lawmakers yesterday approved that this year’s budget deficit will be allowed to rise to CZK 375 bln, about a third higher compared to the initially planned deficit of CZK 280 bln. The rise in the deficit comes as the government took measures to shield consumers and firms higher energy prices due to the war in Ukraine. The rise in the budget deficit marks a U-turn in the government’s policy which initially prioritized on cutting the fiscal deficit. For 2023, the government aims to reduce the deficit to CZK 290 bln. The reaction of the krone to the budget announcement was close to non-existent. EUR/CZK is holding a tight range near 24.55.

British efforts to reverse the Liz Truss-induced calamity, and better-than-expected earnings in the US give a boost to the global financial markets. But the recession fears, the hawkish Fed expectations and headache around a too-strong US dollar are looming risks to the actual investor optimism.

UK hasn’t convinced investors yet, but is on the right path

Britain’s newest Chancellor of Exchequer Jeremy Hunt scrapping almost all that was promised in the mini budget, pulled British gilt yields lower, and pushed sterling higher.

Cable traded above the 1.14 on Monday, but remains under pressure, as Britain’s political turmoil is not over just yet.

The next natural step for Liz Truss government is to replace Liz Truss by someone with a better financial discipline and market sense.

Unfortunately for Liz Truss, the market’s aggressive negative reaction to her spending plan leaves her with little support today. Those who didn’t like her, like her even less due to the calamity that she caused in just about more than a month. And those who liked her, probably don’t like her anymore as she won’t be delivering what she promised she would in terms of tax cuts and energy spending.

A survey from Bank of America showed that investors cut their exposure to the UK stocks by 9 percentage points since Liz Truss took office in September.

We shall see both the pound, the British sovereigns and the equities on a rocky road until investors are convinced that UK has a solid leadership team, which is not the case right now.

Earnings season kicks off on a positive note

Bank earnings were mixed, but most banks topped market estimates.

JP Morgan reported its highest ever quarterly net interest income due to the rising interest rates in the US. Wells Fargo and Bank of America also topped analyst estimates despite concerns of slowing economy.

US retail sales stalled last month due to worsening inflation, but Bank of America said, their clients’ spending, at least, remains resilient to the unideal macroeconomic environment. BoFa’s net interest income revenue also jumped by 24%!

Goldman Sachs also topped estimates with a trading revenue of above $6 billion in Q3, although the bank is looking for another restructuring to scrap businesses that don’t make money.

But Morgan Stanley’s earnings fell for the 3rd consecutive quarter and Blackrock saw its profits fall 16%.

Overall, the US financials rallied more than 10% since October 13 dip, BUT all major US banks, even those that did well in the Q3, boosted reserves to deal with a potential economic downturn. They all put hundreds of millions of dollars to absorb potential losses on loans. Among them, JP set aside more than $800 million, Wells Fargo $375 million and Citigroup around $370 million, because the rising interest rates are good for the interest revenues, but they are also expected to dampen the consumer demand as they make the mortgage and credit rates more expensive.

Beyond banks, Johnson & Johnson topped estimates, although the shares closed the day slightly down as the company narrowed its outlook due to the strong US dollar, while Netflix jumped up to 15% in the afterhours trading as the company finally came with good news on the subscriber front. Netflix added 2.4 million new subscribers in the latest quarter, versus 1 million they had forecasted. The latter marked the end of slowing growth since the beginning of this year, and the end of an era for Netflix, as the company will be launching the ad supported version by early November, which will cost just $6.99 per month to the subscribers. Those who chose the ad-support version will have to watch 5 minutes of ads every hour, which is clearly not ideal, but they will not find the same price in competitors, like Disney+ or HBO max.

According to forecasts, Netflix’s ad-supported strategy could bring an additional $3 billion in extra revenue to Netflix by 2025.

Netflix shares have a lot to recover, as the share price lost up to 75% of its value since last November and is trading with 65% discount compared to last year peak levels. The next natural bullish target stands at $290, the 23.6% Fibonacci retracement on the past year selloff. But the share price should win over the $368 resistance, the major 38.2% level, for a medium term bullish reversal. And that might be difficult in the actual, difficult market environment.

Bloomberg now says the US will be in recession for sure next year, and we think that the latest rally could again be a flash in the pan before a deeper selloff in equities.

Tesla is the next to announce earnings today, after the bell. The Q3 results will likely be good, but will they leave up to high market expectations, is the million-dollar question.

Daily Pivots: (S1) 167.96; (P) 168.89; (R1) 169.87; More...

Intraday bias in GBP/JPY stays on the upside despite some loss of upside momentum. Firm break of 61.8% projection of 148.93 to 165.69 from 159.71 at 170.06 will target 100% projection at 176.47. On the downside, below 165.00 minor support will turn Intraday bias neutral and bring consolidations first, before staging another rally.

In the bigger picture, current development suggests that up trend from 123.94 (2020 low) is still in progress. Sustained break of 61.8% retracement of 195.86 (2015 high) to 122.75 (2016 low) at 167.93 will pave the way to retest 195.86 high. This will now remain the favored case as long as 148.93 support holds.

Daily Pivots: (S1) 146.51; (P) 146.85; (R1) 147.48; More....

Intraday bias in EUR/JPY remains on the upside despite some loss of upside momentum. Current rally should target 100% projection of 133.38 to 145.62 from 137.32 at 149.56, which is close to 149.76 long term resistance. On the downside, below 145.80 minor support will turn intraday bias neutral and bring consolidations first, before staging another rally.

In the bigger picture, the up trend from 114.42 (2020 low) is still in progress for 149.75 (2014 high). Decisive break there will pave the way to 161.8% projection of 114.42 to 134.11 from 124.37 at 156.22. This will now remain the favored case as long as 137.32 support holds.

Daily Pivots: (S1) 0.8652; (P) 0.8692; (R1) 0.8748; More...

Intraday bias in EUR/GBP stays neutral for the moment. Further decline is expected with 0.8869 resistance intact. On the downside, break of 0.8577 will resume the fall from 0.9267, and target 61.8% projection of 0.9267 to 0.8647 from 0.8869 at 0.8486.

In the bigger picture, current development suggests that fall from 0.9267 is a down leg inside long term range pattern. Deeper fall could be seen towards 0.8201/8338 support zone. But strong support should be seen there to bring reversal.

Daily Pivots: (S1) 1.5551; (P) 1.5616; (R1) 1.5686; More...

Despite some loss of upside momentum, further rise is expected in EUR/AUD with 1.5429 support intact. Next target is 161.8% projection of 1.4281 to 1.4965 from 1.4716 at 1.5823. On the downside, break of 1.5429 minor support turn bias back to the downside for deeper pull back.

In the bigger picture, a medium term bottom should be in place at 1.4281, on bullish convergence condition in daily MACD. Further rise would be seen back to 1.6434 key resistance next. Break of 1.4965 resistance turned support is needed to indicate reversal. Otherwise, further rally will remain in favor.

Daily Pivots: (S1) 0.9781; (P) 0.9801; (R1) 0.9821; More....

Intraday bias in EUR/CHF stays mildly on the upside despite some loss of upside momentum. Current rise from 0.9407 should target 61.8% projection of 0.9407 to 0.9798 from 0.9641 at 0.9883. Decisive break there will solidify the case of medium term bottoming and target 100% projection at 1.0032. For now, this will remain the favored case as long as 0.9641 support holds.

In the bigger picture, considering bullish condition in daily MACD, firm break of 0.9864 resistance will confirm medium term bottoming at 0.9407. Stronger rally should then be seen to 55 week EMA (now at 1.0138), even as a corrective rebound. Nevertheless, rejection by 0.9864 will bring down trend resumption through 0.9407 next.

UK CPI rose 0.5% mom in September, above expectation of 0.4% mom. In the 12 months to September, CPI accelerated from 9.9% yoy to 10.1% yoy, above expectation of 10.0% yoy. That's the highest level since around 1982 based on modelled estimates. CPI core also rose from 6.3% yoy to 6.5% yoy, above expectation of 6.4% yoy.

ONS said: "Rising food prices made the largest upward contribution to the change in both the CPIH and CPI annual inflation rates between August and September 2022. The continued fall in the price of motor fuels made the largest, partially offsetting, downward contribution to the change in the rates."

Food and non-alcoholic beverage prices accelerated from 13.1% yoy to 14.6% yoy. After 14 consecutive months of acceleration, current rate is estimated to be the highest since 1980.

Also released, RPI came in at 0.7% mom, 12.6% yoy versus expectation of 0.5% mom, 12.4% yoy. PPI input was at 0.4% mom, 20.0% yoy. PPI output was at 0.2% mom, 15.9% yoy. PPI output core was at 0.7% mom, 14.0% yoy.

Full CPI release here.

Daily Pivots: (S1) 1.3657; (P) 1.3734; (R1) 1.3810; More...

Intraday bias in USD/CAD remains neutral as consolidation from 1.3976 is still extending. Outlook will stay bullish as long as 1.3501 support holds. Firm break of 1.3976 will resume larger up trend, and target 200% projection of 1.2005 to 1.2947 from 1.2401 at 1.4285.

In the bigger picture, up trend from 1.2005 (2021 low) is still in progress. Based on current impulsive momentum, it could be resuming long term up trend from 0.9056 (2007 low). Whether it is or it isn't, retest of 1.4689 (2016 high) should be seen next. This will now remain the favored case as long as 1.3222 resistance turned support holds.

Daily Pivots: (S1) 0.6270; (P) 0.6305; (R1) 0.6344; More...

Intraday bias in AUD/USD remains neutral and further decline is expected with 0.6362 support turned resistance intact. Firm break of 100% projection of 0.7660 to 0.6680 from 0.7135 at 0.6155 will target 138.2% projection at 0.5781. Nevertheless, break of 0.6362 will indicate short term bottoming, on bullish convergence condition in 4 hour MACD, and bring stronger rebound back to 0.6539 resistance.

In the bigger picture, down trend form 0.8006 (2021 high) is expected to continue as long as 0.6680 support turned resistance holds. Next target is 0.5506 low. Medium term momentum will now be closely monitored to gauge the chance of break of 0.5506.