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Last week’s corrective bond rally stranded at the start of the fresh trading week. Core bonds ceded ground with rising inflation expectations responsible for the move. Declining real yields (post-BoE deception) no longer counter inflation dynamics. The European 10y inflation swap returned above 2% (2.06%). US Treasuries underperformed German Bunds in a daily respective with a sloppy $56bn 3-yr Note auction being partly responsible. The highest auction yield since early 2020 couldn’t convince investors in a sign that they continue contemplating Fed rate hikes sooner rather than later. The auction stopped 1 bp through the 1:00 PM bid side with a below-average bid-cover. US yields added 3.7 bps (10-yr) to 6.1 bps (5-yr) with very long end of the curve again outperforming (30-yr: -0.5 bps). An avalanche of Fed speakers hit the wires, but without direct market impact. St Louis Fed Bullard penciled in two rate hikes for 2022 and warns that the Fed might have to act sooner to control inflation. Chicago Fed Evans is on the dovish side of the aisle (2023 rate hike) given his seat in team temporary. Philly Fed Harker in more veiled comments also doesn’t seem in a hurry to raise rates. Vice-Chair Clarida, whose term expires in January, broadly sides with the view given by Fed Chair Powell at last week’s press conference. He diverts attention from inflation to the job market but confirms that the maximum employment (and thus lift-off) criteria will be met by end-2022. Regarding central banks (Fed, ECB), it’ll all boil down to December meetings. The German yield curve bear steepened yesterday with yields rising by 0.7 bps (2-yr) to 4.8 bps (30-yr). 10-yr yield spreads vs Germany narrowed by up to 2 bps. US stock markets again managed an all-time closing high, but daily gains were limited to +0.3%, suggesting some more difficulties ahead. Today’s eco calendar contains US NFIB small business optimism, US PPI and German ZEW. They won’t alter ruling dynamics. The US 10-yr Note auction serves as a wildcard.

Support at the front end of the yield curve couldn’t save the dollar. The US 10-yr real yield fell to the lowest level since August (-1.15%) and approaches the -1.20% bottom. This weakness in US real yields is finally showing in USD/JPY with the pair dropping below the lower bound of the sideways trading channel in place since mid-October (113.23). Key resistance in DXY (94.47/74) held and triggered return action, currently sub-94. EUR/USD has 1.16 within reach. EUR/GBP’s rebound stalled just ahead of the 0.86-handle even if BoE governor Bailey deprived the GBP from interest rate support. On top, the EU-UK deadlock on the Northern Irish protocol risks culminating in a trade war between the two. Political risk primes in the short run and hampers sustained GBP strength.

News headlines

In its semi-annual financial stability report the Fed warned that ‘asset prices remain vulnerable to significant declines should investor sentiment deteriorate, progress to contain the virus disappoint or the economic recovery stall’. On specific topics, the Fed also warned that threats of stablecoins are growing, that volatility in meme-stocks could become more frequent, and also dedicated quite some attention to potential spill-over effects from the problems in the China real estate sector. ’Financial stress in China could strain global financial markets through a deterioration in risk sentiment, pose risks to global economic growth, and affect the United States. On the US housing market, the Fed assesses that prices have increased rapidly since its previous report, but it currently sees ‘little indication of highly leveraged real estate investment activity or a deterioration in underwriting standards.

September Japanese (real) wage growth disappointed. Nominal labour cash earnings rose 0.2% Y/, but corrected for price increases, real pay growth declined 0.6% Y/Y, indicating that price rises are also eroding Japanese consumers’ spending power. The labour market department uses another measure for inflation compared the Bank of Japan. This labor market measure rose to 0.9% Y/Y in September. Low real wage growth has become a target for the new government of PM Kishida. A stimulus package of the new government plans to give tax breaks to companies that are raising workers' compensation. The new government also intends to raise some public sector wages.

Technical analysis

The RSI is above level 50.

The Stochastics is below level 50.

Most likely scenario – BUY

Target prices: 1,829.60 1,835.00

Alternative scenario – SELL

Target prices: 1,819.78 1,807.10

Key levels

Support 1,819.78 1,807.10

Resistance 1,829.60 1,835.00

Daily Pivots: (S1) 152.99; (P) 153.32; (R1) 153.94; More...

Intraday bias in GBP/JPY stays on the downside as fall from 158.19 would target 148.93 structural support level. On the upside, break of 154.63 minor resistance will revive near term bullishness and turn bias back to the upside for 158.19 high.

In the bigger picture, rise from 123.94 is seen as the third leg of the pattern from 122.75 (2016 low). The stay above 55 week EMA affirms medium term bullishness. Current rise should now target 61.8% retracement 195.86 (2015 high) to 122.75 at 167.93 next. In any case, outlook will remain bullish as long as 148.93 structural support hold, even in case of deep pull back.

US indices continue flirting with all-time high levels following a surprise NFP read, the approval of Biden’s $550 billion spending bill and the discovery of an oral Covid treatment from Pfizer.

But inflation worries come to overshadow the Monday optimism in the run up to the most recent Chinese and US inflation data release due Wednesday, which should reveal a further rise in producer and consumer prices.

On the corporate end, the biggest news was of course Tesla, which tanked 5% yesterday, on speculation that Elon Musk would sell 10% of his Tesla stock following a positive answer to his Twitter poll, asking his followers whether he should sell stake to pay taxes. But this week’s Rivian IPO will certainly be a more critical test for Tesla, as the company is seen as the most serious competitor to Tesla in the EV race.

Rivian boost its IPO price target to $72 – 74 a share, which would give it some $65 billion valuation and the company could raise near $10 billion at its market debut. And I believe that there is even more upside potential to that IPO for two reasons. First, a couple of months ago, there were rumours running that the Rivian IPO would be valued at something near $80 billion, and second, people love new tech IPOs and are looking for crazy market bids, and Rivian could be an excellent target for those looking for some good intraday potential, a super rally, and the possibility of rapid gains.

If everything goes according to the plan, Rivian will carve itself a good place within the car industry. With a $60-65 billion valuation, the company will be worth more than Honda and Ferrari, and way more compared to EV start-ups like Canoo ($2 billion market cap), Lordstown Motors (less than $1 billion valuation) or Nikola Corporation ($5 billion in market cap).

Else, the big mover of the after-hours trading was Roblox yesterday, which saw its share price soar more than 30% after it announced its revenue doubled in the third quarter. People spent 11 billion hours on Roblox, helping the company double its revenue in the third quarter. Roblox is seen as a serious competition for Facebook’s Meta.

And the metaverse race boosts appetite in chip makers. AMD rallied 10% yesterday on news that it won Meta as a chip customer, while Nvidia had recorded a similar jump last week, after Wells Fargo had revised its price target 30% higher to $320 a share on expectation that the video-chip maker will grandly benefit from the metaverse race. On top, Bank of Montreal lifted its price target by 50% to $375 a share. Who says more?

A last word on gold and oil. We saw gold drilling above the thick $1800 offers Friday. The price of an ounce reached $1823 this morning, perhaps supported by the recent decline in US yields, which lowered the opportunity cost of holding the non-interest-bearing gold. Yet, gold did a poor job in an environment of ultra-low rates and steep rise in inflation and inflation expectations. Therefore, I don’t see why it would pick up positive momentum, especially looking at how strong the risk sentiment is right now.

On the other hand, the weakness in oil prices didn’t last long, as oil bulls took opportunity to pile in below the $80pb mark in US crude following the post-OPEC plunge. The overall trend remains comfortably positive on the back of a decent energy crisis, which is not OPEC’s problem to solve. In this environment, I don’t see why US crude wouldn’t advance towards the $100 a barrel.

Daily Pivots: (S1) 130.92; (P) 131.17; (R1) 131.45; More....

EUR/JPY's correction from 133.44 is extending lower. But downside should be contained above 130.45 resistance turned support to bring rebound. On the upside, above 132.55 minor resistance will bring retest of 133.44 first. Firm break there will resume larger up trend from 114.42. However, firm break of 130.45 will dampen our bullish view and bring deeper fall back to 127.91 key support.

In the bigger picture, rise from 114.42 (2020 low) is still in progress and the strong support support from 55 week EMA affirms medium term bullishness. Further rise would be seen to retest 137.49 (2018 high). Decisive break there will resume the whole long term rise from 109.03 (2016 low). Next target will be 100% projection of 109.03 to 137.49 from 114.42 at 142.88. This will now remain the favored case as long as 127.91 support holds.

Daily Pivots: (S1) 0.8523; (P) 0.8556; (R1) 0.8575; More...

Intraday bias in EUR/GBP is turned neutral with current retreat. On the upside, above 0.8593 will target 0.8656 resistance. Firm break there will argue that whole down trend from 0.9499 has completed. Stronger rise would be seen to 38.2% retracement of 0.9499 to 0.8401 at 0.8820. On the downside, break of 0.8459 minor support will bring retest of 0.8401 low instead.

In the bigger picture, price actions from 0.9499 (2020 high) are still seen as developing into a corrective pattern. Deeper fall could be seen as long as 0.8656 resistance holds, towards long term support at 0.8276. However, firm break of 0.8656 resistance would argue that a medium term bottom was already formed. Stronger rise would be seen to 0.8861 support turned resistance to confirm completion of the corrective pattern.

Daily Pivots: (S1) 1.5581; (P) 1.5615; (R1) 1.5642; More...

With 1.5532 minor support intact, further rise is still in favor in EUR/AUD. Sustained break of 55 day EMA (now at 1.5764) will argue that whole fall from 1.6434 has completed and bring stronger rally. On the downside, however, below 1.5532 minor support turn turn bias back to the downside for 1.5354. Break there will target a test on 1.5250 low.

In the bigger picture, the down trend from 1.9799 (2020 high) is in progress. Firm break of 1.5250 low will confirm resumption and target 61.8% retracement of 1.1602 (2012 low) to 1.9799 at 1.4733. Sustained break there could bring more downside acceleration to 61.8% projection of 1.9799 to 1.5250 from 1.6434 at 1.3623. In any case, break of 1.6434 resistance is needed to signal medium term bottoming, or outlook will stay bearish.

Daily Pivots: (S1) 1.0557; (P) 1.0577; (R1) 1.0607; More....

Intraday bias in EUR/CHF is turned neutral with current recovery. But further decline is expected with 1.0602 resistance intact. Break of 1.0532 will resume the down trend from 1.1149 and target 100% projection of 1.1149 to 1.0694 from 1.0936 at 1.0481. On the upside, however, break of 1.0602 will turn bias to the upside for stronger rebound back towards 1.0678 support turned resistance.

In the bigger picture, current downside momentum argues that fall from 1.1149 is probably resuming the down trend from 1.2004 (2018 high). Next focus is 1.0505 (2020 low). Decisive break there will confirm this bearish case and target 61.8% projection of 1.2004 to 1.0505 to 1.1149 at 1.0223 next. Strong support from 1.0505 will bring rebound first. But outlook will stay bearish as long as 1.0936 resistance holds.

Market movers today

• The German ZEW index will give us the first glimpse into November's economic growth momentum, consensus is looking for a further decline given that the ongoing supply shortages continue to weigh on German activity.
• US Producer Prices for October will be released in the evening, and Chinese inflation data will follow overnight, consensus looks for a slight uptick in both figures.
• Plenty of central bankers also on the wires today, including Fed's Powell and Clarida as well as ECB's Lagarde and Lane.
• China's sixth plenum of the Central Committee opened yesterday and will last until Thursday. Look out for any policy signals coming out of the sessions.

The 60 second overview

Biden interviews Brainard for top job at the Fed: US president Joe Biden interviewed Lael Brainard for the job as Fed chairman last week, according to sources. The term of current Fed chairman Jerome Powell expires in February and Brainard is the main contestant for the job. Brainard is also under consideration for the job as vice-chair for supervision. Yesterday, Fed governor Randal Quarles announced he would step down by the end of the year leaving another seat open for Biden to fill at the Fed.

The Fed warns about Chinese property sector: In its semi-annual Financial Stability Report, the Fed warned that stresses in the Chinese real estate sector poses some risk to the US financial system. "Given the size of China's economy and financial system as well as its extensive trade linkages with the rest of the world, financial stresses in China could strain global financial markets through a deterioration of risk sentiment, pose risks to global economic growth, and affect the United States,".

China property crisis: Strains in the Chinese property markets have continued to worsen over the past month with stress spreading to investment grade bonds while the Chinese off-shore USD high-yield index today reached a new record high of 23.5%.

Taiwan: The defence ministry of Taiwan said in a report that China's armed forces are capable of blockading Taiwan's key harbours and airports, calling it a "grave military threat". The report is issued every two years.

Equities: A very quiet day yesterday resulted in modest gains driven by US and mostly cyclical companies. Some few travel stocks perform on the back of US opening up for international travel. Despite the positive tone, VIX made its third consecutive move higher. Also worth noting, a huge amount of contracts being written in options space. In the US, Dow +0.3%, S&P 500 +0.1%, Nasdaq +0.1%, Russell 2000 +0.2%. Asian stocks started in green this morning but have lost momentum and are trading lower driven by Japanese stocks. European and US future are down this morning.

FI: A fairly uneventful session following on the back of the very interesting and volatile past two weeks of central bank action and challenged communication. Curves bear steepened after the repricing towards the end of last week. The interview and speech from Lane repeated the transitory inflation narrative while highlighting that the medium-term inflation was still too low and that ECB must be patient in its approach to monetary policy. Spreads tightened marginally.

FX: NZD, NOK and GBP gained vis-à-vis USD, SEK and CHF yesterday, where several Fed speakers gave hints about the monetary policy outlook, but failed to move the market. EUR/USD rose slightly towards 1.1600 and thus remained in its range.

Credit: Credit markets remained positive yesterday with iTraxx Xover tightening a further almost 4bp and Main approximately 0.5bp. HY bonds tightened 6bp and IG 1.5bp.

Nordic macro

In Sweden, the Riksbank buys SEK 2bn munis in 2023-2026 maturities today. Statistics Sweden releases September PVI (production value index) and the consumption indicator. These are hardly any market movers, but will instead provide some colour to economic developments, i.e. to what extent supply disruptions linger on in the manufacturing industry and the degree of lift-off in services consumption on the back of abolished Covid restrictions in early September.

Daily Pivots: (S1) 1.2429; (P) 1.2448; (R1) 1.2459; More...

Outlook in USD/CAD is unchanged as consolidation from 1.2286 is still extending. Intraday bias stays neutral first. Upside should be limited by 1.2497 to complete the consolidation to bring fall resumption. On the downside, break of 1.2286 will resume the fall from 1.2947 to retest 1.2005 low. However, firm break of 1.2497 will turn bias back to the upside for stronger rebound.

In the bigger picture, the rejection by 38.2% retracement of 1.4667 to 1.2005 at 1.3022 argues that rebound from 1.2005 is merely a corrective rise, which is complete. More importantly, the down trend from 1.4667 (2020 high) is not over yet. Sustained break of 1.2005 will extend the down trend to next long term fibonacci level at 61.8% retracement of 0.9406 to 1.4689 at 1.1424. In any case, outlook will not turn bullish as long as 1.2947 resistance holds.