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Markets

And they all went down together again… Core bonds suffered more losses yesterday as investors grab the faintest of reasons to ditch German Bunds, US Treasuries and UK Gilts these days. The sell-off started around noon in the UK and spilled into US dealings. Data from the Confederation of British Industry (CBI) -" genuinely not a market-mover -" showed (input) price pressure remaining near the highest level since 1977 while selling prices rose by the highest amount since 1980. On top of, price pressure is expected to remain sky-high over the next three months. BoE Bailey’s warning to act on inflation still echoed through markets and kick-started the new down leg. A batch of US eco data added to the move with weekly jobless claims falling to a post-pandemic low (290k). (US) investors and the Fed see improvement on the labor market as the final cue to go ahead with (and accelerate in 2022?) policy normalization. The UK yield curve bear steepened with yields adding 2.8 bps (2-yr) to 5.7 bps (30-yr). Daily US yield changes varied between +1.3 bps (30-yr) and +8 bps (3-yr) in a bear flattening move. German yield changes ranged between -1.9 bps (30-yr) and +4.2 bps (5-yr) with the belly of the curve outperforming the wings. Inflation expectations rather than real yields remain responsible for the lion share of the yield increase which helps explain why 10-yr yield spreads vs Germany remain unaffected for now.

BoE chief economist Huw Pill’s maiden interview was published after market closure. He seems to back Bailey by saying that the November meeting is a “live” one. UK inflation can peak slightly above 5% early next year while the previous inflation prognosis (August Monetary Policy Report) are around 1 ppt lower. “That’s a very uncomfortable place to be for a central bank with an inflation target of 2%”. Pill did push back against too aggressive market expectations further out. He suggests that the economy does no longer needs the extraordinary support received during the pandemic, specifically referring to the 0.75% BoE policy rate in early 2020. He added that the BoE doesn’t see the need to go to a restrictive policy stance given the transitory nature of inflation in the base case. In an interesting spin, he pleads in favor of ditching forward guidance on interest rates. Such guidance always starts “pretty well with good intentions, but then always end in some confusion”. We don’t see an immediate market reaction in FX space during Asian hours to the interview with EUR/GBP changing hands at the lower end of the extremely narrow 0.8420/0.8460 trading range in place this week.

Most Asian stock markets are trading positive in the wake of the S&P’s all-time high. Chinese state media report that Evergrande repaid a missed interest payment (Sep 23) on a USD bond. The grace period would have ended this weekend and triggered a formal default. Today’s eco calendar contains EMU/UK PMI’s. Consensus expects a small setback in headline numbers, but details will be crucial. Momentum on bond markets is negative. With regard to the euro, we expect it to return more into the defensive ahead of next week’s ECB meeting. Failure to move above EUR/USD 1.1664 in the wake of the PMI’s would solidify this resistance and bring the focus back towards 1.1495/93.

News headlines

The US reached an agreement with the UK, France, Italy, Austria and Spain on a digital services tax (DST). The agreement covers the interim period until an agreement within the framework of the OECD global tax reform is reached, which is expected end 2023. In the current agreement, "DST liabilities that US companies accrue during the interim period will be creditable against future income taxes accrued under Pillar 1 under the OECD agreement". At the same time, the US agreed to drop the threat of trade tariffs against the five European countries that had already a digital service tax in place against major US tech companies.

The Reserve bank of Australia today for the first time in eight months intervened in the bond market to defend its 0.1% target for the April 2024 government bond under its YCC regime. The RBA bought A$ 1 bln, bringing the yield back to 0.12% from 0.17%. The RBA apparently wanted to take action as markets drifted away from its forward guidance that it is unlikely to raise the policy rate before 2024.

Market movers today

• Friday's highlight will be the October flash PMIs. In euro area, last month's PMIs showed increasing evidence that supply constraints have started to weigh on demand, with new order growth slowing and year-ahead expectations dimming. Focus will be whether this trend continues and how much additional headwind firms expect from Europe's mounting energy crunch.
• For the US Markit PMIs, consensus expects further moderation in manufacturing activity, while marginal improvement is foreseen in the service sector.
• The Central Bank of Russia will announce their rate decision at 12:30 CET. We expect them to continue their tightening cycle by hiking another 25bp to 7.0%, in line with market consensus. RUB has outperformed in the EM space over the last month, also supported by the rising oil and gas prices.
• Finally, keep an eye on potential rating updates from S&P on Italy and Greece, and from Fitch on Finland, Netherlands and Austria.

The 60 second overview

The demand for inflation protection remains strong as shown by the demand for the 5Y US inflation linked bonds seen at yesterday's auction of 5Y US TIPS and the continued widening of the US break-even inflation rate, where the 5Y BEI-rate is now close to a historical high of 3%.

In the UK, the Bank of England Chief Economist stated in an interview with FT, that the decision to raise interest rates at the MPC meeting next month was "live" and "finely balanced,". However, he also indicated that the monetary policy in the future does not need to be very restrictive. A rate hike next month is priced in, but the comments of future hikes may dampen the expectations on the future policy path.

In the Chinese market Evergrande bounced back as they made an interest payment before the week-end deadline and thus avoided a default. Hence, the Asian stock markets rose this morning.

Equities: Thursday saw relatively minor moves, but enough for S&P to cap its seventh straight gain and close at a fresh all-time high. The inflation trade reversed, with energy, materials and financials under pressure and growth outperforming. S&P500 closed in at 0.3%, Nasdaq 0.6%, Dow unchanged and Russell 2000 0.3%. Asian markets are following this morning driven by tech and real estate after rumours that Evergrande has made an interest payment. US futures little changed.

FI: The range trading continues in the bond market with 10Y US Treasuries trading around the 1.60% to 1.70%. Furthermore, the demand for linkers continues to be strong as the 5Y spread between US inflation linked bonds and US Treasuries widened to historical high of almost 3% even though US Treasury department sold USD 16bn in 5Y linkers yesterday.

FX: Overview: Overall yesterday's session in FX markets proved rather uneventful albeit characterised by USD gaining on the rise in USD rates. EUR/SEK, EUR/NOK and EUR/GBP were all little changed.

Credit: CDS indices followed European equities in red while cash bonds were steady. X-over widened 3.4bp while Main widened 0.2bp wider. HY bonds closed 0.5bp wider and IG was unchanged.

The USD/CAD currency pair bounced off a support level at 1.2293 on Thursday. As a result, the US Dollar edged higher by 82 pips or 0.67% against the Canadian Dollar during Thursday's trading session.

Currently, the exchange rate is trading near the upper line of a descending channel pattern and could be set for a breakout.

If the breakout occurs, a surge towards the 1.2400 level during the following trading session.

However, if the channel pattern holds, bearish traders could drive the currency exchange rate lower today.

On Thursday, the British Pound fell by 131 pips or 0.83% against the Japanese Yen. The GBP/JPY currency pair breached the 156.67 support level during Thursday's trading session.

Everything being equal, the exchange rate could trade between the range of 158.18/156.67 levels within this session.

However, if the currency exchange rate breaks the 50– hour simple moving average resistance level at 157.58, buyers are likely to target the 159.00 area within Friday's trading session.

On Thursday, the Australian Dollar sank by 81 pips or 1.08% against the US Dollar. The currency pair breached the 50– hour simple moving average at 0.7493 during yesterday's trading session.

All things being equal, the exchange rate could continue to edge lower during the following trading session. The potential target for the AUD/USD pair will be near the lower line of an ascending channel pattern at 0.7380.

However, the currency exchange rate may find support at 0.7423 within Friday's trading session.

On Thursday, the common European currency declined by 107 pips or 0.81% against the Japanese Yen. A breakout occurred through the lower boundary of an ascending channel pattern during yesterday's trading session.

Given that a breakout has occurred, bearish traders could continue to drive the exchange rate lower during the following trading session. The potential target for sellers will be near the 131.50 level.

However, the support cluster at 132.20 could provide support for the EUR/JPY currency exchange rate within this session.

General trend

• Hang Seng has remained modestly higher; China Merchants Bank is expected to report earnings.
• Shanghai Composite ended morning trading fractionally higher; Property index outperformed amid the Evergrande news.
• Nikkei has moved higher after the lower open; Tokyo Steel is due to report earnings.
• S&P ASX 200 has traded roughly flat.
• Chinese coal FUTs continue to drop amid comments from officials.
• Companies due to report during the NY morning include Autoliv, American Express, Cleveland-Cliffs, HCA, Honeywell, Regions Financial, Schlumberger, Seagate, VF Corp.

Headlines/Economic data

Australia/New Zealand

• ASX 200 opened -0.1%.
• (AU) RBA OFFERS TO BUY A$1.0B IN GOVT SECURITIES IN UNSCHEDULED OPERATIONS (FIRST PURCHASE SINCE FEB TO DEFEND YIELD CURVE).
• (AU) Reserve Bank of Australia (RBA) Gov Lowe: Expanding foreign exchange objective would severely compromise other goals.
• (AU) AUSTRALIA OCT PRELIMINARY PMI MANUFACTURING: 57.3 V 56.8 PRIOR; PMI Services: 52.0 v 45.5 prior (1st expansion in 5 months).
• (NZ) New Zealand PM Ardern: Target for vaccinations is 90% before easing restrictions.

China/Hong Kong

• Hang Seng opened +0.4%, Shanghai Composite flat.
• Evergrande [3333.HK] *SAID TO HAVE PAID $83.5M IN INTEREST DUE ON SEPT 23RD; GRACE PERIOD WOULD HAVE ENDED ON OCT 23RD - China Securities Times.
• (CN) Mortgage rates in 20 cities in China have fallen in Oct [first decline in 2021] - China Press.
• (CN) Fitch Downgrades Sinic [property co.] to Restricted Default After Missed Payments; Withdraws Ratings.
• (CN) China PBOC Gov Yi Gang: Keeping normal monetary policy and retaining interest margin within reasonable range will help promote banks to better serve real economy [from Oct 21st].
• (US) Said that the US Is seeking a virtual summit between US President Biden and China President Xi in Nov - Press.
• (CN) China Commerce Ministry (MOFCOM) Reiterates China and US should work together to create conditions for implementation of the phase-1 trade agreement.
• Huawei: Said that the US Commerce Dept has issued >$100B in export licenses to Huawei and SMIC suppliers [issued between Nov 2020 and Apr 2021] – Press.
• (CN) China Ministry of Commerce (MOFCOM): Expects FDI to hit CNY1.0T in 2021.
• (CN) China State Planner (NDRC): Studying methods to keep Coal companies from seeking excessive profits.
• (CN) China State Planner (NDRC): To investigate coal production and distribution, as well as circulating costs and selling prices [from Oct 21st].
• (CN) China said to have suspended tax collection from Coal miners and Heating companies.
• (CN) China FX Regulator (SAFE): Market expectations are relatively stable and conducive to maintaining stable CNY; Breach of 6.4000 vs USD was normal.
• (CN) Hog farmers in China said to be using derivatives in order to hedge losses - China press.
• (CN) China Ministry of Finance (MOF): 9M Fiscal Rev +16.3% y/y; Expenditures 2.3% y/y.
• (CN) Beijing asks residents to avoid outbound trips that are unnecessary.
• (CN) China PBOC Open Market Operation (OMO): Injects CNY100B in 7-day reverse repos v CNY100B prior; Net inject CNY90B v Net inject CNY90B prior.
• (CN) China PBOC sets Yuan reference rate: 6.4032 v 6.3890 prior.

Japan

• Nikkei 225 opened -0.5%.
• (JP) Bank of Japan (BOJ) said to be discussing phasing out of pandemic support [COVID loan program] if virus cases continue to decline; no decision is expected before Dec – Press.
• (JP) IMF Japan Mission Chief Salgado: Capital gains tax is an option for Japan.
• (JP) JAPAN SEPT NATIONAL CPI Y/Y: 0.2% V 0.2%E; CPI EX-FRESH FOOD (CORE) Y/Y: 0.1% V 0.1%E (First y/y increase since Mar 2020).
• (JP) *(JP) JAPAN OCT PRELIMINARY PMI MANUFACTURING: 53.0 V 51.5 PRIOR; PMI Services: 50.7 v 47.8 prior (1st expansion in 53 months).

Korea

• Kospi opened -0.1%
• (KR) South Korea Vice Fin Min Lee: Korea to temporarily cut fuel taxes, Tariff reduction on LNG imports; Will formally announces cuts next week.

North America

• (US) Fed's Williams (FOMC voter): Longer run inflation expectations in line with 2.0% goal - Comments at China 40 Forum.
• (US) US President Biden: Thinks close to deal [referring to economic agenda]; does not expect broad corporate tax rate hike to be in [reconciliation] bill; Confirms minimum corporate tax proposal could help pay for the bill.; ability to use tax incentives on climate; Would consider getting rid of filibuster on debt limit.
• (US) Fed to limit active trading and have timelier reporting of trades for Fed officials.
• (US) SEMI Sept North America-based Manufacturers of Semi Equipment Billings: $3.72B, 1.7% m/m and 35.5% y/y (near record high set in July).
• Puerto Rico Senate President: Do not have votes to pass Debt Restructuring bond bill.
• AerCap [AER]: Announces pricing of $21B in bonds due 2023, 2024, 2026, 2028, 2032, 2033 and 2041 [9-tranche offering].

Europe

• (UK) Said that the UK may accept the role of the EU Court in North Ireland Protocol.
• (EU) European Commission to look into possible speculation into Carbon market.
• (UK) Oct GfK consumer Confidence: -17 v -16e.
• (IE) Ireland Oct Consumer Confidence Index: 86.8 v 86.4 prior.
• (NL) Netherlands Sept House Price Index M/M: 1.6% v 2.1% prior; Y/Y: 18.5% v 17.8% prior.

Levels as of 01:20 ET

• Nikkei 225, +0.4%, ASX 200 flat , Hang Seng +0.5%; Shanghai Composite +0.3% ; Kospi flat.
• Equity S&P500 Futures: -0.1%; Nasdaq100 -0.5%, Dax +0.4%; FTSE100 +0.3%.
• EUR 1.1631-1.1621 ; JPY 114.20-113.81 ; AUD 0.7490-0.7452 ;NZD 0.7173-0.7145.
• Gold +0.3% at $1,787/oz; Crude Oil -0.3% at $82.27/brl; Copper +0.8% at $4.5920/lb.

Daily Pivots: (S1) 156.63; (P) 157.42; (R1) 158.05; More...

Intraday bias in GBP/JPY remains neutral for consolidation below 158.19 temporary top. Such consolidations should be relatively brief as long as 156.58 minor support holds. Break of 158.19 will resume larger up trend to 61.8% projection of 136.96 to 156.05 from 148.93 at 160.72 next. However, break of 156.58 will turn bias to the downside for deeper pull back.

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 deeper pull back.

Daily Pivots: (S1) 132.06; (P) 132.72; (R1) 133.17; More....

Intraday bias in EUR/JPY remains neutral for consolidation below 133.44 temporary top. Such consolidation should be brief as long as 132.13 minor support holds. Above 133.44 will target 134.11 high first. Firm break there will resume larger up trend from 114.42. Next target is 61.8% projection of 121.63 to 134.11 from 127.91 at 135.62. Nevertheless, break of 132.13 will turn bias to the downside for deeper pull back.

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) 0.8417; (P) 0.8431; (R1) 0.8439; More...

Intraday bias in EUR/GBP remains neutral as consolidation from 0.8420 temporary low is extending. On the downside, break of 0.8420 will resume the larger down trend from 0.9499 to 0.8276 key long term support next. On the upside, though, sustained break of 55 day EMA (now at 0.8521) will bring stronger rebound back to 0.8656 resistance.

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.