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Markets

The violent sell-off at the front end of core bond yield curve still resonates. UK BoE governor pulled the trigger by underlining readiness to act on inflation, causing an underperformance of UK Gilts. UK money markets now take a 15 bps rate hike in November for granted with risks tilted to an even more aggressive move. The BoE is frontrunner among G4 central banks in the battle against persistent price pressures and cut the long-assumed time lag between ending net asset purchases and a first rate hike. UK Gilt purchases still run until the end of the year. The realization that this time lag is no longer a given, prompted hawkish repositioning across the aisle with US money markets now taking into account a total of 50 bps rate hikes in 2022 and EU money markets nearly 20 bps by the ECB. The latter is significant given that the ECB still walks the transitory inflation talk with no strong indication whatsoever on ending net asset purchases, let alone on starting a tightening cycle.

The market reaction at the front end of the curve was the obvious one, but it remains striking that it occurs in a flattening context. Daily changes on the German curve ranged between +5.6 bps (2-yr) and -4.4 bps (30-yr). Yields at 15y+ tenors fell despite the inflation risk and scaled up rate hike bets. One possible explanation is that it might have a lasting (negative) effect on growth assuming inflation doesn’t spiral out of control. A second explanation could be that net asset purchases will remain longer with us than currently assumed and become a permanent feature of future monetary policy. A final explanation could be that any tightening cycle will be short and powerful with central banks afterwards turning their focus again on supporting the economy once supply side shocks leave the system. In any case, for now it feels unnatural that long term bond yields don’t join the move higher. Daily changes on the US yield curve varied between -0.8 bps (30-yr) and +4.4 bps (5-yr). The UK Gilt curve bear flattened with yield changes ranging between +13.6 bps (2-yr) and -0.5 bps (30-yr).

Heavy trading on FI markets marked a stark contrast with subdued action on FX markets. The single currency gained the upper hand over the US dollar and sterling, perhaps as markets ponder the euro’s underdog role. The BoE and Fed already embraced the normalization swing. Whatever the reason, the euro holds the positive vibe in this morning’s positive risk sentiment. Recapturing EUR/USD 1.1664 would be a first sign of bottoming out in the pair. EUR/GBP tries to regain the bottom of the long-standing 0.8450 trading range, only lost last Friday. Today’s eco calendar is empty apart from US housing data. Central bank speakers remain a wildcard for trading. We pay special attention to ECB members.

News headlines

Czech Senate leader Vystrcil suggests that President Zeman is too ill to carry out his duties. Parliament could activate article 66 of the constitution which allows a transfer of powers to other officials. The function to appoint the new prime minister-designate would that way go the speaker of the Lower House. The group of parties that intend to replace the government headed by current PM Babis has claimed that post which would give the initiative to start the formation of a new government. The Lower House holds its first post-election meeting on November 8.

EU competition commissioner Vestager indicated in an FT article that the EU is seeking to extend its relaxation of state aid rules that was introduced to help the economy cope with the pandemic beyond the end of this year. Vestager said: “We want to present what we are doing with hopefully the last version of the temporary state aid framework,” There will be “tools that will help the recovery in these sectors that are still struggling”. She added that future aid will target industries that are hard hit by the pandemic such as airlines and hospitality. Citing unidentified people with knowledge of the plans, the FT indicated that the extension could last until spring 2022.

US stocks wavered on Monday as worries about supply chain issues remained. The Dow Jones declined by more than 60 points while the Nasdaq 100 rose by more than 100 points. This price action happened after data by the US statistics agency showed the impact of Hurricane Ida and the supply chain disruptions. The data showed that capacity utilization by firms declined to 75.2% in September. At the same time, manufacturing and industrial production declined by 0.7% and 1.3%, respectively. Stocks also reacted to earnings by companies like Albertsons and State Street. Later today, the companies to watch will be Johnson & Johnson, Dover Corporation, and United Airlines.

The US dollar was little changed ahead of the latest US housing numbers. The data, which will come out later today, is expected to show that the US building permits declined from 1.72 million in August to 1.68 million in September. In the same period, analysts polled by Reuters expect the data to show that housing starts made a modest increase to more than 1.62 million. These numbers will come out at a time when the US housing market is relatively strong. The sharp increase in demand has also helped push prices to record highs.

The economic calendar will be muted today. In the morning session, Switzerland will publish the latest trade numbers. Although important, these numbers will likely have no major impact on the Swiss franc. The next key event will be two speeches by Fed’s Raphael Bostic. Meanwhile, investors will be focusing on the energy sector. The price of natural gas soared to a record high after Gazprom said that it won’t ship natural gas through Ukraine in November. The next key thing to watch will be how Bitcoin trades now that there is a BTC ETF.

EURUSD

The EURUSD pair formed a major resistance level at 1.1625. It has struggled to move above this level several times in the past few days. On the four-hour chart, the pair is still above the 25-day moving average. Notably, it seems like it has formed an inverted head and shoulders pattern, whose neckline is at 1.1625. Therefore, the pair will likely break out higher as bulls target the next key resistance at 1.1700.

GBPUSD

The GBPUSD pair was little changed during the American session as investors started pricing in a rate hike by the Bank of England (BOE) in the coming months. The pair is trading at 1.3735, which is slightly below last week’s high of 1.3777. On the four-hour chart, the pair retested the upper side of the ascending channel. It also moved above the 25-day moving average. Therefore, the pair will likely remain in this range today.

US30

The Dow Jones index declined slightly on Monday. But the index is still hovering near its highest level on record at $35,690. On the daily chart, the pair moved above all moving averages while the Relative Strength Index (RSI) has been rising. The Average True Range, which is a measure of volatility has also risen modestly. Therefore, the index will likely have a bullish breakout as earnings season continues.

On Monday, the US Dollar declined by 42 pips or 0.34% against the Canadian Dollar. The currency pair breached the 50– hour simple moving average during yesterday's trading session.

All things being equal, the USD/CAD exchange rate could continue to edge lower in a descending channel pattern. The potential target for sellers will be near the 1.2300 level.

However, the currency exchange rate might bounce off the support level at 1.2339 within this session.

On Monday, the British Pound declined by 65 pips or 0.41% against the Japanese Yen. The decline was stopped by the 50– hour simple moving average during Monday's trading session.

Everything being equal, buyers could push the exchange rate higher during the following trading session. The possible target for bullish traders will be near the 158.50 area.

However, the resistance level at 157.37 could still provide resistance for the GBP/JPY currency exchange rate within this session.

Australian Dollar has surged by 72 pips or 0.98% against the US Dollar since Monday's trading session. The currency pair breached the resistance level formed by the 50– hour simple moving average at 0.7413 on Tuesday morning.

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

If the breakout occurs, a surge towards the 0.7500 level could be expected within this session.

However, if the channel pattern holds, the currency exchange rate could make a brief pullback towards the 0.7420 area today.

On Monday, the common European currency surged by 52 pips or 0.40% against the Japanese Yen. The currency pair breached the 132.78 level during the Asian session on Tuesday.

All things being equal, the exchange rate could continue to trend bullish during the following trading session. The potential target for bullish traders will be near the 134.00 level.

However, the upper line of an ascending channel pattern could provide resistance for the currency exchange rate within this session.

General trend

• Hang Seng has extended advance [TECH index rises, Mainland banks trade generally higher; Property sector lags].
• Evergrande bond payments and grace periods still in focus.
• Shanghai Composite ended morning trading higher after the lower open [Coal, Liquor and Banks indices rise; Property index extended drop].
• Nikkei has maintained modest gains; Topix Marine Transportation index outperforms.
• S&P ASX 200 pared gain [Financials rise; BHP declines after issuing Q1 production update, weighs on Resources index].
• NZD supported by higher short-term yields, RBNZ rate hike expectations.
• AU 3-year yield later pares decline.
• Analysts comment on whether the RBA will defend its 3-year yield target amid move up in yields.
• BTC hits multi-year low at 20-yr JGB auction, yield also rose.
• CNH rises, China due to price USD bonds later today.
• Indonesia Central Bank is expected to leave rates unchanged.
• Companies due to report during the NY morning include Bank of NY, Fifth Third, Halliburton, J&J, Manpower, Procter & Gamble, Philip Morris, Travelers.

Headlines/Economic Data

Australia/New Zealand

• ASX 200 opened 0.0%.
• BHP.AU Reports Q1 Waio Iron Ore Production: 70.6Mt v 74.0Mt y/y; Shipments 70.8Mt v 71.0Mte; Affirms all guidance.
• BXB.AU Reports Q1 Rev $1.29B v $1.19B y/y; Guides FY22 underlying net +1-2% y/y at cc; Rev +5-7% y/y at cc.
• (AU) RESERVE BANK OF AUSTRALIA (RBA) OCT MINUTES: Delta variant has interrupted recovery, in central scenario the economy will return to growth in Dec quarter and pre-Delta path in H2 2022.

Japan

• Nikkei 225 opened +0.3%.
• (JP) Japan PM Kishida: North Korea fired 2 ballistic missiles, firing is extremely regrettable, we are gathering information.
• (JP) Japan Deputy Chief Cabinet Sec Isozaki: North Korea missile landed in Sea of Japan, strongly protested to North Korea over launch.
• (JP) Japan MoF sells ¥1.2T v ¥1.2T indicated in 0.500% 20-year JGBs, avg yield: 0.4710% v 0.4120% prior, bid to cover 2.69x v 3.20x prior (btc multi-year low).

Korea

• Kospi opened +0.5%.
• (KR) South Korea Joint Chief of Staff: North Korea fired unidentified projectiles to East Sea, according to Yonhap; Japan Coast Guard said North Korea may have fired a ballistic missile.
• (KR) Shipbuilding cos in South Korea have exceeded their annual targets for new orders - South Korea press.

China/Hong Kong

• Hang Seng opened +0.2%; Shanghai Composite opened -0.2%.
• (CN) China's govt advisor: PBoC should cut RRR.
• (CN) China Ministry of Finance (MOF) starts 4 tranche sale of USD bonds.
• (CN) China PBOC sets Yuan reference rate: 6.4307 v 6.4300 prior.
• (CN) China PBOC Open Market Operation (OMO): Injects CNY10B in 7-day reverse repos v CNY10B prior; Net CNY0B v Net CNY0B prior.
• (HK) Macau Q3 Casino Rev (MOP) 5.96B, +155% y/y; Mass Market gaming Rev 12.8B, +403% y/y.
• (CN) China National Bureau of Statistics (NBS) issues sector breakdown of previously released Q3 GDP data: Property Sector GDP -1.6% y/y.
• 1810.HK Exec: Will mass produce our own cars in H1 2024.

North America

• (US) AUG TOTAL NET TIC FLOWS: $91.0B V $126.0B PRIOR; NET LONG-TERM TIC FLOWS: $79.3B V $2.0B PRIOR; Japan Total Holdings of US Treasuries: $1.320T v $1.310T prior (record high); China Total holding of US Treasuries: $1.047T v $1.068T prior (lowest since 2010).
• IVZ.UK Will not launch Bitcoin futures ETF in immediate near term - comments on press.

Europe

• SOW.DE Raises FY21 full year A&N bookings outlook -12% to -8% (prior -30% to -20%).
• (UK) PM Johnson: UK does not want to turn away Chinese investment, do not see Northern Ireland problem as end of the world.
• MGGT.UK UK Govt starts formal investigation of takeover by Parker Hannifin on national security concerns.

Levels as of 01:00ET

• Hang Seng +1.1%; Shanghai Composite +0.7%; Kospi +0.7%; Nikkei225 +0.6%; ASX 200 +0.1%.
• Equity Futures: S&P500 -0.0%; Nasdaq100 -0.0%, Dax +0.0%; FTSE100 +0.0%.
• EUR 1.1655-1.1609; JPY 114.36-114.08; AUD 0.7457-0.7408; NZD 0.7131-0.7079.
• Commodity Futures: Gold +0.6% at $1,775/oz; Crude Oil +0.2% at $81.81/brl; Copper +0.9% at $4.76/lb.

Market movers today

• Tuesday is a slow day on data front. Consensus expects a modest decrease in US building permits and stagnated growth in housing starts, a potential reflection of rising input costs and labour shortages in the construction sector.
• The central bank of Hungary will announce their rate decision at 14:00 CET. We expect another 15bp hike to 1.8%, in line with the consensus and what the central bank has communicated earlier this month.
• Overnight, September trade data from Japan is likely to show a sharp slowdown in both exports and imports. Considering if, when, and how the stagflation story unfolds, this piece of data could give us some indication of the faltering global demand.
• Also overnight, we get loan prime rates and home price data from China. We expect unchanged loan rates in line with consensus. September house prices will be more interesting as they could well lose momentum as a result from weak home sales in September and developers cutting prices in an effort to raise cash by clearing unsold inventories.

The 60 second overview

Asin sentiment rebounds: Despite the weaker-than-expected Chinese GDP figures yesterday morning, risk sentiment recovered in Asia overnight following the US, and broad USD weakened. One of the large indebted Chinese property developers, Sunac China, was able to make a coupon payment to its bondholders overnight, following recent PBOC comments stating that the Evergrande crisis will be manageable. Nevertheless, we continue to expect further downside risks for Chinese growth going forward, especially given the recent rise in energy prices. Read more about our view and implications for metal markets in Research Global - Power crunch supports metal prices despite fading demand, 18 October.

RBA Minutes: The Reserve Bank of Australia has been among the central banks where market pricing has diverged to a clearly more hawkish path compared to the official forward guidance. In its October minutes released overnight, RBA dovishly stated that while wage pressures were emerging in certain parts of the world, this was not the case in Australia. It continues to signal no rate hikes until 2024, even though market prices in the first hike already by H2 2022. AUD FX was also little affected by the minutes, heading higher overnight. We continue to see market pricing as too aggressive, and expect to see lower AUD/USD also on the back of Chinese-driven weakness in key Australian export commodity prices and broad USD strength.

US Macro: US industrial production fell short of expectations in September, dropping 1.3% m/m (from +0.4%) compared to expected growth of 0.2%. Global supply challenges continue to weigh on output, as shortages of semiconductors caused motor vehicle output to fall by 7.2% m/m. While temporary disruptions related to hurricane Ida also affected the weaker output, the supply shortages are likely to continue to weigh on industrial production, which currently stands 1.1% below pre-covid level.

Equities: The week kicked off on a mixed note. US finished mostly higher but Europe mostly lower, following some morning weakness. Growth was the dominating factor which also helps to explain the regional performance. Sectors such as tech, consumer discretionary and communication services were in the top, utilities and health care in the bottom. S&P 500 closed up 0.3%, Nasdaq 0.8%, Russell 0.1% but Dow -0.1%. Asian markets are following this morning but US futures have dipped into negative.

FI: Yesterday was all about BoE's Bailey saying that they 'have to act' to stem inflationary pressures to avoid inflation expectations to become entrenched, which drove euro rates as well. European markets seems to have 'stopped out' on the transitory narrative as the central banking sensitive segment of 3-5y point suffered significantly, and ended the day around 6bp higher. At the same time, the long end rallied markedly, leaving the 5s30s EUR swap 12bp flatter, so now stand 21bp lower than just one week ago. 5y5y EUR inflation swap rose 5bp to end at the highest levels since 2014 at 1.91%. The 1y inflation gaps, which is around 1.80-1.85% out to 10y show that markets are testing the narrative.

FX: While rates markets had a violent day moves among FX major-pairs were more muted. The EUR was generally the biggest outperformer, which contributed to lifting EUR/USD above the 1.16 mark. In the other end of the spectrum, ZAR, RUB and SEK underperformed returning EUR/SEK above 10.05. Despite the sharp rise in GBP rates EUR/GBP still edged higher. EUR/NOK ended the session roughly unchanged.

Credit: Cash bonds continued to outperform CDS indices yesterday. Xover widened 2bp and Main 0.4bp. HY bonds, on the other hand, tightened 4bp and IG bonds tightened almost 1bp.

Daily Pivots: (S1) 156.58; (P) 156.98; (R1) 157.34; More...

Outlook in GBP/JPY remains unchanged and intraday bias stays on the upside. Current up trend from 123.94 should target 61.8% projection of 136.96 to 156.05 from 148.93 at 160.72 next. On the downside, below 155.32 minor support will turn intraday bias neutral and bring consolidations first, before staging another rally.

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) 132.33; (P) 132.56; (R1) 132.97; More....

EUR/JPY's rally is still in progress and intraday bias remains on the upside for 134.11 high. 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. On the downside, below 132.13 minor support will turn intraday bias neutral and bring consolidation first, before staging another rally.

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.