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The rising Treasury yields and US dollar weigh on precious metals. Some bargain hunters were eager to buy silver at the psychological level of 22.00, which is also critical support from the daily timeframe.

However, the rebound has seen strong selling interest at 23.10. Should buyers gather enough momentum to break free, 23.80 would be the next target.

On the downside, a bearish breakout would shake the last buyers out and conclude an eleven-month-long consolidation with a bearish reversal.

The US dollar continues to creep up after the Fed’s hawkish tilt. The RSI’s overbought situation suggests that the kiwi’s initial breakout has over-stretched itself.

Buying interest could lie between 0.6980 and the psychological level of 0.7000. The bulls will need to clear the origin of the September sell-off (0.7110), and then they could seal the continuation of the rally towards 0.7210.

However, if this turns out to be a false rebound, a bearish breakout would dent the hope of recovery and send the pair to 0.6880.

European markets struggle as embattled property giant Evergrande faces more coupon payments this week.

The Dax 40’s tentative break below the major support at 15050 weighs on traders’ risk appetite. Unless the bulls can push back and absorb offers at 15780, the index could be vulnerable to a deeper correction.

An overbought RSI has caused a stall in the recovery. A bearish MA cross may attract selling interest. 15400 is an important gatekeeper and a breach could trigger a sharp sell-off to 14900.

Markets

The post-Fed surge in core bond yields was confirmed in Friday’s close. (Bond) markets couldn’t profit from the more fragile risk environment. The German 10-yr yield is on track to completely reverse the Summer decline after marching north of -0.25% (62% retracement May/August retreat). The final intermediate target ahead of the YTD high (-0.07%) stands at -0.15% (June high). The US 10-yr yield finally waved goodbye to 1.37% resistance (38% retracement on March/July decline). The next important mark is 1.53% (62% retracement on that same move). We stick with our upward bias for long term bond yields medium term. EUR/USD already ran into trouble near 1.1750 even as German (real) rates outpaced US ones (in a catch-up move). The approaching German election and European stock markets 1% losses probably had an impact. Sterling’s post-BoE rally only lasted for one day with EUR/GBP closing the week in familiar territory at 0.8571.

Asian stock markets are mixed this morning while most commodity and especially energy-related prices resume their increase. The CDU/CSU’s better than expected performance in German elections delivers a stalemate with the SPD, making it at this stage impossible to call what the next government will look like. The political deadlock translates into market inactivity with EUR/USD going nowhere at 1.1720. The Bund is a tad stronger compared with Friday’s closing levels. General risk sentiment will set the tone for trading today given the thin calendar. Eco data are confined to August US durable goods orders and EMU M3 money supply data. The Belgian debt agency aims to raise €3-3.5bn by tapping OLO 92 (0% 2031), OLO 84 (1.45% Jun2037) and OLO 88 (1.7% Jun2050). Year-to-date, the debt agency already raised €30.63bn via medium/long term funding compared with a €36.41bn funding goal. Speeches by central bankers serve as a wildcard today, but also during the remainder of the week. Fed Evans, Williams and Brainard line up and could provide some additional details on last week’s Fed meeting when the central bank gave the go-ahead for a near term start to tapering. ECB Lagarde appears in a hearing before EU parliament. From tomorrow, eyes turn to the Portuguese Sintra where the ECB forum on central banking starts. The topic is “Beyond the pandemic: the future of monetary policy”. It serves as a potential platform to soft sound how 2022 ECB policy could look like. From a market point-of-view, we think that ECB comments have more potential market moving impact since the Fed last week more or less spelled out policy for the next 9 months.

News headlines

German Social Democrats of Olaf Scholz secured a small lead (25.7%; estimated 206 seats) over the CDU (24.1%; estimated 196 seats) in this weekend’s parliamentary elections. Even so, SPD Leader Scholtz and CDU leader Armin Laschet both indicated they intend take the lead in forming a new government. The Greens become third in the election with about 14.8% of the votes (118 seats). The Liberal Free Democrates are fourth with 11.5% (92 seats). Both the SPD and the CDU currently are not in favour of a repeating the Grand collation. In this scenario, both the parties probably face long negations to form a three party coalition with the Greens and the FDP. A left-left-Green collation with the Left, the SPD and the Greens probably won’t reach a majority in Parliament. It might take months for coalition talks to be concluded and translate into an agreement to form a government.

Rating agency Moody’s upgraded the Long-Term credit rating of Hungary from Baa3 to Baa2. The outlook on the new credit rating was put at neutral from positive previously. Moody's said the projected strong growth rebound and medium-term outlook over the coming years will "support fiscal consolidation and reduction in the government's debt burden". The rating agency sees potential growth at around 3-4% over the next five years. The rating agency expects the debt-to GDP ratio to decline almost 4 ppt between 2020 and 2023 to a projected 76.7% of GDP.

Most bad news come from China these days. The Evergrande debt crisis, the Chinese energy crackdown on missed targets and the ban on cryptocurrencies have been shaking the markets, along with Federal Reserve’s (Fed) more hawkish policy stance last week, and not only on its QE taper front but also regarding the interest rates.

The week kicked off on quite a mixed sentiment in Asia. Australian stocks were mostly in the green, Hang Seng eked out some small gains despite the ongoing Evergrande headache, while Shanghai’s Composite dived 1.30%, hinting that one place to avoid again this week, is Chinese equities. First, even an eventual Evergrande bankruptcy wouldn’t trigger a systemic crisis, it will mean that Chinese companies will have harder time getting fresh credit. And because the credit growth has been one of the major pillars of the Chinese growth over the past decade, and because the Chinese growth fuels the global growth, it’s a major worry for the global growth as well.

Then, another major pillar of the Chinese growth, energy, is also in crisis with headlines pointing that half of China’s regions missed their energy consumption targets, which now results in factories being ordered to curb production or even shut down to meet Beijing’s green goals. That’s good news for the planet, but bad news for the Chinese economic activity, obviously.

Energy prices are up

Natural gas futures rebound fast from last week’s dip and should continue rising as the winter approaches.

US crude traded it above the $75 per barrel in Asia for the first time since July. The rally is gaining momentum and we may well see the bulls try an attempt on the $80 per barrel in the coming weeks, but fast rising oil prices also mean a further pressure on inflation, and a further pressure on inflation means tighter central bank policies and less support to the economic activity, which, in return, would mean a slower demand. Therefore, the rally should see a limited upside.

Equities

Despite discouraging news on the wire, US and European futures traded mostly in the positive hinting at some more consolidation in US equities at the start of the week, especially with energy stocks that should lead.

Firm energy prices and cheap pound should help FTSE 100 consolidate above the 7000p mark.

German election

As predicted by the latest poll results, Germany’s SPD party is ahead of outgoing Angela Merkel’s Christian Democrats. And the Greens came third. Now an SPD-led coalition in Germany is quite bearish for the DAX as the center-left party is in favour of increasing minimum wages, raising taxes, and supporting ‘labour’ at the expense of ‘capital’, the kind of changes that would weigh on company earnings, and their share prices. But obviously, what could be done will also depend on coalition partners and changes won’t happen overnight. There is no particular stress on DAX futures this morning, which will likely continue recovering last week’s losses. But it’s good to keep in mind that the hawkish shift in the ECB’s policy due to higher inflation and the new German government could slow down the DAX rally compared to what it would have been otherwise. We still have a couple of weeks and months of uncertainty that could dent appetite in German stocks, but the DAX will probably not dive alone, the overall trend will depend on the overall market sentiment.

China bans cryptocurrencies, again

Now back to Chinese news, the cryptocurrencies were again hit by the Chinese crackdown rules. All crypto transactions and mining activities are now forbidden in China. All crypto-related activities were already forbidden in China, but they were still happening because Chinese mainlanders always found ways to go around the regulations. But this time, it looks like a loophole which allowed citizens to trade cryptocurrencies was closed and the impact is real; crypto exchanges like Binance are no longer accepting new accounts from mainland China and will be gradually closing the Chinese accounts, as no one wants to take the risk of having Beijing on its shoulders. The impact of the latest Chinese news on Bitcoin’s price was significant but not dramatic as the $40K support held well during the kneejerk drop and during the weekend. But Bitcoin is still in the bearish consolidation zone and should make a move above the $44/45K mark to step back to the positive trend, otherwise we may see the price of a coin fluctuating between 40 and 45K range without too much excitement for traders.

Market movers today

• A quiet start to the week in terms of economic data, with media attention set to follow German coalition talks. US durable goods orders will be released in the afternoon.
• This week markets will focus on a range of Fed speakers following last week's FOMC meeting: Williams, Brainard and Evans are on the wires today. ECB's Lagarde will also give a speech in the EU parliament hearing today, and ECB will have its annual forum tomorrow and Wednesday.
• China's Evergrande developments will also remain in focus with more bond payments due this Wednesday. Chinese September PMIs are released on Thursday, and we expect a further decline given the weakening consumption and headwinds in the construction sector.
• On Friday, we'll also get inflation figures both from the US and Euro Area, and we expect to see EA September Flash inflation rising while US August PCE inflation likely slowed down slightly.

The 60 second overview

German election: With the Angela Merkel era drawing to an end, German politics have entered unchartered territory with a possible change in government. As the largest party in the Bundestag with 25.7% of the votes, the Social Democrats' (SPD) candidate Olaf Scholz has the best chances to succeed Angela Merkel in our view, but his fortunes will depend on coalition negotiations. We expect parties to start parallel talks on a 'traffic light' (60% probability) and 'Jamaica' (40% probability) coalition in the coming days. Both outcomes would be positive from an economic perspective in our view, due to an increased focus on public and climate investments and we expect any future government to maintain a strongly pro-European stance. That said, with parties views on economic and fiscal policies diverging, difficult and lengthy coalition negotiations lie ahead that could drag into early 2022.

Market reaction on the election result was muted, also because a pure left-wing coalition of the SPD, Greens and the Left, which held the biggest potential for a fiscal regime shift, failed to gain a majority. Read more in German Politics Monitor - Let the game of thrones begin!, 27 September.

Markets: After a very eventful last week with many central bank announcements and ongoing focus on Evergrande in China markets are likely to increasingly focus on the risk of stagflation. Commodity prices are back on the rise and Bloomberg's aggregate commodity index is now close to index 100 - the highest level since 2015. At the same time we see clear signs of a slowdown in global manufacturing, many central banks are moving in a tightening-direction and with bottlenecks limiting the supply of labour in many countries the risk of "stagflation" has risen. For more on stagflation risks and the potential market impacts please see Research Global - Stagflation risks on the rise, 15 September, and Global Research - Market implications in a global stagflation scenario, 21 September.

Energy prices: While market focus in recent weeks primarily has been on European gas and electricity prices we are likely to see increased focus on the oil market. Brent crude has risen to levels just shy of USD 80/bbl which is the highest level in almost three years. The primary drivers are a combination of bottlenecks, spill-over from other energy markets and the global recovery. As long as we do not see broad based USD weakness - which is not our base case - we still think prices are capped from a faster output normalisation from OPEC+.

Equities: Stocks ended the week broadly unchanged but with huge sector and regional differences both on Friday and through the week. Lots of mowing parts but the fact that yields took a big jump higher on the back a busy central bank week gave renewed tailwind for value companies. US equities on Friday mostly higher with Dow +0.1%, S&P500 +0.2%, Nasdaq -0.03% and Russell 2000 -0.5%. Volatility came back down after the spike Monday and the Evergrande fear diminishing. The VIX index ("index of fear") ended the week at 18 after being close to 30 on Monday. This morning we see mixed markets in Asia while US and European futures suggest a positive opening.

FI: European bond markets were under pressure again on Friday, extending the sell-off from Thursday. 10y German bunds briefly touched -0.22%, before ending at -0.23%. Peripheral spreads were further tested with BTPs-Bund spreads widening to just above 100bp again, on the general soft risk sentiment prevailing in markets.

FX: There has been no market reaction to the German election in FX markets. EUR/USD trades just north of 1.17 - essentially unchanged levels compared to one week ago. EUR/NOK and EUR/SEK have moved lower over the last week with EUR/NOK breaking below 10.05 and EUR/SEK breaking below 10.15. Oil exporting currencies are generally trading higher this morning following the rise in oil.

Credit: Credit markets were downbeat on Friday where iTraxx Xover widened 3bp and Main 0.5bp. Cash bonds were more firm with HY widening 2bp and IG closing unchanged.

Daily Pivots: (S1) 1.1700; (P) 1.1723; (R1) 1.1746; More...

Intraday bias in EUR/USD remains neutral for the moment. On the downside, sustained break of 1.1663 support will resume the fall from 1.2265, and the pattern from 1.2348, to 1.1602 key support next. On the upside, however, above 1.1754 minor resistance will turn bias back to the upside for 1.1908 again.

In the bigger picture, rise from 1.0635 is seen as the third leg of the pattern from 1.0339 (2017 low). Further rally remains in favors long as 1.1602 support holds, to cluster resistance at 1.2555 next, (38.2% retracement of 1.6039 to 1.0339 at 1.2516). However sustained break of 1.1602 will argue that the rise from 1.0635 is over, and turn medium term outlook bearish again. Deeper fall would be seen to 61.8% retracement of 1.0635 to 1.2348 at 1.1289 and below.

Daily Pivots: (S1) 1.3641; (P) 1.3689; (R1) 1.3719; More...

Intraday bias in GBP/USD remains neutral for the moment. On the upside, above 1.3749 will target a test on 1.3912 resistance. Firm break there will argue that consolidation pattern from 1.4248 has completed and stronger rally to retest this high. On the downside, however, break of 1.3570 support will target 1.3482 key support level. Sustained break there will carry larger bearish implication and target 1.3163 fibonacci level.

In the bigger picture, as long as 1.3482 resistance turned support holds, we'd still treat price actions from 1.4248 as a corrective move. That is, up trend from 1.1409 (2020 low) is in favor to resume. Decisive break of 1.4376 key resistance (2018 high) would indeed carry long term bullish implications. However, sustained break of 1.3482 will at least bring deeper fall to 38.2% retracement of 1.1409 to 1.4248 at 1.3164, or even further to 61.8% retracement at 1.2493.

Daily Pivots: (S1) 0.9224; (P) 0.9243; (R1) 0.9262; More....

Intraday bias in USD/CHF remains neutral as consolidation from 0.9331 is extending. Further rally is expected as long as 0.9162 support holds. On the upside, break of 0.9331 will target 0.9471 key resistance. Sustained break there will carry larger bullish implications. However, break of 0.9162 will turn bias back to the downside for 0.9017 support instead.

In the bigger picture, the strong rally above 55 week EMA (now at 0.9175) now tilts favor to the case of bullish trend reversal. That is, decline from 1.3042 (2016 high) is probably completed at 0.8756 already. Sustained break of 0.9471 resistance should confirm this case and pave the way to retest 1.0342 ahead. However, rejection by 0.9471 will mix up the outlook again and retain some medium term bearishness.

Daily Pivots: (S1) 110.40; (P) 110.60; (R1) 110.93; More...

Intraday bias in USD/JPY stays mildly on the upside this week. Consolidation pattern from 111.65 could have completed already. Firm break of 110.79 resistance will target a test on 111.65 high. On the downside, however, below 110.30 minor support will mix up the near term outlook and turn bias neutral again.

In the bigger picture, medium term outlook is staying neutral with 111.71 resistance intact. The pattern from 101.18 could still extend with another falling leg. Sustained trading below 55 day EMA will bring deeper fall to 107.47 support and below. Nevertheless, strong break of 111.71 resistance will confirm completion of the corrective decline from 118.65 (2016 high). Further rise should then be seen to 114.54 and then 118.65 resistance.