What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities were set for a weak session yesterday and ended also lower, but the selloff never intensified and the VIX closed below 20 with the forward curve still in contango. Nasdaq 100 futures opened lower overnight but has since fought to close the gap against yesterday’s close trading around the 14,630 level in early European trading. US interest rates remain calm with the 1.6% on the 10-year remaining a solid resistance level for now keeping a lid on the pressure in equities.
GBPUSD and EURGBP – yesterday certainly didn’t provide any resolution to the pivotal areas here in sterling pairs, like the 1.3600-1.3700 zone in sterling and the 0.8450-0.8500 area in EURGBP as sterling is strongly supported by the increasing sense that the Bank of England could hike rates as early as next month, even if the December BoE meeting is seen as the more likely time frame, while the currency is held back by concerns on post-Brexit isolation, the fiscal outlook, the country getting the worst of the recent energy crisis, and the generally yawning external current account deficit.
USDJPY – the steep USDJPY rally of late was tamed yesterday by a slight dip in US treasury yields after a 10-year treasury auction showed strong demand and sustained strong demand from indirect bidders, who are generally from foreign sources, and likely strong represented by strong Japanese demand. The next chart resistance is the 114.50 area that provided resistance in for much of 2017-18, with long US yields as an important coincident indicator. A 30-year US Treasury auction is up later today.
Crude oil (OILUKDEC21 & OILUSNOV21) has settled into a range with Brent finding support at $82.50 while WTI is holding above $80. The market continues to look to the gas and coal market for direction as tight markets in other fuels may spur increased gas-to-oil switching. The European TTF gas benchmark remains more than five times above its five-year average, and at yesterday’s close at €87.6/MWh the mentioned switch is still at play. On tap today monthly oil market reports from OPEC and the EIA. The IEA will release its World Energy Outlook today ahead of its monthly report Thursday.
Gold remains rangebound in the $1760 area ahead of US CPI and FOMC minutes (see below). US treasuries and the dollar also seems to be on hold with the market looking to assess the inflationary pressures from rising energy prices. The lack of momentum has been on clear display this week as the metal failed to close above the 21-day moving average, today at $1758.
US Soybeans and corn prices dropped on Tuesday after the US Department of Agriculture in its monthly WASDE report continued to raise its production estimates. The highest ever US and Brazilian soybean crops, and the second-biggest US corn crop saw both continue their slump which has seen both markets slump almost 30% from their May peaks.
US treasuries. A weak 3-year auction followed by a strong 10-year auction contributed to a flattening of the yield curve. Ten-year yields dropped below 1.60% following a strong auction which saw indirect bidders taking 71.1%, above last month 66.6%. Yet, things can change quickly today if the CPI numbers surprise on the upside and if bidding metrics are not as solid at the 30-year bond auction.
German Bunds. Ten-year yields closed yesterday at –0.08% for the first time since May. Today’s CPI numbers and 30-year Bund auction are in the spotlight as they can be catalysts for higher yields. Ten-year Bund yields will find weak resistance at –0.07%, however they are likely either to rise fast towards 0% or drop once again below –0.15%.
Italian BTPS. Ten-year Italian government bond yields rose approximately 30bps from the end of September until today, and they are now close to test their resistance at 0.93%. Today Italy is issuing 3-year, 7-year and 30-year BTPS and bidding metrics will be in focus to understand investors' appetite for the periphery as yields rise worldwide. Once yields break above 0.93% they could rise fast to 1%.
What is going on?
China posts record exports in September - rising 28.1% year-on-year in USD terms and at a record of $305.7 billion, an impressive performance, given disruptions to power and even widespread factory shutdowns. Import growth fell to +17.6% year-on-year on weaker domestic demand, resulting in the country posting its third-highest trade surplus for a single month ever.
US August JOLTS Job Openings survey showed a drop in job openings to 10.44M vs. 10.95M expected and the record 11.1M in July, but one interesting statistic in the release was the record number of “quits” as some 4.3 million – especially in the food and retail industries, suggesting workers are very comfortable with the ability to find new work, rather interesting in a month that saw some of the worst of the Delta surge of covid cases.
Apple is expected to manufacture 10mn less iPhones. When the world’s most profitable technology company, that has first priority with chip manufacturers, has to slash its production we know the supply constraints on semiconductors are getting worse. The 10mn less iPhone is around 4-5% of the company’s annual production. Shares were slightly lower in extended trading last night.
ECB’s Villeroy says ECB should keep flexibility on QE purchases post-PEPP – in a speech yesterday, ECB Governing Council member Villeroy said that the ECB continues to forecast that inflation will not reach 2% over the medium term, so monetary policy should remain accommodative once the declared time frame of the emergency PEPP QE purchases is wound down at the end of Q1 next year and should continue to employ the kind of flexibility in the PEPP purchases relative to the ECB’s prior methods of doing QE, like varying the amount and mix of purchases from month-to-month.
US Atlanta Fed chief Bostic and FOMC voter says transitory is a “dirty word” as he sees signs that inflationary pressure are broadening and that the supply chain disruptions will continue to affect prices for longer than previously anticipated. Still, while Bostic says he has brought forward the time frame in which he anticipates the Fed hiking rates for the first time, that time is still “more than a year off” in his forecasts seeing no hurry as most current inflationary pressures are from supply chain issues, not the demand side, although he noted that longer-term injflation expectations have risen. Bostic will not be an FOMC voter next year.
What are we watching next?
Important day ahead in US with CPI and FOMC Minutes – the Fed has dropped its use of the word transitory to describe inflation and one regional Fed president even called transitory a “dirty word” as noted above. That makes the state of the debate in the FOMC on the timing and pace of QE tapering and eventual rate hikes very interesting as will be revealed in tonight’s minutes. Before then, we have the US September CPI data up this afternoon, expected to show inflation steady at a +5.3% pace year-on-year for the headline and +4.0% for the ex Food and Energy time series. The month-on-month data is likely to receive close scrutiny after dropping to +0.3% headline/+0.1% core in August, expected in September at +0.3%/+0.2%, respectively.
China September PPI on Thursday - economists are expecting China’s PPI for September to hit 10.5% y/y up from 9.5% y/y in August on surging power prices and input costs. If tomorrow’s print hits consensus estimates then it will be the highest PPI change since 1995 and an indicator of China exporting inflation pressures into the global economy.
Earnings Watch – The Q3 earnings season starts this week with US financials taking the lead. We wrote a preview of this week’s earnings releases on Friday with a focus on Delta Air Lines, JPMorgan Chase, Bank of America, and Citigroup which are the most important earnings to move the market. Today’s focus is Delta Air Lines and JPMorgan Chase.
Wednesday: Delta Air Lines, JPMorgan Chase, BlackRock, First Republic Bank
Thursday: Fast Retailing, Bank of America, Wells Fargo, Walgreens Boots Alliance, Morgan Stanley, Citigroup, UnitedHealth, US Bancorp, Progressive, Domino’s Pizza
Friday: Zijin Mining, BOC Hong Kong, PNC Financial Services, Goldman Sachs, Charles Schwab, Truist Financial
Economic calendar highlights for today (times GMT)
During the day: OPEC’s Monthly Oil Market Report
During the day: IEA’s World Energy Outlook
0900 – Euro Zone Aug. Industrial Production
1230 – US Sep. CPI
1600 – EIA's Short-term Energy Outlook (STEO)
1700 – US 30-year T-bond auction
1800 – US FOMC Minutes
1900 – G20 finance ministers online press conference
2030 – US Fed’s Brainard (voter) so speak
2030 – API Weekly Report on Oil Inventories, supply and demand
2100 – New Zealand Sep. REINZ House Sales
2200 – Australia RBA’s Debelle to speak
2301 – UK Sep. RICS House Price Balance
0030 – Australia Sep. Unemployment Rate / Employment Change
0130 – China Sep. CPI / PPI
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