Summary: Markets remained in a risk-off mood on Friday as US equities sold off steeply in the wake of in-line US employment data for September that discourages the notion that the Fed is set to let up on the tightening pressure any time soon. Sentiment has not picked up to start the week in the Asian session overnight as China is back from a long holiday. The macro calendar highlight of the coming week is Thursday’s US September CPI data, while the large US banks will kick off the Q3 earnings season late this week.
US stocks fell sharply on Friday, closing back toward the cycle lows and wiping out most of the rally from the previous Friday’s cycle-low close. The sell-off Friday was triggered by the stronger than expected US jobs report: payrolls growth was in-line with expectations, but the unemployment rate dropped back to the modern record low of 3.5%, taking US yields higher as the market fears sustained further tightening pressure from the Fed. With the price action now back near the bear market lows, this week could prove pivotal for markets as we await the key US September CPI data on Thursday and as quarterly earnings season is set to kick off late this week with the large US banks reporting
Hong Kong’s Hang Seng (HSIU2) and China’s CSI300 (03188:xhkg)
China returned from a week-long holiday today and declined moderately with CSI300 off 0.9%. EV, semiconductor, and tourism names retreated. Domestic trips and revenues, as well as traffic data for the period from Oct 1 to 7, were substantially below the levels during the same period last year. Last Friday, the Biden Administration rolled out new rules to restrict China’s access to semiconductor equipment. Oil and gas, poultry, and pig farming stocks gained in the A-share market. Hong Kong’s Hang Seng Index continued to plunge on Monday, falling by more than 2.5%. Chip makers, SMIC (00981:xhkg) and Hua Hong Semiconductor (01347:xhkg) plunged 29% and 9.9% respectively. China internet stocks moved lower, with leading names falling from 3% to 8%.
Cratering risk sentiment on Friday took the US dollar higher as the September US jobs report failed to show any negative surprise that might bring some relief in the Fed’s tightening regime, and as the unemployment rate falling back to the modern record low of 3.5% took US yields back toward cycle highs. The first USD pairs to push to new cycle extremes include AUDUSD overnight, as the pair tested levels below 0.6350, and USDJPY edged further above the 145.00 area as traders wonder if and when the Bank of Japan/Ministry of Finance will intervene again. EURUSD has more room to run before hitting the cycle lows below 0.9600. The key coincident indicators are likely to remain US treasury yields as the front end of the yield curve is pushing on the cycle highs near 4.35%, and on risk sentiment if US equity indices spill to new lows after nearly hitting the cycle lows overnight.
Gold (XAUUSD)
Gold trades back below $1700 and back on the defensive after Fridays stronger-than-expected US jobs report added a renewed bid to the dollar and yields on raised concerns the Federal Reserve will continue to hike rates aggressively. The latest COT report covering the week to last Tuesday when gold, supported by a temporary slump in the dollar and yields, jumped by around 6% showed that most of the buying that week was due to short covering. Overall, the net position jumped 46k lots from the biggest short in almost four years to a small net long. With renewed dollar strength in focus the risk of fresh albeit more muted short selling exists with gold’s renewed upside push unlikely until the market feels convinced that the Fed has reached peak hawkishness. Focus this week on US PPI and CPI prints.
Crude oil (CLX2 & LCOX2) pauses after +15% weekly jump
Crude oil traded softer in Asia as demand concerns resurfaced in response to worries about a global economic slowdown made worse by central banks continuing to hike rates. Despite worries about supply disruptions the OPEC+ group of producers last week agreed to cut production from November, a move that sent prices sharply higher and will likely prolong central banks battle against inflation and with that the risk of a deeper economic contraction. China meanwhile continues its battle with local virus outbreaks further delaying a pickup in demand from the world's largest importer. Ahead of last week’s OPEC decision hedge funds had increased bullish oil bets to a ten-week high, the bulk of the change being driven by short covering. Focus this week being monthly oil market reports from EIA and OPEC on Wednesday followed by the IEA on Thursday.US treasury yields lifted all along the curve Friday in the wake of the US September jobs report, which saw the unemployment rate dropping back to the modern record low of 3.5% (in part on a slight drop in the participation rate). The 2-year yield overnight hit the cycle high of 4.34%, while the 10-year yields has yet to break back above the cycle high just north of 4.00% that was posted during the UK gilt wipeout before the BoE brought emergency intervention. Focus this week on FOMC minutes on Wednesday and the US September CPI data point on Thursday.
What is going on?
The U.S. tightened restrictions on exporting semiconductor equipment, components, and high-end chips to China. The U.S. Department of Commerce rolled out new regulations last Friday to prohibit American companies from exporting advanced semiconductor equipment and components to Chinese companies that can be used to make equipment without first applying for a license from the Department of Commerce effective immediately. The Department of Commerce’s new rules bans U.S. persons from providing support to the development or production of semiconductors at Chinese semiconductor facilities without a license from the Department of Commerce. The Department of Commerce also tightened the Foreign Direct Product Rule to restrict China from obtaining advanced microchips that can be used in supercomputers and artificial intelligence applications from American companies as well as foreign companies that rely on American technologies.
Germany says severing of cables that disrupted train networks Saturday was highly “professional”, although no suspects were identified and no known person or organization has claimed responsibility for the operation, which shut down much of train travel across northern Germany for several hours.
Russian leader Putin calls Security Council for a meeting today after Crimean bridge attack. A truck bomb heavily damaged the only bridge link between Russian territory and Crimea, a move dubbed a terrorist attack by Putin and one that could bring more reprisals on Ukrainian infrastructure, with considerable focus on Europe’s largest nuclear power plant Zaporizhzhia, where intense fighting has at times disrupted power to the plant in recent days.
Iron Ore (SCOc1) price hits a three-week high after China returns from week-long holiday. The price of the key streel ingredient, Iron Ore (SOCA,SCOX2) rose 2.4% $96.25 in Asia today after China’s markets reopened after a week long holiday. The 2.4% jump in the iron ore is the biggest one day advance in three weeks. The Iron Ore remains 50% lower than its all-time high of $211 after China curbed imports and lockdowns continue to linger. Iron ore is finding it hard to break out of a bear market, despite, US steel giant, Nucor announced two weeks ago its pushing ahead with plans to expand steel production, with its newest line to open in mid-2025. However, shares in BHP (BHP:xasx) listed in Australia have rallied off their lows and trade 15% away from record high-territory, with the miner benefiting from rising cash flows from its other businesses (coal and oil).
Chicago wheat futures jumped nearly 3% in early trading, underpinned by concerns over the Russia-Ukraine war slowing grain shipments from the Black Sea region. This after Putin accused Ukraine of orchestrating the explosion on the bridge over the Kerch Strait, a key prestige project for the Russian President. The developments cast even more uncertainty over shipments to the world market through Ukraine’s export corridor in the Black Sea, which comes up for renewal next month. Dozens of grain-hauling vessels are already backing up while awaiting inspection at Istanbul under the terms of the deal.
What are we watching next?
The economic calendar for the week picks up on Wednesday with the latest set of FOMC minutes, but the highlight of the week will be Thursday’s US September CPI report, after the August data surprised with significantly higher than expected inflation. Friday we get a look at US September retail sales after core spending has been on a declining trend for the last several months.
Earnings to watch
The Q3 earnings season kicks off this week, with the most important day being Friday, as seven large US financial institutions reporting. The key focus points will be to what extent US banks are able to increase their net interest margin and the levels of credit provisions.
Economic calendar highlights for today (times GMT)
US Bank Holiday (treasury market closed, equity market open)
0815 – ECB's Centeno to speak
1030 – ECB's de Cos to speak
1300 – US Fed’s Evans (voter 2023) to speak
1300 – ECB Chief Economist Lane to speak
1700 – US Fed Vice Chair Brainard to speak
2200 – Australia Sep. CBA Household Spending
2330 – Australia Oct. Westpac Consumer Confidence Index
0030 – Australia Sep. NAB Business Conditions/Confidence
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Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
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