What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
Yesterday’s US equity session will go down in history as one of the weirdest trading sessions. The US September CPI figure showed a negative surprise to inflation with the 6-month average core CPI hitting the highest level for the cycle at around 0.6% m/m (7.4% annualised) initially setting off a steep slide in US equities with S&P 500 futures hitting levels as low as the 3,502 level. However, in the subsequent part of the session US equities rallied hard with S&P 500 futures closing at the 3,681 level up 2.6% and the index futures are continuing higher this morning trading around the 3,703 level. It seems that the session was driven by technical factors and potentially realignment of inventories by market markets and trading firms, so we think investors should not put too much weight on the recent price action. By next week, we will know how long-term institutional investors are judging the inflation print.
Hong Kong’s Hang Seng (HSIU2) and China’s CSI300 (03188:xhkg)
Stocks in Hong Kong and mainland China rallied strongly, Hang Seng Index surging 3.4%, and CSI300 climbing 2%. The dramatic turnaround in the U.S. equity overnight helped set a more optimistic tone at the open. To add to the positive sentiment was the softer-than-expected Chinese CPI and PPI data released this morning showing inflation grew at a benign 0.6% y/y in September once the volatile food and energy prices were excluded. It fuels the anticipation of more room for the Chinese authorities to roll out stimulus measures. HSBC (00005:xhkg), which was also boosted by the strong rally in the pound sterling in anticipation of the U.K. Truss government changing course in some of the planned tax cuts, jumped 6.5%. Leading the Hong Kong benchmark were also pharmaceuticals, China property, China consumption, and China Internet names. In China A shares, healthcare, medical equipment, food and beverage, Chinese liquor and cloud computing were among the top performers.
USD climax reversal? Lacking confirmation...
The US dollar blasted higher on the hotter-than-expected core CPI data, which took the currency to new highs versus many of the less liquid currencies, only to see the action reversing sharply on the day as risk sentiment rallied and the move higher at the longer end of the US yield curve reversed. This created a bullish “hammer” reversal on many USD charts, like AUDUSD and inversely in USDCAD, but we will need for sentiment to launch a sustained recovery and for US yields to retreat further if we are to see a more significant consolidation in the dollar rally. After all, the move higher in Fed rate tightening expectations held up fairly well as the market now sees the Fed peaking at a policy rate of 4.75-5.00% and odds of a 100 basis point move in November have crept higher, though still very low. For EURUSD, the focus will be on the 0.9800-50 zone as the resistance barring the path to parity, while a close back below 0.9700 suggests the risk of further downside in the near term remains. Elsewhere, the USDJPY never really blinked despite all the volatility elsewhere, holding just below the highest levels since 1998 (more below).
Gold tumbled following the US CPI print but later recovered to settle back into the $1660 to $1680 range that has seen most of the action this week. While the 8.2% YoY inflation print for September raised expectations for more aggressive rate hikes by the Federal Reserve, the sentiment improved as the dollar reversed lower (see above) while the S&P 500 saw its 5th-largest intraday reversal from a low in the history of the index. Another rise in bond yields capped the upside to gold with the yield on two-year Notes hitting a fresh 15-year high above 4.5%. In our latest gold update we highlight the reasons behind our medium-term bullish outlook but also why the ducks are not yet lined up properly for the recovery to begin. Resistance at $1687 and $1695.
Crude oil (CLX2 & LCOZ2)
Crude oil is heading for a weekly loss made smaller by a surprise dollar weakness following yesterday's higher than expected US CPI print. The overall weakness seen this week being in response to a continued subdued demand outlook globally, especially in China as the government continues to support its growth reducing Covid-zero policy. The week also delivered global demand downgrades from the OPEC, EIA and yesterday the IEA, with the latter warning last week’s OPEC+ production cut was not justified by fundamentals leaving the price at risk of spiking thereby potentially tipping the global economy into a recession. Focus on US distillate stocks (diesel and heating oil) at a seasonal three-decade low driving refinery margins to a record high in New York.
US treasuries (TLT, IEF)
The strong core US CPI data yesterday lifted the entire US yield curve, but while the move higher in short yields largely stuck, the long end pushed back lower to close the day largely unchanged. In the case of the 10-year yield, that meant back below 4.00% after posting new cycle highs above 4.05% intraday. This inverted the yield curve back toward the cycle extreme negative 50 basis points. A 30-year T-bond auction a couple of hours after the data release yesterday generated few headlines and no notable market reaction.
What is going on?
U.S. September CPI remains uncomfortably high
U.S. CPI was up 8.2 % year-over-year last month versus expected 8.1 % year-over-year. This is a worrying signal which confirms that financial conditions are not tight enough to significantly lower inflationary pressures. Into details, the main drivers behind the increase in inflation are energy with a jump of 19.8 % year-over-year (gasoline fell in recent months but natural gas and electricity increased more), food with an increase of 11.2 % (food at home +13 %) and finally vehicles, transportation, medical and shelter with a price jump of 6.6 %. The latest inflation figures for September (both the headline CPI and the PPI) open the door to a 75-basis point interest hike by the U.S. Federal Reserve at the November meeting.
US earnings recap: Walgreens, Delta Air Lines, and BlackRock
Investors were relieved to read Walgreens’ EPS outlook for its next fiscal year with EPS at $4.45-4.65 vs est. $4.51, but we would argue there is a downside risk to this target as revenue growth is negative and wage pressures are building in the US labour market. Delta Air Lines surprised the market with an upbeat EPS outlook for Q4 with EPS at $1-1.25 vs est. $0.80 as pent-up demand remains strong and management said as well that the strong USD is not impacting its international business. BlackRock surprised on Q3 earnings against estimates, but AUM missed and the initial reaction from investors was negative.
Reports of another potential UK fiscal U-turn
There’s no ending to the drama in the UK markets, with reports of another potential U-turn in the fiscal plans of Liz Truss government. Now, there are talks that the government is mulling hiking corporate taxes despite initial plans to scrap the previously planned tax hike and keep it unchanged. Such reports, along with the BOE’s increased bond-buying this week, could help put a floor on UK assets next week as the central bank halts its bond purchases today. Still, the credibility of UK authorities remains in question, and that would mean it remains hard to include Gilts in asset allocation. Sterling is also all over the map – leaning to the strong side on hopes that the market has disciplined the Truss government from undermining the long term stability of UK government finances.
The rises in China’s CPI and PPI were slower than expected
China’s CPI came in at +2.8% Y/Y (vs consensus +2.9%; August +2.5%) and the core CPI (excluding food and energy) growth slowed to +0.6% Y/Y from +0.8% in August. The rise in the headline CPI was driven by a 36% Y/Y increase in pork prices and increases in most other food prices as well in September. The deceleration in the PPI to +0.9% Y/Y (vs consensus +1.0%) from +2.3% in August was driven by weaknesses in energy, mining, and raw materials as well as declines in prices in the oil and gas process, ferrous metal processing, and non-ferrous metal processing industries. The CPI and PPI overall point to sluggish demand in China.
Weak verbal intervention in the Japanese yen
USDJPY traded to a fresh record high of 147.67 overnight, and stayed above the 147 handle despite a reversal in US dollar strength later in the session. Only some weak comments were noted from Japanese authorities, with FinMin Suzuki saying that FX volatility was discussed at the G20 meeting. BOJ Governor Kuroda kept the easing bias, saying that it is not appropriate to raise rates in Japan now, and with US yields still seeing some more room on the upside, there could be more room for yen weakness. Our technical analyst highlights that if USDJPY breaks 147.65 resistance, 149.34 level is not unlikely.
Industrial metals trade higher for a third week
The Bloomberg Metals index trades up 4.4% this month supported by stretched supplies of copper in China and renewed fears over the flow of metals from Russia, especially aluminum currently up 10% this month, as the White House may sanction Russian aluminum producers. The sector saw a very challenging third quarter with multiple risks to demand, from the global threat of recessions to Europe’s energy crisis and China’s chronic property slump. However, low global stockpiles especially in China, where spending on metal intensive renewable energy projects is rising and the government tries to accelerate infrastructure spending.
What are we watching next?
ECB QT is likely to begin in Q2 2023, lower ECB terminal rate
ECB discussed possible timeline for balance sheet reduction at Cyprus meeting earlier this month. Consensus appeared to emerge for quantitative tightening to start sometime in Q2 2023. Reports suggested that the ECB could already tweak its language on reinvestments at its October meeting and then could provide a detailed plan possibly in December but more likely in February. Meanwhile, Reuters reported that an ECB staff model puts the terminal rate in Europe at 2.25%, beneath the 3% that markets are currently pricing in; however, the response from ECB policymakers was mixed, with some fearing the model contains errors.
The Chinese Communist Party convenes its 20th National Congress on Oct 16General Secretary Xi Jinping will make a speech and presents the Work Report of the 19th Central Committee to the 20th National Congress of the Chinese Communist Party (CCP) on Oct 16. From Oct 16 to 22, around 2,300 delegates from all over the country will elect 205 full members and 171 alternate members of the 20th Central Committee and select the members for the 20th Central Commission for Discipline Inspection. On Oct 22, the 20th National Congress will vote to approve the Work Report of the 19th Central Committee and approve an amendment to the charter of the CCP. The 20th National Congress ends on Oct 22 and the newly elected 20th Central Committee will hold its 1st plenary session on Oct 23 and decide on the most important 25-member Politburo and its 7-member Standing Committee, as well as members of the Central Military Commission and Central Secretariat. Nomination of Premier and Vice-premiers of the State Council are matters to be decided not this time but later in the 2nd plenary session which may be held in February 2023 and that nomination will need to be approved by the National People’s Congress in March 2023.
Earnings to watchToday’s earnings focus is on US banks such as JPMorgan Chase, Morgan Stanley, Citigroup, and Wells Fargo. Expectations are low for these US bank earnings with analysts expecting JPMorgan Chase EPS down 24% y/y and the focus is on net interest margin and credit provisions.
- Today: Shanghai Putailai New Energy, YTO Express Group, PNC Financial Services, JPMorgan Chase, Morgan Stanley, Citigroup, UnitedHealth Group, Wells Fargo, US Bancorp, First Republic Bank
Next week’s earnings releases:
- Monday: Bank of America, Sandvik
- Tuesday: Charles Schwab, Johnson & Johnson, Goldman Sachs, Intuitive Surgical, Lockheed Martin, Truist Financial
- Wednesday: ASML, Elevance Health, Tesla, IBM, Lam Research, P&G, Abbott Laboratories, Atlas Copco
- Thursday: China Mobile, China Telecom, ABB, Danaher, Investor, Philip Morris, Union Pacific, CSX, AT&T, Blackstone, Marsh & McLennan, Yara International, Nordea, Volvo, Ericsson, Freeport-McMoRan, Dow
- Friday: CATL, American Express, Schlumberger, Verizon Communications, HCA Healthcare, Sika
Economic calendar highlights for today (times GMT)
- 0900 – Eurozone Aug. Trade Balance
- 1230 – US Sep. Retail Sales
- 1230 – Canada Aug. Manufacturing Sales
- 1400 – US Fed’s George (Voter 2022) to speak
- 1400 – US preliminary University of Michigan Sentiment
- 1430 – US Fed’s Cook (Voter) to speak on the economic outlook
- 1615 – US Fed’s Waller (Voter) to speak on central bank digital currency
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