Summary: A rocky ride for markets yesterday, which were trying to post a rally until a steep sell-off developed late in the session as Bank of England Governor Andrew Bailey warned that UK pensions must get their house in order by Friday, sticking with the end date of the Bank of England’s emergency intervention. Then this morning, the FT reports that the Bank of England may be willing to extend those measures, helping to stabilize sentiment.
US equities slid again yesterday with S&P 500 futures closing below the 3,600 level for the first time since November 2020, but the index futures are bouncing back a bit this morning trading around the 3,623 level. The fragile situation in the UK Gilt market is a fresh source of negativity with BoE Governor Bailey’s comments yesterday adding to nervousness (see more detailed summary below). Later today the market will get US September PPI figures which are expected to remain at 0.3% m/m excluding energy and food. PepsiCo is the first big US company to report full Q3 earnings with the results expected before the market opens.
The tightening of pandemic control in large cities including Shanghai and Shenzhen plus and the mouthpiece People’s Daily reiterating the country’s adherence to the Dynamic-Covid-Zero policy for the third day in a row this week to the notion of reopening held by some analysts and investors continued to linger over stocks in the Hong Kong and mainland bourses. The IMF cut China’s growth forecasts to 3.2% in 2022 and 4.4% in 2023. Hang Seng Index dropped 2% to the level last seen in October 2011. The China Internet, China consumption, China developers, and Macao casino names were among the worst performers. CSI300 fell 1.4% to make a new 2.5-year low. While SMIC (00981:xhkg) fell nearly 4%, other semiconductor stocks managed to bounce off their low, with Hua Hong Semiconductors (01347:xhkg) up 2.7%, SG Micro (300661:xsec) up 3%. China’s September credit data came in better than expected with acceleration in loans to corporate.
Surely Andrew Bailey’s days as Bank of England governor are numbered if BoE does indeed end up extending the QE programme (as the FT reports this morning) that Bailey was out warning yesterday would end on schedule this Friday? GBPUSD has traded all over the map and has correlated with general risk sentiment on the issue, pumping to nearly 1.1200 yesterday before dumping to the low 1.0900’s late yesterday and back to 1.1000 this morning. Any announcement of Bailey’s departure might see short-term upside for sterling. Eventually, the US dollar should steal back the limelight as we get a look at tonight’s FOMC minutes and tomorrow’s US September CPI data: even if the data point is somewhat weaker than expected, will the markets be willing to celebrate a single data point when the US labor market remains so tight and perhaps a large driver of inflation risks at this point in the cycle? Note the upside pressure in USDJPY, which traded to new 24-year highs above 146.00 as traders feel emboldened on the absence of official intervention.
Gold has settled into a tight but nervous trading range around $1670 and following last week's aggressive short squeeze, potential short sellers have turning more cautious at this stage where the market has been left pondering how close we are to seeing peak hawkishness, a development that may signal a low in gold. The first potential sign came on Monday when Federal Reserve Vice Chair Lael Brainard laid out the case for exercising caution, noting that the previous increases are still working through the economy at a time of high global and financial uncertainty. Key support at $1658, the 61.8% retracement of the recent correction, with the market focusing on Thursday’s US CPI print for direction.
trades lower for a third day as recession concerns once again offsets last week's OPEC production cut, and after China continues to reiterate its firm belief in the nation’s Covid zero policy, thereby potentially prolonging a slump in demand from the world’s biggest importer. Prices have also responded to a growing chorus of analysts predicting a hard landing in the US while the IMF has downgraded global growth for next year saying that policies to tame high inflation may add risks to the global economy. Monthly oil market reports from the EIA and OPEC today and the IEA on Thursday will be watched closely for any changes in the supply and demand outlook.
US treasury yields trading fairly steadily just below the key cycle high of 4.00% for the 10-year treasury benchmark and ahead of the macro event risk of the week, tomorrow’s US September CPI data. A three-year treasury auction yesterday was seen as somewhat weak on tepid foreign demand. A 10-year treasury auction is up later today and a 30-year T-bond auction tomorrow.
For a third day this week, the People's Daily published an article reiterating the Chinese authorities’ determination to adhere to the “Dynamic Covid Zero” policy and pledge not to “lie down” passively. It warns that any relaxation of pandemic control would result in many infections and death and a collapse in the healthcare system so the insistence on Dynamic Covid Zero is the best way to protect people’s lives and health which are of utmost importance. The series of articles is apparently to dash the speculation of relaxation of pandemic control after the Chinese Communist Party’s national congress next week. In the meantime, Covid cases bounced above 2,000 after the National Day golden week holiday during which many people traveled around the country. Large cities, including Shanghai and Shenzhen, tightened pandemic control measures somewhat.
The US is not pleased with Saudi Arabia’s decision to allow OPEC+ to cut oil production by 2mn barrels per day amid the ongoing energy crisis. Biden said in an interview Tuesday night that there will be consequences and the speculation is that there could be restrictions on defence contracts.
While consumption patterns are weakening in key consumer categories such as consumer electronics and clothing, the high-end luxury market is in decent shape. LVMH reports organic revenue growth of 19% y/y in Q3 vs estimates of 14.4% y/y driven by strong performance in its Fashion & Leather division.
The PC market is facing severe headwinds post the pandemic demand boom and the ongoing cost-of-living crisis in the world. This is forcing Intel to significantly cut the number of employees with sales and marketing potentially seeing a 20% cut.
Chicago wheat futures dropped on Tuesday after Russia having produced a bumper crop, may abolish its quotas on grain exports. This a day after prices jumped to a three-month high on worries about the viability of the Ukraine grain corridor following Russia’s latest attacks on Ukraine cities. Corn meanwhile trades near a four-month high ahead of today’s important WASDE report from the US Department of Agriculture, which will offer traders insights about the current outlook on world supply and demand for key crops. The report is likely to show lower US corn and wheat stocks while the drop in global stockpiles is expected to be smaller due to a pickup in production elsewhere.
As noted above, the Bank of England messaging on its emergency QE programme and the fate of UK pension funds is a proper mess that the already very shaky Truss government can ill afford and could mean changes to the BoE’s leadership (or “should” mean?). Elsewhere, note that USDJPY has slipped to new 24-year highs, with the question of intervention hanging over the market as the price action works higher.
The economic calendar will increase momentum with the latest set of FOMC minutes, but the highlight of the week will be tomorrow'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, measured month-on-month, since early this year.
Today’s earnings focus is PepsiCo which is scheduled to report Q3 earnings figures before the market opens with analysts expecting 3.1% y/y revenue growth and slightly lower EBITDA margin q/q providing the first signs of whether a margin compression theme is building. PepsiCo has a broad product portfolio, and we expect it to have delivered robust results from the company.
1135 – UK Bank of England’s Pill to speak
1230 – US Sep. PPI
1330 – ECB President Lagarde to speak
1400 – US Fed’s Kashkari (voter 2023) to speak
1600 – EIA's Short-Term Energy Outlook
1600 - USDA’s Monthly World Agriculture Supply & Demand Estimates
1700 – UK Bank of England’s Catherine Mann to speak
1700 – US 10-year Treasury Auction
1800 – US Fed’s FOMC Minutes
2030 – API's Weekly US Oil inventory report
2230 – US Fed’s Bowman (voter) to speak on forward guidance as policy tool
2301 – UK Sep. RICS House Price Balance
During the day: OPEC’s Monthly Oil Market Report
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2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
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.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
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.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
