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Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - sentiment in equities bounced yesterday on stronger than expected ADP numbers and a pullback in energy prices. The VIX futures curve was close to flip into backwardation at the intraday lows but snapped back into steeper contango as equities rallied. Nasdaq 100 futures have taken out the recent highs trading just below the 14,900 level in early European trading. The 15,000 level is obviously a psychological level to watch if momentum extends.
Hang Seng (50HK.I) - Hang Seng Tech index is up 4.9% from yesterday’s close and Hang Seng futures are up 2.3% as the positive sentiment in global equities has spilled over into China, but also news about China Estates, a real estate developer backed by Evergrande, is going private to restructure the debt. This seems to be a potential playbook in the Chinese housing market debacle that taking developers private the news flow disappears from public markets which makes it easier to control the events. Evergrande is still suspended from trading.
EURUSD – the euro is the weakest of G10 currencies and dropped to new lows for the cycle below 1.1560 despite some relief on the energy crunch front as natural gas prices reversed sharply on the announcement from the Kremlin yesterday (see below). The action remains bearish until proven otherwise and the next objective is the big round number at 1.1500, with 1.1290 a major Fibo level lower still if the bear trend extends further.
GBPUSD – sterling made a considerable comeback from a steep sell-off in recent days after the big plunge through 1.3600 area support and even a brief foray below 1.3500, a huge chart level for many years. Yesterday’s attempt by Prime Minister Boris Johnson to rouse his base and tout the party’s Build Back Better and Leveling Up policies saw UK short rates posting new highs for the cycle and GBPUSD has tickled the key 1.3600+ area resistance this week, while EURGBP has poked down into the key 0.8500-0.8450 zone that is the bottom of the post-Brexit range. At these pivotal technical levels, it is time for sterling to make a breakthrough or fall back.
EU gas, coal and power markets witnessed another day for the record books on Wednesday after Dutch TTF gas surged to a fresh record before slumping by 35%, but still only back to levels reached on Tuesday. The coal market jumped before ending the day lower by 24%. Selling emerged after Russia offered to ease the gas crisis, but once again Nord Stream 2 was mentioned as the solution, thereby not removing concerns that Russia by inaction has helped orchestrate the energy crisis. At current levels, Dutch TTF gas still trades 6.5 times above the five-year average. Gazprom is expected to increase supplies once Russia’s stock rebuild finish around November 1. The weakness spread to the US where natural gas prices tanked by 10% on warmer weather outlook after hitting a 12-year high on Tuesday.
Crude oil (OILUKDEC21 & OILUSNOV21) extended yesterday’s drop overnight in Asia in response to a second weekly increase in US crude stocks, and not least, after Russia’s offered to ease the natural gas crises. The prospect for increased gas-to-oil switching supported the recent upside extension, and that focus, or support will only fade if gas supplies pick up and prices return to a more sustainable level. The US administration also joined in by talking about additional SPR releases and a ban on crude oil exports. Oil explorers need to raise drilling budgets by 54% to more than half a trillion dollars to forestall a significant supply deficit in the next few years (Moody’s Investors Service via Bloomberg). All developments that will ensure a continued high level of volatility and uncertainty in the global energy market.
Gold (XAUUSD) remains on the defensive ahead of Friday’s US job report with focus on the stronger dollar, the lack of inflation angst in the bond market, US debt ceiling negotiations, and a recovery in stocks. Key level to watch today being $1765 where a trendline from the September peak and the 21-day moving average is currently providing resistance.
Today the US Senate will vote for a short-term extension of the debt ceiling, giving some relief to the bond market and allowing 10-year US Treasury yields to rise in case of strong jobs numbers tomorrow (IEF:xnas, TLT:xnas). A strong jobs report might wake up bears as a tapering announcement is likely to be delivered in November and the recovery of jobs together with elevated inflation may force the hand of the Federal Reserve into hiking interest rate early, resulting in higher yields across the yield curve. The market reaction to tomorrow’s jobs report depends on whether today the US Senate will vote for a short extension of the debt ceiling until December. We expect 10-year yields to trade rangebound between 1.4% and 1.6% if the debt ceiling issue is not agreed upon today. However, if a short-term resolution is found, yields could break above 1.60% amid strong jobs report.
We expect sentiment to improve in the European government bond space as the ECB looks to create a new bond purchase program to substitute the PEPP with when it ends (VGEA, BTP10, IS0L). European bond yields erased gains yesterday afternoon, and this morning bonds of those countries with a high Beta, such as Italy, are gaining as news hit the market that the ECB is looking to create a new bond-buying program to substitute the PEPP with. Favorable financing conditions have been a main focus for the ECB, and creating a new bond-buying program to prevent market conditions is going to help the central bank to achieve that. It will provide the market with a short break from the recent selloff; however, we are still of the opinion that yields will resume their rise with Bund yields turning positive by the end of the year.
What is going on?
Positive surprise for U.S. employment. According to the ADP national employment report, the U.S. economy added 568,000 jobs in the private sector in September. This is more than the consensus of 428,000. The leisure and hospitality sectors remain the biggest beneficiaries of the recovery. But there is still uncertainty due to the trajectory of the pandemic. Since the outbreak, the U.S. economy has already recovered 14.1 million jobs. There are still 5.5 million to go. On the bright side, there are 10.9 million job openings. As a gentle reminder, the ADP report does not give much clue about the nonfarm payrolls released on Friday.
US Congress may raise debt ceiling until December – Democrats are apparently willing to except a proposal forwarded by Republican minority leader McConnell in the Senate, which will “kick the can” and stave off the immediate risk of a US default or at least desperate measures to avoid a default, but one that only means the issue will return in December as the debt ceiling will need raising again to avoid the same situation developing into the end of the year.
Poland’s central bank surprises with rate hike – moving the rate 40 basis points higher to 0.50% versus expectations for no change. The bank tripped over its own prior guidance in which it declared the intent to wait until the November meeting and new projections on inflation before deciding on whether to hike rates. Perhaps adding urgency to the surprise decision was the Polish zloty trading near the bottom of its range and the Poland’s September CPI, released just last Friday, rising to a cycle high of 5.8%.
What are we watching next?
The 2022 French presidential election is full of surprises. A Harris Interactive poll release on 6 October put the far-right leader Marine Le Pen in third position, two points behind a Trump-inspired candidate, the TV columnist Eric Zemmour. They are at 15% and 17% of voting intentions in the first round, respectively. This is the first time ever that Le Pen is relegated to the third position in a poll. Contrary to the IPSOS poll released on 1 October (see French Election Update: The Far Right’s Big Battle), the Harris Interactive poll is more reliable. The sample is large. The margin of error is small. It is still early days. But it is clear that the momentum is on Zemmour’s side. Expect that the campaign will focus on immigration and the place of Islam within French society.
Looking for strong U.S. nonfarm payrolls September report on Friday – after a very strong ADP private payrolls number yesterday, although the two surveys often produce very different results. Fed Chair Powell made it clear at the most recent FOMC meeting press conference that nothing particularly impressive would be needed from the September jobs report to move forward with a tapering announcement at the next FOMC meeting on November 3. What will really matter is the composition and pace of the tapering, in our view. As well, the average hourly earnings data for September could see more focus if it posts another jump on the scale of the August rise.
Earnings Watch – the next two trading sessions will see marginal earnings releases, but next week the Q3 earnings season will heat up. We will write an earnings preview tomorrow.
- Today: Seven & I, Conagra Brands
- Friday: Tractor Supply
Economic calendar highlights for today (times GMT)
- 0800 – UN FAO’s Global Food Price Index
- 0830 – ECB Chief Economist Lane to speak
- 1100 – Mexico Sep. CPI
- 1130 – US Sep. Challenger Job Cuts
- 1130 – Euro Zone Meeting Minutes
- 1230 – US Weekly Initial Jobless Claims and Continuing Claims
- 1300 – ECB Chief Economist Lane to speak
- 1300 – ECB's Schnabel to speak
- 1400 – Canada Sep. Ivey PMI
- 1430 – DOE's Weekly Natural Gas Storage Change
- 1545 – US Fed’s Mester (non-voter) to speak
- 0030 – Australia RBA Financial Stability Review
- 0145 – China Caixin Sep. Services PMI
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