Collective Sigh Of Relief As Oil Prices Drop, Yields Fall, And Stocks Rise

The US dollar is mixed today, the general tone in the capital markets is constructive.  Success by the Saudi-back Yemen forces have recapture strategic territory from the Houthis, which has held drive oil prices lower. Bond yields in Europe have tumbled and the wide peripheral premiums over Germany have narrowed.  Equities are higher.  

Five Fed officials speak today but barring a surprise, expectations for this month’s FOMC meeting are unlikely to change significantly until next week’s CPI report, where early projections point to a small increase in price pressures. The futures market has about 83 bp of tightening between now and the end of next year, which is down from around 95 bp peak seen in the past two weeks. 

Prices 

G10

• The euro recorded a low in the Asia Pacific session, near $1.1160 yesterday.  It spent the European and North American session in a roughly $1.1185-$1.1220 range.  French bonds stabilized yesterday and the 10-year premium over Germany narrowed to 136 bp, which is still elevated.  A combination of Le Pen, the leading candidate to become the next French president, promised to reduce public spending and limit further borrowing, a drop in oil prices as the Saudi-backed Yemen forces push the Houthis from strategic territory has seen French and Italian bond yields fall 11-12 bp, narrowing the premium over Germany, and sending the euro higher.  The single currency approached $1.1250 in the European morning. A move above yesterday’s high (~$1.1260), which is also where the five-day moving average is found, would help stabilize the technical tone. Still, the options (for more than 7 bln euros) at $1.1300 expire tomorrow and Thursday. 

• The dollar recovered from the Asia-Pacific low near JPY157.45 against the yen to the session high around JPY158.30 in North America yesterday. Although that was above the pre-weekend high, last week’s high (~JPY158.45) and the 200-day moving average (~JPY158.50) remained intact. Even then, the dollar’s high from September 24-25 (~JPY158.95-JPY159.05) may be a more important technical level to breech. The dollar is firm today, but within yesterday’s range.

• Sterling recorded an inside day yesterday, trading within the pre-weekend range, which itself was inside the range set last Thursday (~$1.3180-$1.3275). The spring coils further today with sterling confined to slightly less than a half-cent range above $1.3200. The euro approached the low for the year against sterling yesterday that was recorded in mid-July (~GBP0.8455). It recovered to about GBP0.8485 and reached almost GBP0.8495 today. Overcoming yesterday’s high near GBP0.8510 would steady the tone. 

• The greenback reached almost CAD1.43 yesterday, and the US two-year premium over Canada widened to almost 159 bp. It was nearly 126 bp three weeks ago. It is a new high for the US dollar since early April 2025 and the widest premium since mid-1997. Parti Quebecois won yesterday provincial election. It promises to hold a referendum on succession during its four-year term, but only after US President Trump’s term ends.  Alberta holds a referendum on October 19 and one of the questions is whether it should pursue secession as well.  The US dollar is trading firmly but within yesterday’s range. 

• The Australian dollar recovered from approaching $0.6930 in the local session to almost $0.6975 in North America yesterday. It stalled a couple hundredths of a cent in front of the pre-weekend high. It settled above the five-day moving average (~$0.6955 today) for the first time in nearly two weeks. The Aussie made a marginal new high today but held below $0.6980. A move above $0.7000 helps lift the technical tone. 

EM 

• For the first time in two weeks, the dollar settled below the previous session’s low against the Mexican peso.  Bolsonaro’s stronger-than-expected showing in Sunday’s election lifted most currencies in the region. The Brazilian real was the best performing, surging by about 4.2%. The Colombian peso rose by 2.0%.  The Mexican peso’s gain of about 0.5% was more modest, but sufficient for the dollar to settle below the five-day moving average (~MXN18.14) for the first time since September 9. Follow-through peso buying today saw the greenback approach MXN18.00, a four-day low. A convincing break would initially target the MXN17.85 area. 

• The dollar was confined to its pre-weekend range against the offshore yuan yesterday (~CNH6.70-CNH6.72). It slipped slightly below CNH6.70 today for the first time in almost two weeks. Mainland markets re-open on Thursday. 

• Despite the pullback in oil and global yields today, the Indian rupee remained under pressure today. The dollar closed the gap from late July, which extended to INR96.3450. Reports suggest the central bank intervened, but the greenback settled near the session high (~INR96.45). The July high (~INR96.6725) is the next important chart point. 

Other Markets

• The S&P 500 gapped higher on Friday and the gains were extended yesterday.  It reached its best level since August 14. The Nasdaq Composite also gapped higher on Friday and reached a new record yesterday.  And these advances are materializing as US long-term rates rise. The US rally lent a positive backdrop for equities today. Nearly all the bourses in the Asia Pacific region advanced today. Europe’s Stoxx 600 is up almost 1%, for its third consecutive advance.  US index futures also are enjoying a firmer tone. 

• Benchmark 10-year yields in the Asia Pacific region played catch-up today after US 10-year yield rose by 3.5 basis points after being up more than seven intraday.  The 10-year JGB yield edged higher and the Australian and New Zealand 10-year yields rose about six basis points. Still, European benchmark yields are off mostly 3-10 bp and the peripheral premiums have narrowed.  French, Italian, and Greek yields are off around 10 bp, the German Bund three. The 10-year US Treasury yield is off three basis points as well, to a little below 5.28%. 

• Gold popped above $4200 before the weekend but was rejected.  It was sold to a new four-day low yesterday, a little below $4123. It took out last week’s low (~ $4111) and fell a little below $4105 before recovering.  It is little above $4150 in late European morning turnover. Silver traded with a firmer bias, but it was unable to push above the four-day high set before the weekend (~$62.10). Between $60 and $62.30, it is hard to get excited about silver, and it remains within tht range today. 

• November WTI traded yesterday within its well-worn ranges. It was confined to a roughly $89-$92 trading range.  The success of the Saudi-backed Yemen forces took back some strategic territory in its attempt to regain control over the Bab el-Mandeb Strait.  November WTI was sold to almost $87 today, its lowest level in a month. Around $85 is the next important technical area.  

Data

• The US reports the August trade balance today.  We already know from the advanced goods trade figures out late last month that the trade balance deteriorated to $132.6 bln from $118.9 bln. It is the largest deficit since March 2025, the month before “Liberation Day”. The median forecast in Bloomberg’s survey is for a $102 bln shortfall after $88.6 bln in July. Note that US gold exports this year are running a little more than twice last year’s pace at around $89.3 bln through July (4.4% of US goods exports vs ~2% in first seven months of 2025. 

• Canada reports August’s merchandise trade figures today.  There has been a swing in Canada trade balance from a C$21.7 bln deficit in the Jan-July period to a C$4.9 bln trade surplus in the first seven months of this year.  Given trade tensions with the Us, the bilateral trade figures may drat attention.  In July, Canadian exports to the US fell 6.6%, which was the steepest since April 2025. Overall, 2/3 of Canada’s goods exports were destined for the US market. Canada’s trade surplus with the US narrowed to C$5.9 bln (~$4.3 bln) in July from C$10 .3 bln. The September IVEY PMI is due.  It was a four-year high of 64.3 in August. 

• The eurozone reported August aggregate retail sales edged up by 0.1% after falling 0.6% in July.  Germany reported a whopping 10.6% decline in August factory orders. The median forecast in Bloomberg’s survey was for a 1% decline. The drop was driven by a decline in large orders. Excluding large orders, Germany would have reported a 0.1% decline in August factory orders. Tomorrow Germany reports August industrial output, and it is expected to have risen by 0.5% (median in Bloomberg’s survey) after falling 1.1% in July.  France reported a 0.3% decrease in its August industrial production (the median in Bloomberg’s survey was for a 0.2% increase. Still, manufacturing output increased by 0.3%, as expected. Spain reported its August industrial output fell 0.7% after a 0.6% increase in July.  Separately, note that Germany and France proposed that at next week’s summit new powers be granted that for the EU that will lower the bar to blocking Chinese imports and that would allow faster action (days).  The announcement of the proposal is part of the effort to bolster the EU’s hand in talks with Chinese officials this week. It requires unanimous support and many of the advocates seem to be assuming it, but this still must be proven. Meanwhile, the most immediate and pressing challenge, like the widening of the student (and now teachers and university students strike in France, the demonstrations against the draft in Germany, and the collapse of the Spanish government, and the rise of the AfD in Germany seems to have little to do with China. The people in the street are objecting to their country’s policies and the German and French leadership focused on the challenge from China.  

• The UK reported that its September construction PMI rose to 46.1 from 44.3. It is the third uptick in the past four months and the best level since January. It has not been above the 50 boom/bust level since the end of 2024.  The AI build-out is not fully compensating for the decline in construction in other sectors.