Markets: Three-Headed Dogs

Welcome to the gates of hell, markets started Monday greeted by Cerberus as the focus for trading centered around Brexit talks stalling, German Greens gaining in Bavaria and Saudi threats to respond to pressure from EU/US over journalist Khashoggi disappearance leading to oil market jitters. However, there maybe more demons in the making with the news agenda ahead - all keeping risk-taking modest  - as we face the midnight EU/Italian budget deadlines, US 3Q earnings and US retail sales.

So traders need to be more like Hercules today with plenty of labors to get over the wall of worry. Capturing the dog maybe simple in comparison to other stories yet to come. The reality of oil holding bid and CNY holding 7 are important to finding stability outside of the US. Emerging Markets remain in the crosshairs and with Asian shares sharply lower despite the US Friday bounce, its clear that trade tensions dominate fears with the Japan data modestly upbeat except in the details of mood. Similarly, China sees much the same gloom about economic prospects while inflation remains the biggest and most obvious fact for markets, witness the WPI in India today.

The ability for global markets to see narrowing margins – PPI-CPI being a positive number means less profits – is the key worry. Watching the markets, the safe-havens are back in play with the notable exception of the USD. We have to blame this on rates, the US/Saudi war of words and the role of China as the alternative. The notable winner today is gold and its got a larger breakout to watch at $1235. Gold maybe the best barometer to judge whether we are being dragged further into the circles of hell or we can escape for the next worry – if we break back to $1215 relax, else prepare for more trouble above $1250.    

Question for the Day:Is Oil the real driver for risk? The jump in volatility last week matters as it will force smaller risk taking, hamper liquidity and make many more cautious about all asset classes. The driver for such ultimately maybe inflation concerns as the tender balancing act for markets is in the pass-through of higher prices to consumers and manufacturers. The action of central bankers to battle this into a modest rise has been the magic of the post WWII financial world. There has a notable shift this year as US rates moves up (thanks to the Fed) and the US deficit sucks out excess capital (thanks to the tax reform) all lift up off-shore USD costs. The effect on capital flows has been significant. Read the FT report from Fundamental Intelligence data on the EM capital markets in 2018.

EM issuers have raised $270bn of capital in 3Q via bonds, equity and syndicated loans, that is down from $382bn in 2Q and $455bn in 1Q – and it’s the lowest since 2011 when the Greek crisis was at the apex. 

In the past, a higher oil price has left the world awash with USD. Perhaps this will be the case again, but the role of China and its CNY oil contract is worth considering. The contract is backed by gold and its correlation to how CNY trades looks important. There is clearly a change in how global economic demand now translates into global capital flows. Risk for EM seems wrapped up in the shift of oil pricing and role of US as a big producer. 

The risk for today maybe in Saudi actions leading to more CNY flows and less USD ones – this should show up with the CNY holding the 7.00 line in the sand. So far today that has been the case. 

What Happened?

• Japan October Reuters Large Manufacturing Tankan 28 from 26 – better than 25 expected with January 2019 outlook (4Q Tankan) seen flat at 28. The rise was led by metal products/machinery and textiles/paper. The non-manufacturing index fell to 24 from 33 with a 29 bounce expected for January. The hit from natural disasters was notable, dragging down transport/utility and retail/wholesale sectors. Overall managers complained about global trade tension, rising raw material costs and the difficultly in passing costs on to consumers due to weaker consumption. 

• Japan August final Industrial Production rose 0.2% m/m, 0.2% y/y after 2.2% y/y – better than -1.4% y/y expected. The shipments rose 1.7% m/m, 0.5% y/y while inventories fell 0.4% m/m, +3% y/y. 
• China September PBOC liquidity survey: Conditions improve. According to the survey, traders seeing improved liquidity conditions rose to 44.4% in September, up from 16.7% in August. However, fewer traders now see room for the seven-day repo to move higher, with one in three survey respondents seeing the rate fall over the next two weeks. That's up from 16.7% in the previous survey. Half of the respondents saw no change in the rate. The easing expected to modestly continue, but economic outlook remains gloomy with funding difficulty. With concerns over growth to the fore, just 11.1% of survey respondents said they see the yield on 10-year China government bonds (CGB) moving higher over the next three months, the lowest since Feb, 2015 and down from 38.9% in August's poll. Just under 40% saw the 10-year yield lower over the period.
• India September WPI jumps to 5.13% y/y from 4.53% y/y – more than 4.9% y/y expected. Primary article inflation rose 2.97% after -0.15% in August. “The rate of inflation based on WPI Food Index consisting of ‘Food Articles’ from Primary Articles group and ‘Food Product’ from Manufactured Products group increased from -2.25% in August to 0.14% in September,” the ministry said in an official release. Food inflation fell in milk and oilseeds but rose in cereals, wheat and potatoes. The retail inflation published last week was 3.77% from 3.69% y/y. Manufactured product index grew 4.22% whereas fuels inflation rose 16.65% from 17.73% in August. 

Market Recap:

Equities: US S&P500 futures are off 0.4% after a 1.42% bounce Friday. The Stoxx Europe 600 is off 0.25% rebounding from off 0.4%. The MSCI Asia Pacific fell 1% while the MSCI EM fell 0.9%. 

• Japan Nikkei off 1.87% to 22,,271.30
• Korea Kospi off 0.77% to 2,145.12
• Hong Kong Hang Seng off 1.38% to 25,445.06
• China Shanghai Composite off 1.49% to 2,568.10
• Australia ASX off 0.98% to 5,948
• India NSE50 up 0.38% to 10,512.50
• UK FTSE so far up 0.05% to 7,000
• German DAX so far up 0.35% to 11,567
• French CAC40 so far off 0.1% to 5,088
• Italian FTSE so far up 0.15% to 19,289

Fixed Income: Risk-off in Asia, Italy, Brexit and German Bavaria election driving with only Spain suffering a catch up trade. Supply in EU this week is larger but centers around Germany while rest of world is light – UK Gilts leading rally today – 10Y yields off 2.5bps to 1.6050 on political fears wrapped around Brexit. German Bunds off 0.5bps to 0.492% while French OATs off 0.3bps to 0.858%. Periphery mostly bid – Italy off 1.5bps to 3.555%, Portugal off 1bps to 2.018%, Greece off 1bps to 4.347% while Spain up 2.5bps to 1.695%. 

• The Netherlands sold E3.36bn of bills with usual demand– E1.91bn of 3M Jan 2019 DTC at 0.76% with 1.64 cover and E1.45bn of 6M Mar 2019 DTC at 0.65% with 1.34 cover. 
• US Bonds rally with bull steepening play watching retail sales, equities– 2Y off 1.2bps to 2.841%, 5Y off 1.9bps to 2.996%, 10Y off 1.5bps to 3.146% and 30Y off 0.5bps to 3.33%. 
• Japan JGBs rally with equities lower, thin trading with focus on BOJ, 20Y sale next– 2Y off 0.4bps to -0.126%, 5Y off 0.4bps to -0.077%, 10Y off 0.8bps to 0.132%, 30Y up 0.1bps to 0.901%. 
• Australian bonds rally with bull flattening play on Saudi, Italy, Brexit worries– 3Y off 1.8bps to 2.039%, 10Y off 5.6bps to 2.689%.
• China PBOC skips open market operations, leaves liquidity neutral as the CNY451.1bn in MLF is offset by last week’s RRR cut. The PBOC noted level of liquidity in the banking system is “relatively high.” Money market rates were mixed with 7-day up 1bps to 2.602% and O/N off 6bps to 2.633%. The 10Y bond yields were up 1bps to 3.59%. 

Foreign Exchange: The US dollar index is off 0.2% to 95.01 with 95.01-95.37 range – focus is on 94.95 and 94.70 support.  In EM FX, USD mixed – EMEA is USD offered: ZAR up 0.6% to 14.43, TRY up 1.4% to 5.79, RUB up 0.6% to 65.67; ASIA is USD bid: TWD off 0.1% to 30.895, KRW off 0.3% to 1134.40 and INR off 0.3% to 73.805

• EUR: 1.1595 up 0.3%.Range 1.1535-1.1600 with 1.1580 pivot breaking for 1.1620-50 again and 1.1520 base building. 
• JPY: 111.75 off 0.4%.Range 111.63-112.28 with EUR/JPY 129.60 off 0.1% - equities and the firm break of 112 open 110.50 next. 
• GBP: 1.3170 up 0.1%.Range 1.3082-1.3182 with EUR/GBP .8805 up 0.15% - all about Brexit deals/May politics. 
• AUD: .7135 up 0.3%.Range .7099-.7144 with jobs later this week key, NZD .6535 up 0.4% - waiting for CPI. 
• CAD: 1.3015 flat.Range 1.3009-1.3033 with oil helping along with crosses but 1.2980 and data ahead (CPI/retail sales) key. 
• CHF: .9855 off 0.7%.Range .9848-.9920 with EUR/CHF off 0.4% to 1.1430 – catch up to JPY with 1.14 and 1.1250 back as target – but Italy, oil key. 
• CNY: 6.9154 fixed 0.05% weaker from 6.9120 Friday, trades weaker into London at 6.9255 from 6.9234 official Friday close. Trades 6.92 flat right now with 6.9129-6.9337 range. The RMB weekly index rose after two weeks of falling – up a modest 0.03% to 92.38, still well below the 93.05 high from Sep 14 week. 

Commodities: Oil up, Gold up, Copper off 0.3% to $2.8520. 

• Oil: $71.85 up 0.7%.Range $71.27-$72.70 with Saudi focus driving, Brent up 1.1% to $81.30 – successfully holding key technical support $70 in WTI, $80 in Brent with $72.50 and $83 resistance in play.
• Gold: $1231.25 up 1.15%.Range $1216-$1232. Gold rallies on Saudi and trade jitters with $1225 re-break key for more important $1235 resistance, target $1248 next. Silver up 1.1% to $14.74 with $14.77 then $15 targets. Platinum up 1% to $8.22 and Palladium up 1.75% to $1086.50. 

Economic Calendar:

• 0830 am US Oct NY Empire Fed Manufacturing 19p 19e
• 0830 am US Sep retail sales (m/m) 0.1%p 0.6%e /ex autos 0.3%p 0.4%e / control group 0.1%p 0.4%e
• 1000 am US Aug business inventories 0.6%p 0.5%e
• 1030 am Canada BOC Business Outlook Survey