Daily Market Outlook - Wednesday, Oct. 18

By Patrick Munnelly of Tickmill

Wednesday, October 18, 2023 4:20 AM EDT

person using MacBook Pro on table

Image Source: Unsplash

Asia -Asian stocks displayed a mixed performance, influenced by escalating tensions in the Middle East ahead of US President Biden's visit to Israel. The cancellation of scheduled meetings with the Palestinian President and Arab countries added to the geopolitical uncertainty. In economic news, China reported a robust 1.3% quarter-on-quarter increase in Q3 GDP, surpassing expectations and resulting in a 4.9% year-on-year growth rate, which exceeded the consensus forecast of 4.5%. Oil prices experienced an upward trajectory during this period, while Treasury bond yields remained relatively stable overnight. This stability followed a previous uptick in yields, which had been driven by strong US data, including encouraging figures from the retail sales sector.

Europe - The UK's Consumer Price Index (CPI) inflation, which was released earlier, remained unchanged in September at 6.7%. This figure exceeded the consensus forecast, which had anticipated a slight dip to 6.6%. Core inflation, which excludes energy and food components, saw a modest decline from 6.2% to 6.1%, albeit smaller than expected. Several factors influenced this outcome, with lower prices for food and furniture contributing to a decrease in overall inflation. However, this reduction was offset primarily by higher petrol prices. Looking ahead to next month, the October figures are expected to reflect lower Ofgem utility prices, potentially causing the headline CPI to drop below 5%.

In the Eurozone, the Consumer Price Index (CPI) inflation, scheduled for release this morning, is anticipated to confirm preliminary 'flash' estimates, indicating a decline in the headline rate from 5.2% in August to 4.3% in September. This would mark the lowest rate in nearly two years, with core inflation also reaching a 13-month low of 4.5%. There is a possibility of a slight upward revision to either or both the headline and core rates due to rounding, but European Central Bank (ECB) policymakers are likely to take comfort from the overall downtrend this year. As a result, the ECB is expected to keep interest rates unchanged during their upcoming meeting next week.

US - Stateside this afternoon, the US will release data on housing starts and building permits, which could prompt analysts to refine their forecasts for third-quarter GDP growth. The indicators are expected to provide further insight into what is likely to be a robust economic performance during that period. Additionally, market watchers will closely monitor various Federal Reserve speakers scheduled for today and the rest of the week, with particular attention on Fed Chair Powell's remarks set for Thursday. This comes as we approach the onset of the 'blackout' period just before the Federal Reserve's policy decision scheduled for November 1st. Fed Governor Michelle Bowman and Fed Governor Christopher Waller are both scheduled to speak today on different topics related to the economic outlook and monetary policy. Bowman will speak at the Harvard Law School Program on International Financial Systems, where she will discuss responsible innovation in money and payments. Waller will speak at the Rocky Mountain Economic Summit, where he will share his views on the conflicting data from the labor market and the real economy. He will explain why he thinks the labor market is very tight and inflation is far too high, and why he supports reducing inflation and achieving the Fed's price stability goal. He will also discuss the implications for monetary policy and the economic outlook. Equity investors are looking for good news from Netflix tonight, as its crackdown on account sharing could boost its subscriber growth. Tesla also reports tonight, that investors are alert for information on its profit margins, which could suffer from price cuts.

FX Positioning & Sentiment

Implied volatility of near-dated FX options serves as a predictor of future realized volatility and risk. Currently, it is notably lower than recent highs, and call premiums for USD, CHF, and JPY have softened. This comes as the Israel/Hamas conflict remains contained. Resilient U.S. economic data and ongoing geopolitical concerns keep the U.S. dollar at risk of strengthening against various currencies. However, for those looking to hedge against this scenario, USD call options with reverse-knock-out triggers can provide a cost-effective solution. Specifically, the implied volatility for USD/JPY appears significant, with one-week and one-month expiries trading at their lowest levels in 18 months, approximately 5.75 and 7.6, respectively, during the early London session. Despite this, a brief and sharp drop/recovery in the exchange rate from 149.75 to 148.75 corresponded to the 1-week option break-even point and has sparked renewed interest from buyers at these lower levels.

CFTC Data As Of 4-10-23

The US Dollar Index ($IDX) declined by 1.2% in this period.
The Euro (EUR/$) appreciated by 1.36% during the same period, leading to a reduction of -3,411 contracts in speculative positions. The total net long positions now amount to +75,532.
The Japanese Yen (JPY/$) saw a minor decrease of -0.22%, resulting in an increase of +14,512 contracts in speculative positions. The total net short positions now stand at -99,476, and the pair is close to the key 150 level.
The British Pound (GBP/$) strengthened by 1.75%, but speculative positions reduced by -3,368 contracts, mainly due to a dovish Bank of England.
The Australian Dollar (AUD/$) gained 2% in the same period, with speculative positions increasing by +5,410 contracts, totaling -76,577. The AUD has been lower since Tuesday.
Bitcoin (BTC) saw a modest increase of 0.04%, and speculative positions grew by +95 contracts, reaching +1,151. The expectation of ETF approval supports BTC.
It's worth noting that the USD has rallied on a more hawkish Federal Reserve outlook since the period ended, and SOFR red contracts suggest an expectation of higher rates for a longer duration. (Source Reuters)

FX Options Expiries For 10am New York Cut

(1BLN+ represent larger expiries, more magnetic when trading within daily ATR)

EUR/USD: 1.0500 (1.3BLN), 1.0525 (807M), 1.0600 (8090M), 1.0665-80 (1.5BLN)
USD/CHF: 0.8965 (690M), 0.9055 (493M). AUD/USD: 0.6325 (222M)
GBP/USD: 1.2040 (932M), 1.2250-65 (550M), 1.2400 (1BLN), 1.2430-40 (935M)
NZD/USD: 0.5910 (282M), 0.6000 (409M). USD/CAD: 1.3505 (1.BLN)
USD/JPY: 148.00-10 (1.5BLN), 148.40 (320M), 148.65 (520M)
150.00 (1BLN), 150.25 (505M)

Overnight Newswire Updates of Note

China Exceeds Growth Expectations as Consumer Spending Strengthens
Jordan Cancels Biden Summit Following Deadly Explosion at Gaza Hospital
Hezbollah Declares a 'Day of Unprecedented Anger' Against Israel During Biden's Visit
Oil Prices Surge Amid Escalating Regional Tensions Triggered by Gaza Hospital Blast
IMF Warns that China's Property Slowdown Will Impact Asia's Economic Growth
Japan's Prime Minister Kishida Plans Temporary Tax Measures
RBA's Bullock Expresses Concern About Persistent Geopolitical 'Shocks' Fueling Inflation
Fed's Kashkari Stresses Inflation Remains Uncomfortably High
ECB's Stournaras Highlights Middle East Crisis as a Shadow Over Upcoming ECB Meeting
Country Garden Teeters on the Brink of Its First Default as Silence Surrounds Bond Situation
BoJ Intervenes in Market to Stem Soaring Bond Yields
Japan's 10-Year Yield Climbs to a Ten-Year High, Testing the BoJ
Nvidia and Other Chip Stocks Dip Due to New US Export Restrictions on China
Fed to Propose Reducing Debit Card Swipe Fees
United Airlines Anticipates Lower Profits Due to Rising Fuel Costs and Middle East Conflict
Strike Deadline Set for October 29 in Stellantis-Unifor Negotiations
Chesapeake Contemplates Acquisition of Southwestern Energy