Daily Market Outlook, Tuesday, Sept. 26

By Patrick Munnelly of Tickmill

Tuesday, September 26, 2023 4:14 AM EDT

Munnelly’s Market Commentary…

Asian equity markets mostly traded lower, reflecting the mixed performance in the United States and concerns about rising yields.

Freepik

The Nikkei 225 declined by 1.0%, partly due to the acceleration in Services Producer Price Index (PPI) data and uncertainty surrounding potential foreign exchange (FX) intervention related to recent currency movements. Meanwhile, the Hang Seng and Shanghai Composite were both trading in minor negative tensions. Trade tensions added to the negative sentiment after the US imposed restrictions on additional Chinese and Russian companies involved in supplying components for drone production in Russia. However, mainland China's losses were partially offset by significant liquidity injections, coupled with hopes that the upcoming Mid-Autumn Festival and National Day Golden Week holidays would boost consumption and economic activity.

Investors are also concerned about the looming possibility of a US government shutdown on October 1st, as Moody's has issued a stern warning that could jeopardise the country's AAA credit rating. Additionally, investors are keeping an eye on an increase in Treasury supply, as a series of heavy Treasury auctions is set to begin with the sale of two-year notes on Tuesday, followed by three-year notes on Wednesday and seven-year paper on Thursday. This comes as the US budget deficit continues to widen due to higher spending and reduced tax receipts.

In the European session, the data calendar is relatively light, with the European Central Bank's Lane scheduled to speak at a conference at the Bank of France on monetary policy. In the US, the focus will be on the Consumer Confidence report, with a strong reading potentially exerting upward pressure on both US yields and the dollar, which could impact overall market sentiment.

FX Positioning & Sentiment

It's worth noting that current implied volatility prices are still significantly higher than the realized volatility measures. This discrepancy underscores the lack of actual volatility in the market and is expected to keep pressure on implied volatility. While FX options price action doesn't rule out the possibility of further gains for the US dollar (USD), it's likely to follow a gradual and less volatile upward trajectory. EUR/USD barrier and trigger options have been benefiting from this environment for some time and are expected to continue doing so. More barriers, triggers, and related defensive strategies are positioned around the 1.0500 level to provide support. In the case of GBP/USD, a substantial £1.4 billion 1.2200 strike expiry is set for 10 am New York/14 GMT on Thursday. This level could act as a magnet and limit GBP/USD movements in the lead-up to the expiration.

CFTC Data As Of Sept. 22

USD net spec short flips to long $4.567 in Sept 13-19 period; $IDX +0.51%
EUR$ -0.67% in Sep 13-19 period, specs -11,099 contract, now +101,981
Hawkish Fed posturing at Fed hold Wednesday pushed EUR lower in current period
$JPY +0.55%, specs -2,906 contract as pair hovers near 2023 highs
Dogfight b/w bulls & bears as longs profit, new longs eye US-JY yield diffs
GBP$ -0.87% in period, specs -12,491 contracts on less-hawkish BoE rate view
Weak BoE data, recent hold hints at further GBP weakness
AUD$ (+0.54%), $CAD (-0.9%) sold aggressively despite higher commodity prices
BTC +4.29% in period, specs -635 contracts; higher Fed rate musing stir long unwind (Source: Reuters)