Hard To Be Sterling

Overview: Energy prices pulled back late yesterday, but it offered a little reprieve to the bond market where the 10-year benchmark yields in the US, UK, Sweden, and Switzerland reached new three-month highs. November WTI traded to almost $76.70 before reversing lower and leaving a potentially bearish shooting star candlestick in its wake. The US S&P 500 and NASDAQ gapped lower and did not recover, setting the stage for today's drop in Asia. All the major markets sold off but Hong Kong. However, the sell-off stopped in Europe, where the Dow Jones Stoxx 600 is snapping a three-day slide.US futures indices are also trading higher. The gaps created by yesterday's sharply lower opening may be key to the near-term outlook. They are found roughly between 4419-4436 in the S&P 500 and 14817-14865 in the Nasdaq. The US 10-year Treasury yield is consolidating and slipped below 1.50% in European turnover. European yields are softer, led by a 4-5 bp decline in Italy and Greece's 10-year benchmarks. The dollar is mostly firmer, though the yen, Swiss franc, and the Canadian and Australian dollars resist the pressure and post small gains near midday in Europe. Most of the liquid and freely accessible emerging market currencies are higher, and the JP Morgan Emerging Market Currency Index is trying to end a three-day downdraft. Gold slipped below $1730 yesterday and is now probing resistance a little above $1740.The 4.1 mln barrel crude build estimated by API saw November WTI slip to $73.75 today after trading a little above $76.65 yesterday. It is recovering to approach $75 in Europe. Industrial metals are mixed. The CRB Index has a six-day rally in tow coming into today.  

Asia Pacific

Japan's Kishida edged out Kono to become the leader of the LDP. Next week (October 4), the Diet will confirm him as the next Prime Minister. Like the other LDP candidates, he favors a large fiscal stimulus effort, which is likely to be presented ahead of the national election, seen in November. We have identified another component of the LDP consensus, and that is a harder line toward China. Seeming unrelated to the LDP politics, Japan's Government Pension Investment Fund, citing settlement, liquidity, and stability concerns, announced it would not invest in sovereign Chinese bonds. Separately, in the face of a sharp drop in infections and a vaccination rate that has now surpassed the US, outgoing Prime Minister Suga announced the lifting of the state of emergency as of tomorrow.  

Evergrande reportedly has sold a stake in a banking unit to a local Chinese government for CNY10 bln (~$1.5 bln), but the proceeds are not expected to be used to service bondholders but to settle debts with the bank. Reports suggest that at least 10 banks told investors in recent weeks that they have sufficient collateral for loans. Evergrande shares rose 15% today in Hong Kong, leaving it down around 80% for the year. The dollar bonds due next year fell and appeared to close slightly below 25 cents, a record-low close. Separately, China will report its PMI and the Caixin manufacturing PMI tomorrow before the week-long holiday begins on Friday.  

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Read more by Marc on his site Marc to Market.

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