Overview: After a couple of sessions of taking on more risk, investors are taking a break today. Equities are mostly lower today after the S&P 500's six-day advance took it almost to its record high, while the Nasdaq's streak was halted at five sessions. The Nikkei's nearly 1.8% slide paced the Asia-Pacific session, where most bourses retreated. Europe's Dow Jones Stoxx 600 is off about 0.15% near midday after rising approximately 0.65% over the past two sessions. US futures point to a weaker opening. The US 10-year yield is slightly softer, around 1.64%, while European yields have edged higher. The dollar is firmer against most currencies, with the Antipodeans and Norwegian krone seeing the largest losses, while the yen is the most resilient. The dollar stalled yesterday in Asia near JPY114.70 and has been trending lower to reach JPY113.90 just before European markets opened. Emerging market currencies are also under pressure today, led by the South African rand and Turkish lira. Turkey's central bank is widely expected to lower its key repo rate today. Gold is firm and near the middle of the day's range (~$1780-$1790). December WTI set a new high just shy of $84 before retreating and is now below $83. Copper is off around 2%, which, if sustained, would be the largest loss this month. Other industrial metals are also trading heavily. The CRB Index rose to new highs yesterday and is up 5% on the month, the seventh consecutive monthly rise.

Asia Pacific

Japan's weekly portfolio flows show two trends remain intact. First, Japanese investors are buying foreign bonds. The JPY1.22 trillion bought last week was the most in six months. Buying has been elevated since the end of August. Second, foreign investors are buying Japanese stocks. They bought JPY960 bln last week after JPY1.01 trillion the week before. That is the most in two weeks in two-and-a-half years. Tomorrow, Japan reports September CPI, and the core rate, which excludes fresh food, is expected to be above zero for the first tie since March 2020. Separately, the flash October PMI will also be released. It has not been above the 50 boom/bust level since January 2020.

Evergrande has ended efforts to sell a 50.1% stake in its listed property management arm. It has renewed anxiety about a disorderly default. A few other property developers are also in trouble. News yesterday of a decline in urban house prices weighs on sentiment. Separately, SWIFT reported that the yuan accounted for 2.19% of its volume last month. It is slightly higher than the 2.15% share in August but below the high for the year set in March at almost 2.50%.

The dollar's advance against the Japanese yen, which brought it to JPY114.70, stalled. It snapped a four-day rally yesterday and is off about a quarter of 1% hovering near JPY114.00. Immediate support is seen around JPY113.80. The steep trendline off the September 22 and early October lows comes in today around JPY113.25. The Australian dollar is reversing lower after reaching almost $0.7550, its highest level since early July. It has been sold to around $0.7380 in Europe. A break and close below yesterday's low (~$0.7365) would warn of a deeper correction after it has rallied more than three cents this month. The PBOC set the dollar's reference rate above expectations (CNY6.3890 vs. CNY6.3876). The central bank has stepped up its liquidity provisions for the second session. The sharp drop in money market rates (overnight repo -41 bp to 1.67% and the seven-day repo -19 bp to 2.02%) may help reinforce the signal for a lower yuan. For the first time this month, the dollar edged higher against the yuan for the second consecutive session.

Europe

The EU enlargement strategy, encouraged by the UK, had been one of broadening, not deepening. Nothing fails like success, and the cost of the UK strategy was the gradual shift to qualified majority voting, which meant the erosion of London's veto. With the UK counterweight gone and the issues changing, the emphasis seems more on deepening or reinforcing the common values. A crisis has been brewing for some time between the Polish and Hungarian governments and the EC and many individual members on the other. Poland's government is challenging the primacy of EU rules, specifically about the independence of the judiciary. The primacy of European law is enshrined in the treaties under which Warsaw and Budapest joined the EU. The EC, encouraged by the European Parliament, may soon trigger the "conditionality mechanism' that would allow the withholding of budget payments and recovery funds (tens of billions of euros) until the democratic standards are met. Poland and Hungary are challenging the legality of the "conditionality mechanism" before the European Court of Justice.

The record high in Bitcoin and the launching of an ETF based on Bitcoin futures capture imaginations, while there has been a development in France that may have just as much if not greater significance. Using an IBM-based system and in partnership with the largest financial market institutions, including Euroclear, the Banque de France has been engaged in a ten-month experiment with a digital currency and blockchain. It has been successfully tested in issuing new bonds, the conduct of repos, paying coupons, and facilitating redemptions. The Federal Reserve's report on its investigation on a digital currency is expected any day. If not before, perhaps Chair Powell will be asked about it at the next press conference following the FOMC meeting on November 3. Meanwhile, Bloomberg recently told the story of the Chinese city of Zhengzhou, an early adaptor of the internet payment networks. When a recent flood led to a power outage, including the internet, people could not contact first responders, communicate with family/friends, or access their (digital) money. Of note, the report mentions some resort to barter, but no mention of gold.

Turkey's central bank is expected to cut rates today. The market leans toward a 100 bp cut, matching last month's move. However, this would paint the central bank into a corner. The governor has shifted the focus from the headline inflation rate (19.58% in September) to the core rate (16.98%). He promised to keep real rates positive, and the one-week repo rate is at 18% now, and a 100 bp cut would exhaust its room to maneuver. If, strategically, the central bank wants to cut rates, it seems tactically a 50 bp move would be preferable. It would still deliver the rate cut the president is insisting on while stretching out the process. The lira has fallen more than 6% since last month's rate cut, which, if sustained, will further aggravate the inflation challenge.

The euro initially approached this week's high, slightly shy of $1.1670 in Asia, and was turned back. It fell below $1.1640 in early European turnover before stabilizing. It remains within the range set on Tuesday, where the low was near $1.1610. The five-day moving average crossed above the 20-day average for the first time since mid-September, but it has not signaled fresh buying. Continued consolidation seems the most likely scenario ahead of tomorrow's preliminary October PMI. For the third consecutive session, sterling hit resistance in the $1.3835 area, just before the 200-day moving average (~$1.3850). It has been pushed back to around $1.3785 in Europe. Initial support extends to about $1.3760, and a break of yesterday's lows (~$1.3740) would be a negative development.

America

The US reports weekly jobless claims, and the week covers the survey period for the monthly non-farm payrolls report. Recall that weekly claims fell to the pandemic low of 293k in the week ending October 8. This week's report may be impacted by last Monday's partial holiday. The early call anticipates an almost 400k increase in October non-farm payrolls after a disappointing 194k increase in September. Today, the US also reports the Leading Economic Indicator (expected 0.4% after 0.9% in August). September existing-home sales are expected to have recovered from the previous 2% decline. The overall pace is still strong and among the best since the Great Financial Crisis. The Philadelphia Fed survey is expected to have moderated in October (25.0) from September (30.7). The Beige Book, released yesterday, downgraded growth slightly, noted the strong demand for labor, and businesses able to pass through rising costs.

Canada reported a slightly higher than expected headline and core inflation yesterday. Still, the implied yield of the June 2022 BA futures eased four basis points, which seemed corrective in nature. The swaps market continues to price in about 75 bp of tightening over the next 12 months. Canada reports August retail sales tomorrow, and a recovery is expected after a 0.6% decline in July. Mexico reports its August retail sales today. They are expected to have declined (~-0.5%) for the third consecutive month.

The US dollar was sold to a new four-month low against the Canadian dollar in Asia, a little below CAD1.2290. However, this appears to have exhausted the move, and the greenback quickly snapped back to CAD1.2345, where it has been consolidating for a few hours. A potential bullish hammer candlestick may be forged today, and a move above yesterday's high (almost CAD1.2370) would be a favorable development for the US dollar. The US dollar is also recovering against the Mexican peso after trading briefly through the 200-day moving average yesterday (~MXN20.1675). It has traded above yesterday's high (~MXN20.2810), and a close above there would lift the dollar's tone. Recall that since October 12, the greenback has fallen around 3.5% against the peso. Lastly, the US dollar closed at its best level against the Brazilian real since mid-April yesterday, slightly below BRL5.60. The risk-off sentiment signals further gains today. There is a $300 mln option at BRL5.6230 that expires today.