Political risks reign in Spain.
The trading week started with Catalan talks in Madrid. Catalonian President Carles Puigdemont sent a vague letter to Madrid reiterating that Catalonia will declare independence and the declaration of independence has been suspended momentarily as Catalans seek discussions with the Spanish government. Spanish PM Mariano Rajoy is not open to talks on the other hand. Although Mr. Puigdemont claims that the October 1st referendum has given him a mandate to carry on with the Catalan independence plan, the referendum is illegal in the eyes of Madrid, giving the Spanish government the right to trigger the Article 155, sack the Catalan regional government and call for a new election if Catalans pursue independence.
The IBEX 35 rolling index traded past 10300 as the European cash markets opened, yet rapidly reversed its course on Catalan uncertainties and lost as much as 135 points shortly after the start of trading.
In Germany, Chancellor Angela Merkel heads into coalition talks this week to form a national government after the disheartening general election outcome. However, DAX traders are less concerned with the political spectrum and politics should not be a barrier for the rising DAX.
The EURUSD failed to break above the 1.1880-resistance (Fibonacci 50% retracement on September – October decline) last week. The downside correction is underway and could deepen toward the 100-day moving average (1.1717). Light call options are due at 1.18-strike at today’s expiry, hinting at an eventual consolidation against the US dollar close to this level. Traders are hedged for a further slide below 1.1760, suggesting that the sell-off could accelerate if the pair trades below this level.
Against the pound, large EUR/GBP put options will expire at 0.8886 / 0.8900 today.
FTSE 100 started the week on a positive note and could make a renewed attempt toward all-time highs on the back of firmer oil and commodity prices. Mining stocks (+1.44%) lead gains in London, as COMEX copper rallied 2.43% and Brent crude traded at $58 per barrel on the back of tensions in Iraq. Strong pound could limit the topside appetite nearing 7565p (October 12 high).
The pound is the best performer against the US dollar. Pound traders’ focus is on Tuesday's inflation report. Analysts expect that the British consumer price inflation may have hit 3% year-on-year in September. A solid inflation should revive expectations that the Bank of England (BoE) could raise rates as soon as next month's MPC meeting and boost the GBP-long positions. The probability of a November rate hike stands at 75% and the probability of a December rate hike is seen near 80%. Hence, the upside risks prevail before Tuesday’s inflation data. The key resistance against the US dollar is eyed at 1.3342 (50% retrace on September – October decline). Support could be found at 1.3262 (50-hour moving average), 1.3230 (100-hour moving average), 1.3195/1.3190 (2000-hour moving average / 50-day moving average).
Yellen talked down US inflation worries, earnings in focus
The US dollar kicked off the week higher in Asia despite the slight disappointment in Friday’s inflation figures. The US consumer price inflation, excluding fresh food and energy, eased to 0.1% month-on-month in September from 0.2% printed a month earlier. Soft inflation read accentuated some Federal Reserve (Fed) members’ concerns about the slowing inflation. At her Sunday speech, the Fed Chair Janet Yellen responded that her “best guess” is consumer prices will soon accelerate after a period of surprising softness. ‘A forecast echoed by European Central Bank President Mario Draghi and Bank of England Governor Mark Carney’ reported Bloomberg.
The US equity futures edged higher along with the Asian and European equity markets. The US equity markets will likely be driven by earnings from major companies and banks this week. Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS), Blackstone (NYSE:BX) Group, Chinese ICBC, Phillip Morris, Unilever (LON:ULVR), Netflix (NASDAQ:NFLX) and General Electric (NYSE:GE) will post results throughout the week.
Some colour out of Asia
Asian equities started the week on a positive note. Hang Seng index (+0.62%) gained along with Nikkei (+0.47%), Topix (+0.62%) and ASX 200 (+0.56%) while Shanghai's Composite (-0.36%) failed to consolidate morning gains. As expected, Chinese consumer price inflation retreated to 1.6% year-on-year in September from 1.8% printed a month earlier; producer price inflation surged from 6.3% to 6.9% over the same period, beating the consensus of 6.4%. Copper (+0.66%) and steel rebar (+1.64%) futures edged higher in Shanghai. Investors could be reluctant to increase allocations in Chinese markets on the run up to the twice-a-decade Chinese Communist Party (CCP) congress due to kick off on October 18th.
The USD/JPY rebounded from 111.71 in Tokyo. Firmer US dollar helped. The yen sentiment is mixed before the October 22 snap election in Japan. Limited risk appetite could prevent investors to move away from the risk-haven yen, although some of the risks, such as the North Korean nuclear menace and the snap election, threaten Japanese markets directly.
The antipodeans lagged the most against the US dollar due to limited carry inflows. The AUD/USD retreated to 0.7863 in Sydney. Rising iron ore futures (+2.40%) gave a positive spin to the Aussie before the end of the session. Support is eyed at the 100-day moving average (0.7860).