Market Brief
Asian markets traded lower following a weak US session. US stocks were pulled down as the start of Q3 earning disappointed investors, expectations for a Fed rate hike increased and Russia statements suggesting an output cut seemed less clear. A significant earning miss by Alcoa (NYSE:AA) kicked off a sell-off in material stocks and triggered broad-base risk aversion. The weak Alcoa report indicates that commodities and commodity related stocks are vulnerable. Crude Oil was able to hold the high ground as IEA stated that supply cuts by OPEC (recent headlines indicate that Iran is now onboard) could help rebalance the energy markets. WTI firmed above the $51 brl handle, although the key question of implication still exists. Fed Evans provided less dovish comments, which sent futures markets pricing in a near 68% from 61% probability of a December rate hike. Evans stated “Even though I would like to wait and gather more information and have more confidence about inflation, I think one move would not seriously affect the continuing likelihood that inflation will move up.” USD continues to benefit from the macro conditions broadly gaining against G10 and EM currencies. Asia regional equites indices were lower across the board as the Nikkei fell -1.09%, Hang Seng - 0.98% and Shanghai -0.40%. In the US, incoming polls are now giving democratic presidential nominate Hillary Clinton a wide double digit lead.
In Japan, core machine orders dropped 2.2% m/m in August, yet machine orders rose 11.6% y/y exceeding expectations. The read highlighted the incoming risk of strong JPY and weak global demand. With US treasury yields continuing their march higher, USD/JPY have been moving lock-in-step. BoJ Governor Kuroda provided the usual rhetoric indicating that policy will be eased if needed, including more negative interest rates and JGB buying to influence the yield curve. USD/JPY was range bound in Asian trading between 103.25 and 103.65.
Yesterday's German ZEW provided a positive surprise despite expectations that events emulating from Deutsche Bank (NYSE:DB) would drag down sentiment. The positive results support strong factory orders growth, and industrial production, suggesting that the largest economy in the Eurozone remains healthy. We anticipate the ECB will provide additional support by extending asset purchases but little else.
Finally, GBP was temporarily able to shake the negative sentiment as Prime Minister May allowed an open debate and vote in government (legal arguments will be heard at the High Court on 13 and 17 October), and will not tirgger Article 50 without parliamentary approval. Yet critically there is no indication that she has removed the provision to send Article 50 to Brussels by April. This news has lowered expectations for “Hard Brexit”.
The highlight of the trading day will be the release of the FOMC minutes. We anticipate that it will not signal a rate hike 2016 and allow USD to get pushed lower.
Currency Tech
EUR/USD
R 2: 1.1616
R 1: 1.1428
CURRENT: 1.1113
S 1: 1.1046
S 2: 1.0913
GBP/USD
R 2: 1.3121
R 1: 1.2857
CURRENT: 1.2448
S 1: 1.2352
S 2: 1.1841
USD/JPY
R 2: 107.90
R 1: 104.32
CURRENT: 103.91
S 1: 99.02
S 2: 96.57
USD/CHF
R 2: 0.9956
R 1: 0.9885
CURRENT: 0.9825
S 1: 0.9522
S 2: 0.9444