Rising energy prices and softer survey data weighs on sentiment. Tensions between the US and China may rise, which has not been good for equities when the US formally acknowledges Beijing has not complied with the Phase 1 trade commitments. OPEC+ is not likely to accelerate output increases of more than 400k barrels as it previously agreement.
Chinese mainland markets were still closed, and Hong Kong listings bore the brunt of the China Evergrande Group (HK:3333) (OTC:EGRNY) break-up.
KOSPI and Taiwan shares also fell, though Australia, India, and most of the smaller markets in the region advanced. The MSCI Asia Pacific Index fell for the third consecutive week, during which time it shed around 6%. Europe's Dow Jones Stoxx 600 was trading little changed after having fallen in five of the last six sessions coming into today. It fell 2.25% last week, roughly the same as the S&P 500, which it and the other US future indices were trading lower.
The bond market was firm, with the US 10-year yield at 1.49%. European benchmark yields were also 1-2 bp higher. The dollar was trading with a weaker bias against the major currencies, led by the Norwegian krone and Canadian dollar. The yen was struggling. Emerging market currencies were mixed. Most of the freely accessible ones were mostly weaker, and the JP Morgan Emerging Market Currency Index was paring the pre-weekend gain, which was its first in six sessions.
Gold made a new seven-day high near $1766 but came off to test the $1750 area. A break of $1748 could signal another $10 pullback. November WTI was trading quietly above $75 a barrel ahead of OPEC's decision. It has risen for the past six weeks (from ~$62 to $76). Nat gas was also rallying, up another 3% or so today. Singapore's iron ore futures contract recouped the pre-weekend loss of 2% in full, while copper prices were pared last Friday's 1% loss almost in half.
Asia Pacific
Japan's Kishida has officially become the new Prime Minister. Local media reported that a lower house election was being planned for Oct. 31, while the upper house election will be held next year. Kishida kept the foreign and defense ministers. In addition, Japan has a new finance minister for the first time in several years, as Kishida replaced Aso with Suzuki, the Olympics Minister, and also in Aso's faction, keeping the internal balance of power. A new post was created as well for economic security. A sizeable fiscal stimulus bill is expected, but the latest reports suggest it may not be completely ready before the lower house election.
China was celebrating its Golden Week holiday, but it did not prevent it from sending a record 39 military aircraft into Taiwan's airspace on Saturday and another 16 on Sunday. Chinese planes flew close to the Pratas Islands, on which Taiwan has a garrison. We have suggested that Beijing could take the main island as a show of force in the region, sending a powerful signal to Taiwan and the world.
Meanwhile, later today, the US Trade Representative is expected to deliver a speech at a Washington DC think tank that will officially acknowledge that Beijing has not complied with the Phase 1 trade deal negotiated by the Trump administration. The shortfall has been well documented. The unknown element is how the Biden administration will respond. It will likely say it will consult with its allies, but the US deal to secure a fixed dollar-share of China's import markets ostensibly comes at the expense of other countries exports.
The dollar slipped to a five-day low a little below JPY110.90 in early activity, but by late morning turnover in Europe was probing the JPY111.25 area. An option there for about $510 mln expires today. The pre-weekend high was closer to JPY111.50, and the intraday momentum indicators were getting stretched. The greenback's high for the year was set in the middle of last week, slightly shy of JPY112.10.
The Australian dollar's gains stalled as the three-day one-cent rally tested the $0.7285 area. It was holding above $0.7250, where an option for almost A$745 mln expires today. The aussie has fallen for the past three weeks and needs to rise above $0.7300 to lift the tone.
With the mainland closed through Thursday, the yuan focus is on the offshore market. The greenback closed soft near CNH6.4370 before the weekend and was trading around CNH6.4450 around midday in Europe. It rose to almost CNH6.46 before being sold in late morning activity.
Europe
The UK Chancellor of the Exchequer is expected to unveil a new jobs initiative to replace the furlough program that ended last month. The Tory Party should be sitting pretty, with a strong majority in parliament and an opposition that has yet to offer a compelling vision, but labor shortage, which exacerbates the energy shortage and supply chain disruptions, has put it on the defensive.
New unforeseen consequences of Brexit are also evident. Next month's budget is expected to be tight, and the BOE has sounded particularly hawkish. Over the past few weeks, the implied yield of the December 2021 short sterling interest rate futures has risen by around 10 bp. The bank rate was set at 10 bp. Sterling has been one of the worst-performing major currencies since mid-September, falling almost 2%.
German Greens will hold an internal vote over the next two weeks to choose who to try to work with first, the CDU/CSU or the SPD. There was talk that CDU leader Laschet could step down, allowing the CSU's Soeder to replace him, which ostensibly would provide new negotiating space. Meanwhile, following last week's news of a jump in German inflation, more attention was paid to wage negotiations.
German September consumer prices were 4.1% above year-ago levels (vs. 3.4% in aggregate for the monetary union). Mobile home manufacturing workers in one company were seeking a 4.5% wage increase and extra retirement funds. In Hesse, retail and mail-order workers got a 3% pay hike for this year and a 1.2% increase next April.
A five-day drop ended before the weekend as the euro edged higher. It was building on those gains today to near $1.1620. Last week's low, the low for the year, was seen last Thursday and Friday, a little below $1.1565. Near-term potential may extend toward the $1.1635-$1.1660 area. However, the downside may be protected by an option for slightly more than one billion euros that expires at $1.16 today. There is a smaller option (~445 mln euros) that expires there tomorrow.
Sterling bottomed in the middle of last week ahead of $1.3410, and before the weekend, was probing $1.3575. It remained firm but mainly in the pre-weekend range. Initial support was seen around $1.3530. Sterling had been helped in the second half of last week by gains against the euro, but that momentum eased as the euro approached the middle of the old range near GBP0.8550.
America
The US Congress managed to extend the federal government's spending authorization until early December last week, but the debt ceiling restrictions continued to loom. As a result, there could be less than two weeks before the Treasury's room to maneuver has been exhausted. In addition, the infrastructure debate within the Democratic Party took a new twist as some progressive elements sought to reduce the price tag, not making some new initiatives permanent.
The US encouraged OPEC+ to boost its oil output. OPEC+ is expected to announce its November production plans shortly. Currently, they intend to increase production by 400k barrels a day for the next several months to restore the production cut earlier in the pandemic. In April 2020, when the price of crude fell below zero, many observers claimed OPEC was dead. Now prices are in the $75-$80 a barrel region.
Last week, OPEC's technical committee identified shortages relative to demand but also low inventories. The storm-induced outages in the US have not been fully recouped, and the soaring price of natural gas is spurring some European and Asian utilities to switch to oil.
The US (and Canadian) employment reports are the highlight of the week. However, the dismal auto sales reported before the weekend have implications for production and consumption figures in the coming weeks. Economists expected US sales to be around 13.0 mln (seasonally adjusted annual rate). Instead, they came in at 12.2 mln, off 5% for the month and almost 25% year-over-year. It was the weakest monthly sales since May 2020. The inventory-to-sale ratio remains below one for the fifth consecutive month.
Auto sales in Canada fell by 4.3% in September to 1.55 mln vehicles. They are down 19.6% from a year ago. It is well recognized that the main issue is one of supply, not demand, but monetary and fiscal policy cannot address it (especially in a meaningful period).
US August factory goods are featured today. As we saw with the preliminary durable goods orders report, transportation orders (planes) helped flatten the headline. Excluding the transportation sector, orders likely slowed sequentially. Canada reports August building permits, and a rebounded after July's 3.9% drop is expected.
Mexico reports its domestic auto sales today and its August Leading Indicators. The highlight of the week is Thursday's September CPI report. The headline and core rates are expected to tick higher, keeping the central bank, which says it is "data dependent" on course to hike rates when it meets again on Nov. 11.
Brazil has a busy economic calendar this week, beginning with auto sales today. Industrial production and retail sales, Tuesday and Wednesday, respectively, are followed by IPCA inflation on Friday, which is expected to surge above 10%.
The greenback was testing the CAD1.26 area. It frayed it briefly early last week but bounced to CAD1.2775. It was trying again. A break of the CAD1.2580 area may confirm a larger technical topping pattern that could project toward CAD1.24. However, the intraday momentum indicators suggested that a convincing break was unlikely today. It may take a strong recovery in US stocks to provide an added incentive. Note that tomorrow there are around $2.1 bln in options expiring between CAD1.2615 and CAD1.2625.
The US dollar posted a big outside down day against the Mexican peso ahead of the weekend (trading on both sides of Thursday's range and settling below Thursday's low). However, was no follow-through dollar selling, and the greenback bounced to around MXN20.5750 in Europe. It retraced about half of the pre-weekend loss, and the next retracement (~61.8%) was closer to MXN20.61.