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Markets Take Collective Breath and Beijing Tweaks Fixing Mechanism

Markets Take Collective Breath and Beijing Tweaks Fixing Mechanism

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Overview:  The surging pandemic sapped the risk-taking appetites as some investors hunker down for what could be a volatile period ahead.  The S&P 500 lost nearly 3% at its lows before rebounding 1% in late dealings.   However, the US's fiscal stimulus remains highly likely even if not immediate, and more intensive trade talks between the UK and EU have already begun. The spread of the virus also means policymakers must be vigilant in their response, and many countries will need to extend their efforts.  Equities in the Asia Pacific and Europe are mostly lower.  Chinese and Indian markets were more resilient, while the Antipodeans experienced a 1.7% slide.  Europe's Dow Jones Stoxx 600 is off for the ninth session in the past 11 for around a 5% pullback.  The S&P is seen little changed.  It surpassed the 50% retracement of the rally off last month's lows (~3379), and the next retracement is near 3339.  Bonds markets are mostly quiet after Asia Pacific markets played a little catch-up after yesterday's yields softened in the US and Europe.  The US benchmark 10-year note yield is around 0.80%.  The dollar is mixed, but mostly little changed.  The euro slipped below $1.18 but is back above it in the European morning. The dollar remains below JPY105.00, Many Asian emerging market currencies edged higher, the Chinese yuan is a little softer.  The Turkish lira remains under pressure, and the dollar rose to new a new record above TRY8.15.  Gold is little changed, holding above $1900, while December WTI is firm but holding mostly below $39 a barrel. 

Asia Pacific

There were three pieces of data out in the notable region.  First, industrial profits slowed in China in September.  The year-over-year pace slowed to 10.1% from 19.1% in the year through August.  For the first nine months of the year, profits are still off around 2.4%.  Second, South Korea's economy expanded by a stronger than expected 1.9% in Q3 following a 3.2% contraction in Q2.  The year-over-year decline narrowed to 1.3% from 2.1%.  Third, New Zealand's September trade figures show the 12-month trade surplus reached a six-year high (~NZD$1.71 bln).  Two highlights lie ahead:  The BOJ meeting and possible lower economic assessment, and Australia's quarterly inflation report ahead of next week's central bank meeting due to first thing tomorrow.

China appears to have boosted imports from the US last month.  Some reports estimate it at nearly $10 bln of oil, soy, and auto parts.  Many private observers figures are far from the US's estimate at the end of last week, suggesting China had met around 70% of its purchase agreements.  Meanwhile, the US is going forward with new weapon sales to Taiwan.  The US has approved a $2.4 bln package of land-based anti-ship missiles.  These measures enjoy bipartisan support.  

The dollar poked above JPY105 in North America yesterday but did not draw any follow-through buying.  The JPY105 level remains intact today, perhaps helped by the expiry of a $1.8 bln option struck there.  Initial support is seen near JPY104.55, though last week's low was nearer JPY104.35.  The Australian dollar is quietly inside yesterday's range, which itself was inside the pre-weekend range (~$0.7100-$0.7160).  A break of $0.7100 could signal a re-test on last week's low near $0.7020.  The PBOC set the dollar's reference rate at CNY6.6989, which was a little firmer than the models expected. It is the fourth consecutive day that the dollar has risen above the previous session's high.  The four-day dollar advance is the longest since May.  We initially anticipated a move to CNY6.72.  The dollar rose to nearly CNY6.7180 today.  The PBOC announced it was removing the "counter-cyclical element" in setting the reference rate.  This was a bit of a black box that seemed to give authorities greater say.  The removal of it could make it more transparent.  

Europe

The ECB meeting is the highlight of the week. Although no new initiatives are likely to be unveiled, the groundwork, primarily in word cues, for an expansion of its bond purchases, and perhaps other measures as well, is expected.  Today, September's money supply was reported.  M3 growth accelerated to 10.4% in the year through September, nearly a percentage point faster than in August.  Loan growth to households ticked up to 3.1% from 3.0%, while loans to businesses maintained a 7.1% pace.  However, the ECB also reported that banks tightened their lending standards in Q3 and banks expect to be more restrictive in Q4 amid concerns about the economic outlook and uncertainties around the extension of fiscal measures.  The ECB could try to counter this by a new long-term loan program (TLTRO) with a rate as low as minus 100 bp.  

The UK will report the CBI retail sales shortly, and it is expected to have weakened from the 11 reading in September.  The BOE meets next week and is widely expected to ease policy, with new Gilt purchases expected and a possible cut in the base rate to zero from 10 bp.  UK-EU trade talks have intensified, which amounts to daily meetings, according to reports.  We continue to remain concerned that even if a deal is struck, the disruption will be great.  The latest report suggests that important software needed at the border will not be ready in time, and this will add to anticipated delays.  

Turkey is finding itself increasingly at odds with Europe and the US.  It expands its search for gas in waters that Greece and the EU claim.  It tested a Russian-made anti-aircraft defense system that will likely spur sanctions.  It has criticized France and the French President personally, and France has withdrawn its ambassador to Turkey.  It is on the opposite side of Russia in Armenia and Azerbaijan conflict.  Its decision not to raise the one-week repo rate last week (though it did lift the late loan window, which does raise funding costs in the current environment) has seen the lira slide by around 4.2% to a new record low.  This reinforces a vicious cycle of the weaker lira, price pressures, and the weak, politicized policy response. 

The euro has been confined to less than a half of a cent range today.  It dipped below $1.18 in early European trade and bounced back to almost $1.1820.  There are nearly 1.2 bln euros in options struck between $1.1800 and $1.1805 that expire today, and the market may work through whatever defense is left.  A break of the $1.1780 area could spur a test on last week's low near $1.1700.  There may be little incentives to extend long euro positions ahead of what is expected to be a dovish ECB.  Sterling reached a high last week a little above $1.3175 and slipped below $1.30 yesterday for the first time since the middle of last week.  It has held above $1.30 today, but barely so. A move above $1.3050 would help stabilize the tone.  The euro-sterling cross is little changed near GBP0.9070.  

America

The US sees August's house prices, September durable goods orders, the October Conference Board's consumer confidence, and the Richmond Fed's manufacturing survey.  Outside of headline risk, the market is looking beyond these high-frequency data points.  Tomorrow's trade and inventory figures will solidify forecasts for Q3 GDP due Thursday morning.  On a quarterly basis, the US economy contracted by around 9% in Q2 and is expected to have rebounded by about 7% in Q3. Most economists are anticipating a dramatic slowdown in Q4 to about a 1.25% quarterly pace. 

The Bank of Canada meets tomorrow.  It continues to buy CAD5 bln a week of government bonds, and its purchases appear to have been focused on newly issued bonds for liquidity purposes.  Its share of the newly issued market is seen to be near a third and could rise to 50%.  The distortion that it may cause could prompt the Bank of Canada to alter its approach, even if not yet.  Under yield curve control, it might not have to buy as many bonds.  

Mexico reported a record trade surplus in recent months. This, coupled with strong worker remittances and the attractiveness of Mexico real and nominal interest rates for global investors, helped the peso recover around half of what it lost earlier this year.  The September trade figure will be reported today and are expected to show the surplus falling to around $3.6 bln from $6.1 bln in August.  Ahead of the weekend, it will report Q3 GDP.  It is expected to have expanded by almost 12% after a 17.1% contraction in Q2. 

The US dollar jumped to CAD1.3225 yesterday amid the risk-off push, which often weighs disproportionately on the Canadian dollar.  The greenback is consolidating in about a 20-tick range on either side of CAD1.3190.  Initial support in North America is seen near CAD1.3160.  The US dollar spiked to a little beyond MXN21.13 was sold into, and it finished near MXN20.9350 yesterday.  It is a little changed before the start of the North American session.  It recorded a low last week by MXN20.8550, just above the September low (~MXN20.8450). A consolidative session is likely as fresh incentives are awaited.  




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International

GBP/USD extends losses on mixed UK data

UK retail sales improve, PMIs remain in contraction The British pound is in negative territory after two days of losses. In the European session, GBP/USD…

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  • UK retail sales improve, PMIs remain in contraction

The British pound is in negative territory after two days of losses. In the European session, GBP/USD is trading at 1.2245, down 0.40%. The struggling pound is down 1.1% this week and is trading at its lowest levels since late March.

UK retail sales improve, PMIs mixed

It is a busy day on the data calendar for UK releases. Retail sales rose in August by 0.4% m/m, following a 1.1% decline in July and was just shy of the market consensus of 0.5%. The sharp decline in July was largely due to unusually wet weather. On an annual basis, retail sales fell by 1.4%, compared to -3.1% in July. Consumer spending has been in a nasty rut, as annualized retail sales have now declined for 17 straight months. The silver lining was that the -1.4% drop marked the slowest pace of contraction in the current streak.

The September PMIs were a mixed bag. The Services PMI slowed to 47.2 in September, down from 49.5 in August and missing the consensus estimate of 49.2. This marked a second straight deceleration and the sharpest contraction since January 2021. The Manufacturing PMI increased to 44.2 in September, up from 43.0 in August and above the consensus estimate of 43.0.

The decline in activity in both services and manufacturing points to a UK economy that continues to cool. The Bank of England, which held interest rates on Thursday, will be hoping that the slowdown translates into lower inflation and that it can continue to hold interest rates.

UK consumer confidence remains low, but there was a bit of an improvement in September. The GfK consumer confidence index rose to -21, up from -25 in August and beating the consensus estimate of -27. This was the highest reading since January 2022, but the economy has a long way to go before consumers show optimism about the economic outlook.

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GBP/USD Technical

  • GBP/USD is testing support at 1.2267. The next support level is 1.2156
  • There is resistance at 1.2325 and 1.2436

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International

“Go To Hell”: Brave EU Politician Delivers Damning Message To Global Tyrants

"Go To Hell": Brave EU Politician Delivers Damning Message To Global Tyrants

Via The Vigilant Fox,

Member of the European Parliament Christine…

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"Go To Hell": Brave EU Politician Delivers Damning Message To Global Tyrants

Via The Vigilant Fox,

Member of the European Parliament Christine Anderson has been an unyielding opponent to Klaus Schwab’s ‘Great Reset’ Agenda. Known best for her famous smackdown on Justin Trudeau, MEP Anderson has established herself as one of the few politicians left who represent the interests of the European people.

September 13 was no different as MEP Anderson took no prisoners in her latest warning to the globalitarian elite. Before the European Parliament, in a session specifically focused on the COVID-19 response and the World Health Organization, MEP Anderson ended the meeting with a powerful statement.

Here’s what she said, word for word:

“We just need to find a way to wake the people up. Because the point is simply this: it comes down to a choice. It’s either freedom, democracy, and the rule of law — or enslavement.

“There is no such thing in between. There is no such thing as a little freedom, a little democracy, a little rule of law, just as there is no such thing as a little enslavement. So that’s the choice. It comes down to – it’s either the globalitarian misanthropists or the people. It comes down to – it’s either us or them. And that’s, I think, what this really is all about.

“Now, when my colleagues and I were elected to this parliament, there was no question about it. We were on the side of the people because the people actually pay us to act in their best interests. That’s our job. And once again, I will say to every single elected representative around the world, to every single member in every elected government around the world, if you do not unequivocally stand with the people and serve in their best interests, act in their best interests, you have no place in any parliament or in any government. You belong behind bars. You may even rot in hell for all I care at this point because that’s exactly what you deserve if you sell out the people.”

*Applause ensued*

MEP Anderson continued. “Now, I would like to make a promise to the people, and I’m pretty sure I can speak or speak on behalf of my colleagues. We will continue to stand with you, the people. We will continue to fight for freedom, democracy, and the rule of law. We will not shut up, and we will not stop going after those despicable globalitarian misanthropists.

“But we would also like to have you make a promise to us. You may have heard it’s all coming back. The first country is already starting [to talk about] mask mandates in Israel. They’re already imposing it. I’ve heard of a few universities in the United States. They’re already bringing it all back. And I would really like for you, the people, to not go along. Simply say no! They want you to wear a mask; say no. They want you to put in another mRNA shot; say no. They want to impose a curfew on you; say no. That’s really all you have to do.

“And it might not be or might sound a little hard, but it’s actually not that hard. Because once you have made it clear to them that you will no longer go along, once you’ve let them know, they cannot scare you anymore. Because as long as you are afraid of what they might do if you don’t comply, they have power over you. Take the power away from them! Simply say no. Once you do that, they don’t have power over you anymore. You will feel so free. Simply say no.

“And considering what we’ve heard today, and considering what we’ve seen in the last three years. Considering what we know they want to implement, heck, you might even be well within your right to tell them to screw themselves and go to hell! That’s where they belong. What will you get out of that? I can tell you. Once you’ve done that, once you’ve told them to just go to hell, they no longer have power over you. You will have an incredible feeling — kind of like a sensation of freedom will swap through your body. I promise you will feel so relieved.

“And this is the state of mind that I would ask all of you to get to. Simply don’t let them grind you down anymore. You are worth it. You are deserving of just standing up for yourselves. And tell them all to go to hell. Thank you very much.”

*  *  *

Subscribe to Vigilant News here to receive updates on the latest and most newsworthy stories.

Tyler Durden Fri, 09/22/2023 - 06:30

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Government

Yen Drops After BOJ Does Nothing and Says Little

Overview:  The BOJ’s failure to do anything or
further ideas that an exit of the negative target rate, despite the firm CPI
report helped the dollar…

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Overview:  The BOJ's failure to do anything or further ideas that an exit of the negative target rate, despite the firm CPI report helped the dollar recover the ground lost yesterday against the yen. The focus has returned to "intervention watch" and the market continues to press for the official pain threshold. Sterling is the weakest of the G10 currencies, off another 0.5% today following the BOE's decision not to hike yesterday. The dollar-bloc currencies enjoy a firmer tone. Emerging market currencies are mostly firmer, including the Chinese yuan.

Reports that Beijing is considering reducing some capital controls helped lift Chinese and Hong Kong equities today. Taiwan and Australian equities also advanced, while the other large bourses headed south. Europe's Stoxx 600 is extending yesterday's 1.3% drop, while US index futures are slightly higher. Yesterday's 1.6% drop in the S&P was the largest drop in six months and it was unable to recover from the gap lower opening. That gap (~4375-4401) has technical significance. European bond yields are narrowly mixed, but UK Gilts continue to rally. The US 10-year Treasury yield is slightly softer near 4.48%. Gold has come back firmer after falling more than 0.5% yesterday (its largest loss in around three weeks) and is near the 200-day moving average ($1925). November WTI has steadied and looks to snap a three-day decline. It is back above $90 a barrel and looks poised to settled higher for the fourth consecutive week. 

Asia Pacific

The Bank of Japan did not change its stance, and Governor Ueda gave little hint that a change in rates is possible before the end of the year, as he did earlier this month. Indeed, he suggested those remarks were intended simply to keep the BOJ options open. The dollar, which had fallen to around JPY147.30 yesterday recovered to back toward the recent highs near JPY148.40. Japanese officials underscored they are prepared to counter excessive fx moves. 

Before the BOJ's meeting concluded, Japan reported August CPI figures, which were largely anticipated by the Tokyo CPI previously reported came in a little firmer. The headline rate slipped to 3.2% from 3.3%. The core rates were unchanged. Excluding fresh food, Japan's CPI remained at 3.1% and the measure excluding both fresh food and energy stayed at the cyclical high of 4.3%. Separately, the flash PMI came in softer. The manufacturing PMI eased to 48.6 from 49.6 and the services PMI stands at 53.3, down from 54.3. This saw the composite fall to 51.8 from 52.6. Lastly after buying the most foreign bonds since 2020 in the week ending September 8 (~JPY3.6 trillion or ~$24.5 bln), Japanese investors bought another JPY885.5 bln. Meanwhile, while foreign investors bought JPY438 bln of Japanese bonds, they dumped JPY1.58 trillion of Japanese stocks, most in four years.

Australia's flash PMI showed the service sector grew (50.5 vs. 47.8), while the manufacturing sector slump deepened (48.2 vs. 49.6). Manufacturing new orders were the weakest since May 2020. The composite rose above 50 (to 50.2 from 48.0) for the first time in three months. The central bank meets on October 3 and the market sees practically no chance of a change in rates. 

Yesterday, the dollar traded on both sides of Wednesday's range but the close was within the range, which removed much of the technical significance of the outside day. The broad range may be best explained by short covering of the yen ahead of the BOJ meeting. The dollar is trading back above JPY148.00 as the market continues to test the official resolve. The dollar settled near JPY147.85 last week and has only falling in one week since the end of July. The Australian dollar peaked before the FOMC meeting outcome near $0.6510 and found some bids near $0.6385 yesterday. It settled at $0.6415. It is trading with a firmer bias today and is knocking around $0.6440. To help stabilize the technical tone, the Aussie needs to get back above the $0.6465 area. However, the intraday momentum indicators are stretched in the European morning, suggesting some back and filling in early North American activity. Reports suggesting China is considering lifting some capital controls helped the yuan steady today. The greenback has been in about a 35-pip range on either side of CNY7.30. The dollar's reference rate was set at CNY7.1729. The average in Bloomberg's survey was CNY7.3028 and the gap with the fix was the widest yet. Offshore liquidity is being squeezed.

Europe

Following the flurry of European central bank meetings yesterday, the preliminary September PMI lost some of its luster. Norway, where we thought there was scope for surprise, turned out to be the least surprising. Sweden hiked but was more cagey about another hike, lifting its policy path by 10 bp. Milquetoast. It announced it would liquidate a quarter of its currency reserves, which was unexpected. The Swiss National Bank stood pat, surprising economists. But the swaps market did not think a hike was the most likely scenario, but the franc sold off hard anyway. The market went into the BOE meeting with an almost 50/50 outlook after the soft August CPI. In a 5-4 vote, where Governor Bailey cast the deciding vote, the BOE stood pat. It cut Q3 GDP forecast to 0.1% from 0.4%. However, it increased the pace of the balance sheet unwind to GBP100 bln in the fiscal year beginning next month from GBP80 bln this fiscal year.

The eurozone flash September PMI was mixed. The manufacturing PMI slipped to 43.4 from 43.5 and the services PMI edged up to 48.4 from 47.9. The composite stands at 47.1, up from 46.7. New orders softened to 44.5 from 44.6, which is the lowest since November 2020. Germany's preliminary readings were poor but better than August. The manufacturing PMI is at 39.8 (from 39.1). The services PMI is at 49.8 (47.3). The composite rose to 46.2 from 44.6, the first uptick since April. France moved in the opposite direction. Its PMI fell. The manufacturing tumbled to 43.6 from 46.0. The services PMI is at 43.6, down from 46.0. The composite now stands at 43.5 compared with 46.0 in August, a new low since late 2020. 

The UK reported August retail sales. After falling a revised 1.1% in July (initially -1.2%), UK retail sales rose 0.4% in August, slightly less than the median projection in Bloomberg's survey. The flash PMI was disappointing. While the contraction in manufacturing eased (44.2 from 43.0), the contraction in services deepened (47.2 from 49.5). The composite PMI fell to 46.8 from 48.6, a new three-year low.

After posting an outside down day on Wednesday, the euro extended its decline to almost $1.0615 yesterday, a six-month low, and retested it today. Since the low was recorded, the euro's high has been about $1.0650. The price action, however, is uninspiring and an important low does not seem in place. Sterling was punished for the BOE's failure to deliver a hike, which was roughly 50% discounted. Yesterday's six-month low was near $1.2240 has been taken out today, and a marginal new low closer to $1.2230 has been recorded. Like the euro and yen, sterling recovered into the close of the European session to trade a little above $1.2300. It spent the North American afternoon in about a 10-tick range and settled a couple of hundredths of a cent below $1.23, and today, was sold when it briefly poked above it. Nearby support is seen near $1.22, but the next important target is the $1.2000-$1.2075 area. 

America

US data was mixed yesterday. The Q2 current account deficit was slightly smaller than expected but it was inconsequential. Weekly jobless claims were lower than expected and the four-week average (217k) is the lowest since February. Continuing claims fell to their lowest since January. The September Philadelphia Fed survey was showed a sharp deterioration (to -13.5 from 12.0) and existing home sales fell for the third consecutive month, defying expectations for a small gain, after falling nearly 5.5% in the previous two months. The August index of Leading Economic Indicators continued it uninterrupted decline that goes back to Q1 22. Attention today turns to the preliminary September PMI, where economists expect slightly firmer readings. Still, the market is trying to adjust to the signal by the FOMC sees an economy growing faster than its non-inflationary speed limit, requiring policy to be restrictive for longer. The Fed funds futures strip does not have the first fully discounted in late Q3 24. By comparison, the swaps market has the first ECB cut fully discounted by early Q3. 

Canada reports July retail sales today. Somewhat better numbers than June are expected when retail sales rose 0.1%, driven by autos. With them, retail sales fell by 0.8%. The swaps market has almost an 80% chance of another Bank of Canada rate hike by the end of the year. No cut its priced through Q3 24. Inflation for the first half of September will be reported by Mexico today. The bi-weekly reading may accelerate slightly, but the downtrend in the year-over-year rate should continue. The central bank meets next week, but policy is expected to be steady well into next year. The swaps market seems to be pushing the first cut into Q2 24.

The US dollar popped up to almost CAD1.3525 yesterday. The week and month's low were set on Tuesday near CAD1.3380. The greenback's momentum stalled, and it settled slightly below CAD1.3485. It is trading with a heavier bias but is holding above yesterday's low near CAD1.3450. Support now is seen around CAD1.3440, but the US dollar looks set to trade higher in North America today. After briefly dipping below MXN17.00 before the outcome of the FOMC meeting, the dollar reached MXN17.25 yesterday. That is a little shy of the (38.2%) retracement of the leg down from the nearly four-month high set on September 7 around MXN17.7080. The next retracement (50%) is slightly above MXN17.35. It is consolidating in the European morning mostly MXN17.16. 


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