Month-End Leaves Market at Crossroads

Global equity markets are closing another
strong month
The MSCI Asia Pacific Index was little changed on
the day, but up 4.3% in October, the 10th consecutive monthly
advance.   Europe’s Dow Jones Stoxx 600 is also flattish today, but
up 1.6% on the month.  It is the second
monthly advance after a June-August swoon.  The benchmark is closing in on
the high for the year set in May.    The S&P 500 made new
record highs at the end of last week.  Coming into today’s session, the
S&P 500 is up 2.1% on the month, and since last October, has only posted a
single losing month (March  -0.04%).  

While global equity markets rally, seemingly no matter what, the bonds
and currencies know more than one direction. 
The US 10-year yield
recorded the low for the year just above 2.0% in early September.  It has
since risen to around 2.47% and has backed off in recent sessions.  A few
attempts in Q2-Q3 to push above this area have failed.  We suggested that
a move below around 2.35% would spur ideas that this recent attempt has also
failed.  This area was approached
earlier today, and it held.  

Interest rate differentials have moved against the US dollar in Q2-Q3 but
have moved more forcefully in the dollar’s direction recently. 
dollar is likely to close higher against all the major currencies this
month.  However, here the too market
is testing key levels.  For example, the $1.1600-$1.1660 band in the euro
is important, and while the euro had edged into the high $1.1500s, but the
break has not yet been convincing.  A convincing break would suggest
losses toward $1.1250.  On the other hand,
if it holds, another the euro can recover back to $1.18, if not

The dollar has been turned back from the JPY114 area in May and July, and
again probed this area last week.
The poor price action ahead of the
weekend warned of the risk of a setback, we thought, toward JPY113.00.  This was tested
earlier today and it, reinforced by the 20-day moving average (~JPY112.90),

Sterling rallied in strongly in the first half of September on the back
of the latest hint that the BOE would likely raise rates. 
Brexit and political issues seemed to weigh it into the first part of October,
and this month has chopped around a two-cent range. A dovish hike by the BOE,
or no hike, for that matter, could send sterling back toward $1.30 for a more
significant challenge.  On the other hand, a broader dollar pullback and a
hawkish comments or forecasts could see
sterling challenge $1.3350-$1.3400. 

The US dollar has trended higher against the Canadian dollar, and with
last week’s gains, retraced 50% of this year’s slide.
  To keep the upward momentum intact, the
greenback must convincingly surmount the CAD!.2930 area.  On the other
hand, the support is seen in the
CAD1.2725-CAD1.2750 area.   

Today’s news stream and month-end adjustments will likely prevent a
decisive move today.
  In terms of
economic developments, there have been a few highlights.  First, China’s
PMI.  It will not surprise many that some less favorable news on the
economy may have been held back ahead of
the recent 19th Party Congress.  In any event, the October PMIs softened.  The manufacturing PMI
slipped to 51.6 from 52.4, which is a bit larger of a drop than expected. 
The non-manufacturing PMI eased to 54.3 from 55.4.  Forward-looking new orders and prices moved
lower.  President Xi did not repeat the goal of doubling China’s GDP in
the 2010-2020 period, and many observers
recognize that this could allow the country to report slower growth, which
would be consistent with the shift toward quality issues.

Second, the BOJ did not change policy.  It did, though,
recognize the inevitable and brought this year’s inflation forecast to 0.8%
from 1.1%.  Next years was shaved to 1.4% from 1.5%.  The GDP
forecast was tweaked to 1.9% from 1.8% this year and left unchanged at 1.4%
next year.  Of note, the new board member, Kataoka dissented again,
arguing for new measures to achieve the 2% inflation target.  He argued to
cap the 15-year yield below 20 bp.     It is currently near 30
bp.  Also of interest, Governor Kuroda did not waver on the ETF purchases
(JPY6 trillion target).  The Nikkei 400, which the ETF tracks is up 5.7%
this month, and the BOJ is believed to have pulled away from its

Third, the eurozone reported better
growth, but less inflation, than expected.
The first look at Q3 GDP showed a 0.6% increase, and Q2 was revised to 0.7% from 0.6%.  Growth is not the immediate challenge in the
eurozone.  Unemployment also continues to
fall.  At 8.9% in September, it is a new
cyclical low.  That the August figure was revised to 9.0% from 9.1% underscores the
trend improvement. 

On the other hand, price pressures
  The headline pace slipped to
1.4%, but the real challenge to the ECB comes from the core rate, even though
it does not directly target it.  The core
rate slipped to 0.9% from 1.1%.  This indicates that it is not just energy
prices, which Draghi had warned would likely drag inflation lower in the
near-term.  The key issue is what the ECB
will do next September, as its course until then has been largely mapped out,
with all the due caveats of its flexibility.

Fourth, the Catalan secessionist move has been
  The leader, Puigdemont, reportedly is in Brussels
seeking asylum.  Madrid invoked Article 155, but importantly, it
simultaneously called for quick elections (before Christmas).  Madrid was
taking away its autonomy and then giving it back quicker than anyone
anticipated.  Spanish stocks and bonds are outperforming a bit today, but
note that the peak in the crisis was actually
several weeks ago.  

The New Zealand’s dollar appears to be trying to bottom, from a technical
point of view, but the political/policy
headwinds are a deterrence
.  Comments from the Finance Minister give
the bears little reason to fear official concern despite 10% slide in the Kiwi
over the past three months.  The moves to deter foreign speculation
(investment?) in New Zealand real estate is seen cutting into an important
source of demand for the currency.  That said, we continue to suspect that
just as the market overreacted to Trudeau’s victory in Canada and his effort to
buck the new fiscal orthodox and stimulate, the market may be exaggerating the
negatives of the new government, like
giving the central bank a dual mandate.

There are some large options that expire
in NY today.
  There is a 1.1 bln euro options truck at $1.16, and a
$614 mln option struck at JPY113.00.  There is a GBP350 mln option struck
at $1.3200 that will be cut today.

In the US despite, the two
indictments and a surprised guilty plea
from a third person in the investigation into Russia’s attempt to influence the
US election, the market impact was limited. 
It is a bit like a game
of bridge where players are signaling each other, in this investigation, with
the type of charges and the like, which creates
subtext and bit of Kabuki theater.  The takeaway seems to be that the
investigation is still in the early stages and it will probably linger through
at least most of next year.   

Meanwhile, investors are more
interested in the tax reform, and here the situation, even at this late date is
very fluid. 
Although the speculation has been around for a couple of
weeks, the possibility of gradually phasing in the corporate tax cuts (three
percentage points a year from 2018 through 2022), was disappointing to those
who wanted a big move, while it seemed to be a compromise on cost.  News
that Treasury Secretary Mnuchin had given up, for the time being, on extra-long dated bond spurred a quick though
small reaction in the curve at the very
long end.  


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