Shaken not Stirred

Overview:  The global capital markets have begun the week with a better tone than last week ended.  Equities are higher.  In the Asia Pacific region, Japan, South Korea, and Hong Kong led with more than a 1% advance, and the MSCI Asia Pacific Index snapped a three-day slide.  Stocks in Europe are higher for a second day, and the 1.2% gain in late-morning turnover is the largest in a couple of weeks.  US shares are also trading stronger.   Benchmark 10-year yields are mixed, though with a slight upside bias in Europe, except for the UK, which the yield, like for US Treasuries, is a little lower.  The US 10-year yield is about 0.86%.  The dollar is firmer, though not against the dollar bloc, and the JP Morgan Emerging Market Currency Index is off for a sixth consecutive session, with the Russian rouble and Turkish lira off the most.  Despite reports suggesting progress with fisheries, sterling is the weakest of the majors, though it is recovering after having fallen to almost $1.2850, its lowest level in nearly a month.  Gold is firm but capped around $1890.  Oil prices skidded lower amid the new in Europe and rising supply from Libya.  The December WTI contract fell to about $33.65, the lowest level since late May, stabilizing.  

Asia Pacific

China’s official October PMI was little changed, leaving the general sense of that recovery remains intact.  The manufacturing PMI slipped to 51.4 from 51.5.  A Reuters survey found a median expectation for 51.3.  Output slipped, new orders were unchanged, and export orders ticked up.  The Reuters survey found that economists expected the service PMI to ease 55.2 from 55.9, but instead, it rose to 56.2.  However, the forward-looking components, like new business, slowed, and new export orders fell further below the 50 boom/bust.  Service employment contracted at a slower pace (49.4 vs. 49.1), while redundancies in the manufacturing sector accelerated slightly (49.3 vs. 49.6).  The Caixin manufacturing PMI defied expectations by rising to 53.6 (from 53.0), though the growth export orders slowed.  

A common pattern with the October manufacturing PMI is that most countries saw improvement from the preliminary estimate, where available, or from September.  Japan’s manufacturing PMI rose to 48.7 from the 48.0 flash reading and 47.7 in September.  South Korea’s manufacturing PMI rose to 51.2 from 49.8.  It is the highest since September 2018.  India’s manufacturing PMI rose to 58.9, its highest since 2010.  

The US dollar traded at a five-day high against the yen but was unable to resurface above JPY105.00.  It has been sold in the European morning and may bring the option for $440 mln at JPY104.50 back into view.  The Australian dollar traded a little below $0.7000 for the first time since late July.  It has rebounded in Europe to trade back near sessions highs around $0.7030.  Participants may be reluctant to challenge resistance in the $0.7050-$0.7070 area ahead of the outcome of the RBA meeting first thing tomorrow.  The PBOC set the dollar’s reference rate at CNY6.7050, which was in line with expectations.  The yuan rose to its highest level against its basket (CFETS) used to track it. The dollar traded softer against the yuan for the third consecutive session.  It fell by nearly 1.5% in October, the fifth consecutive monthly loss for the greenback.  

Europe

Aside from Germany, Norway, and Denmark, practically every other European country (yes, including Sweden) had more cases of the virus on a per capita basis than the US on Saturday.  Britain joined Ireland, Austria, Greece, Portugal, Belgium, France, and Germany, with some kind of new lockdown/curfew/social restrictions.  The new national lockdown in the UK represents a reversal for Prime Minister Johnson, who had been criticized for moving too slowly previously.  Starting later this week, people are permitted to lave their residence for a specific reason, like going to work, groceries, etc. The shutdown earlier this year (late March through early July) saw the economy contract by a fifth.  On the same day that the new restrictions will be implemented, the BOE meets.  Many were looking for it to boost its Gilt buying by GBP100 bln to GBP845 bln prior to the new stay at home order.  Meanwhile, Brexit negotiations are to resume this week.  The progress reported on fisheries is largely a function of kicking the can down the road and agreeing to resolve it at a later date.  The next deadline in the EU meeting, November 16, in Berlin  

The contagion, however, overshadows what would have been favorable news from the manufacturing PMI reading.  There was consistent improvement.  In Germany, the flash manufacturing PMI of 58.0 was revised to 58.2 after 56.4 in September.  The French manufacturing PMI rose to 51.3 from 51.0, to reverse the decline from September’s 51.2.  Italy and Spain’s manufacturing PMI rose to 53.8 (from 53.2) and 52.5 (from 50.8), respectively.  The aggregate reading rose to 54.8 from the preliminary estimate of 54.4 and the September report of 53.7.  The UK was an exception.  The final reading was higher than the preliminary estimate (53.7 vs. 53.3) but was still lower sequentially, after September’s 54.1. 

The euro fell in every session last week and extended those losses today to a little below $1.1625.  It has not been above $1.1650 in the European morning.   Key support remains at $1.16, which the euro has not traded below since late July. Speculators in the futures market continue to trim gross long euro position. As of October 27, the bulls were long a little more than 217k contracts, down from 266k in August, which is still larger than anything since mid-2018 save the past few months.  This suggests that the position adjustment may not be complete.  Sterling’s recent losses were extended as it was sold to about $1.2855, the lowest level in nearly a month.   It is better bid in Europe and has pushed above $1.29.  Immediate resistance is seen in the $1.2950-$1.2960 area.   The Bank of England is widely expected to ease policy later this week, with an increase in Gilt purchases seen a the most likely action. 

America

More than 93 mln Americans have voted now compared with almost 130 mln in 2016.  Rules about voting and counting vary widely among the states.  Many observers assume that projections based on results from most of Florida, Georgia, and North Carolina will show the day’s meme and the likely national implications.  Polls in some of the key battleground states appear to have tightened a little in recent days. Before the weekend, the Federal Reserve lowered the threshold for loans under the Main Street lending facility to $100k from $250k.  Like most of the facilities the Fed launched, Main Street has not been used very much (almost 400 loans for around $3.7 bln).  By adjusting the program before the FOMC meeting, the Federal Reserve keeps distinct these operations and monetary policy proper.  No one is expecting fresh moves by the FOMC this week.  Instead, most interesting will be insight into where that line lies and how close it is to extending bonds its buys, as the Bank of Canada announced last week. The Reserve Bank of Australia is expected to announce tomorrow.  

With the US practice of reporting GDP on an annualized basis, it is difficult to make quick international comparisons.  On a quarter-over-quarter basis, the US economy contracting by 9% in Q2 and rebounded by 7.4% in Q3. Economic output in the eurozone fell by 11.8% in Q2 and expanded by 12.7% in Q3.  The net result is that the US economy is about 2.9% smaller than a year ago, while the eurozone is 4.3% smaller. 

Markit offers its final reading on US manufacturing.  Recall that the preliminary estimate was 53.3 after 53.2 in September and 53.1 in August.   ISM’s manufacturing report is also on tap today.  It is expected to have risen to 55.8 from 55.4 in September and 56.0 in August.  The new orders component is expected to recover toward 62.0 after falling from 67.6 in August to 60.2 in September.  With Q3 GDP behind us, the September construction spending report is unlikely to draw much attention.  Markit will report Canada’s manufacturing PMI. It has risen since hitting 33.0 in April, but the monthly gain has gradually slowed.  That said, September’s 56.0 reading was the highest since August 2018.  The IMEF reports Mexico’s manufacturing and non-manufacturing PMIs today, and while both are expected o have risen, neither is expected to have surpassed the 50 boom/bust threshold.  

The US dollar rose to CAD1.3370 in Asia to challenge last week’s high but has come back offering in Europe and is approaching CAD1.33, where an option for roughly $660 mln is struck that expires today. Initial support is seen around CAD1.3270-CAD1.3280.  A break could spur an initial move toward CAD1.3235.  The US dollar is firm against the Mexican peso around MXN21.23 and is trading within the pre-weekend range. The MXN21.16 area may offer support.  

  Disclaimer

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