Markets Today: Playing it cool

There was no scary ending to the month of October with markets in general playing it cool ahead of a busy week of data releases, central bank meetings and what is turning out to be a fairly dramatic US presidential election.

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David Bowie’s Scary Monsters (And Super Creeps) would have been a perfect title for a Halloween night with Metallica’s Creeping Death a pretty morbid alternative too! In the end there was no scary ending to the month of October with markets in general playing it cool ahead of a busy week of data releases, central bank meetings and what is turning out to be a  fairly dramatic US presidential election.

The only scary move from the overnight session was the sharp drop in oil prices with WTI down 3.9% and Brent-4.1%. There is a growing sense of scepticism that OPEC will be able to achieve a pullback in production with talks over the weekend failing to provide a concrete agreement to cut production.

Friday’s risk off mood from the Clinton’s email saga failed to gained momentum overnight with equity markets seemingly airing on the side of caution as we wait for more news. European equities fell at the open, reflecting Friday’s drop in US equities, but proceeded to trade sideways with energy stock underperforming as oil prices took a dive. Meanwhile US equities have swang in and out of positive territory and look set to end the day practically unchanged.

The cautious mood was also evident in currencies with all G10 pairs barring GBP recording modest moves against the USD. News that BoE Governor Carney will extend his time in office, following conflicting reports over the past couple of days lifted Cable back above the 1.22 mark. In a letter to Chancellor of the Exchequer, Carney said that he will extend his time in office by a year to 2019 to guide the economy through Britain’s split from the European Union. After briefly trading down to 0.7583, the AUD is currently trading at 0.7611 and is the second best performingG10 currency, up 0.13% over the past 24 hr. NZD is little bit softer, down 0.17%  and after fleetingly trading with a 105 handle, USD/JPY is little change at ¥104.80.

As for data releases, both European advance CPI and GDP printed in line with expectations (core CPI 0.8% yoy and GBP 1.6% yoy) while US data releases were mixed. Chicago PMI disappointed dropping to 50.6 from 54.2, personal income rose 0.3% in September in line with expectations while spending rose top 0.5%, a tenth above consensus. Finally, the core deflator was in line with forecats, rising 0.1% and leaving the yoy rate unchanged at 1.7%.

Coming Up

We have an action packed day today with China’s official October manufacturing and non-manufacturing PMIs out at midday followed by the Caixin manufacturing PMI forty five minutes later. The BoJ policy announcement could come any time after midday and then at 2:30 pm we have the RBA Board Meeting where most including ourselves expect the Bank to stand pat. Tonight, Europe has a quiet day and the US gets the October ISM manufacturing survey.

China’s official manufacturing PMI is expected to drift towards 50.3 from 50.4. If so, it would suggest activity remains steady and marginally in expansionary mode. That said, early in the month, the MNI China PMI survey posted a big drop in October pointing to downside risks to today’s number. As for China’s non-manufacturing survey, it would not be surprising to see another print above 53 given the survey has been printing above the 53 mark for seven months in a row,

Although the RBA is widely expected to remain on hold this afternoon with the market pricing a 5% probability of a rate cut and most economists including NAB’s tipping a no change, the post meeting statement will be closely scrutinised for any signs of an easing bias, particularly given the low core inflation print in Q3 and the disappointing September labour force report which showed a trend slowdown in the rate of employment growth. So the risk is the RBA steps up its dovish rhetoric, the market is pricing just 12bps of rate cuts over the coming year and a month ago pricing was at 22bps, suggesting there is scope for repricing. Similarly the AUD could come under some pressure, however a break below the 0.745-0.775 range held since July this year looks unlikely to be tested.

As for the BoJ a no change to the bank’s policy setting is unanimously expected, however the market will be looking to see if the inflation target gets pushed further out in time.

Moving on to the US, consensus forecast suggest the ISM manufacturing should print at 51.7 just marginally above the 51.5 seen in September. The message from regional surveys has been rather mixed, but the marked rebound in the new orders component (55.1 from 49.1) in last month’s survey suggests there is potential for an upside surprise.

Overnight

On global stock markets, the S&P 500 was -0.10%. Bond markets saw US 10-years -0.18bp to 1.83%. In commodities, Brent crude oil -4.36% to $48.47, gold+0.1% to $1,279, iron ore +0.7% to $64.38. AUD is at 0.761 and the range since yesterday 5pm Sydney time is 0.7599 to 0.7614.

Good luck.

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