Today’s podcast

https://soundcloud.com/user-291029717/us-jittters-europe-soft-canada-sweden-hawkish

Overview: Too much monkey business

• European and US equities fall again. S&P500 erases gains for the year
• Soft economic data releases and mixed earnings report the major culprits
• USD threatening a topside range breakout
• Euro sub 1.14 eyeing August 1.1301 low ahead of ECB tonight
• CAD the outperformer following a hawkish BoC hike
• AUD and NZD lower but remained contained within their recent ranges

Too much monkey business for me to be involved in – Chuck Berry

Soft economic data releases and mixed corporate earnings reports have combined to extend the losses in European and US equity markets. Safe haven demand, amid concerns over the global growth outlook and future equity earnings growth have pushed US Treasury yields lower and the big dollar is stronger against most currencies with European currencies the major under performers while CAD is the strongest G10 currency after a hawkish hike from the BoC.

Currencies

Prior to last night, the FX market was mostly a bystander to the equity jitters seen in previous days. But  overnight a combination of soft European PMI prints alongside additional falls in equity indices has triggered a more meaningful reaction in fx rates.

Risk aversion driven by an extension to European and US equity sell offs has boosted the USD across the board. Softer than expected European PMI prints triggered a sharp drop in the Euro and it has provided further fuel to the notion that global growth is slowing against a backdrop of rising inflationary pressures and higher borrowing rates.

Looking at USD indices, the broader Bloomberg Dollar Spot Index has made a decisive move above its previous  year to date high of 1196 in mid-August and now it is toying with a break above 1200, a level not seen since mid-June last year. The narrower DXY index currently trades at 96.40, 33pips below its year to date high of 96.731.

The Euro’s sharp decline from 1.1470 to 1.1398 currently has been one big driver for the USD gains overnight. The softer than expected European PMI prints were the initial trigger for the move lower in the euro, EZ PMIs for October were weaker than expected, continuing their softening of late. Services came in at 53.3 against expectations of 54.5. Manufacturing also soft at 52.1 against expectations of 53.0. A look at the sub-indices painted a fairly bleak picture, pointing to a broadly based decline while also dismissing the notion that the slowdown could be attributed to temporary factors (impact from auto emission regulation one prominent example). The sub-indices revealed a slowdown in rates of growth across all the main measures of business performance: output, new orders and employment, so in addition to Italian budget dramas and Brexit uncertainty, Europe now also needs to absorb the prospect of a slowdown in economic growth. The next level of support for the Euro is the August low around 1.1300 and while no changes to policy guidance is expected from the ECB tonight, our sense is that at his press conference Draghi is likely to strike a caution tone emphasizing the Bank guidance is very much dependent on incoming data.

Looking at other G10 underperformers GBP is down 0.8% to 1.2887, with ongoing negative headlines on Brexit offering no support. PM May has survived another day with her speech before the backbench 1922 committee apparently well received. Meanwhile EU’s Tusk noted that there is “no guarantee hard Irish border can be avoided” and that Brexiteers were 100% responsible for the Irish-border problem. So no new news on the Brexit front.

A hawkish BoC hike has helped the CAD to outperform all G10 currencies overnight with pair briefly trading sub 1.30, before the equity rout drove a broad base bid on the USD. The Bank of Canada hiked its policy rate by 25bps for a fifth time this cycle to 1.75% and offered a hawkish outlook – dropping previously language about a “gradual approach” and indicating that rates will need to “rise to a neutral stance to achieve the inflation target”.  BoC officials Poloz and Wilkins indicated the need for “flexibility” with every meeting “live” and flexibility to hike either more quickly or slowly.

AUD and NZD drifted lower during the overnight session, nevertheless both pairs remained contained within their recent ranges. AUD now trades at 0.7062 and NZD is at 0.6522. For AUD a break below the 0.7040 area could open a move sub  70c and for NZD 0.6500 looks to be the near term resistance to watch. Both currencies remain at the mercy of risk sentiment and the overnight negative lead from equities suggest the Asia open will be a big test for both antipodean currencies.

Equities

The S&P500 is down just over 3% and the big headline is that it has now erased all the gains yea to date. Disappointing earnings from AT&T and Texas Instruments drove declines in the communications and semiconductor groups, while a better than expected earnings report from Boeing was only a minor offsetting force. Earlier in the session the Stoxx Europe 600 index closed down 0.2%, its sixth consecutive daily decline.

Bonds

US Treasury yields have drifted lower, in line with weaker US equities.  The 10-year rate is down 4.8bps to 3.109% and the 2y10y curve is a couple of bps flatter at 26.8bps. Core European yields also declined a few bps while the Italian 10y sovereign rate climbed 1.4bps to 3.599%.

Commodities

It has been a mixed night for commodities with Brent, Gold and the LMEX index down around half a percent while iron ore, steam coal and WTI oil are up between 0.20 and 0.40%.

Economics

Riksbank held rates with a continued steer towards a December or February rate hike.

EZ PMIs for October were weaker than expected, continuing their softening of late. Services came in at 53.3 against expectations of 54.5. Manufacturing also soft at 52.1 against expectations of 53.0

US new home sales fell 5.5% to 553K from a downwardly-revised 585K in August, well below the consensus, 625K.  There was also a negative net revision to the previous 3 months of -55k, so whichever way you one slices it, it is not a good report. No doubt Hurricane Michael played a part, but downtrend since the start of the year reflects other factors at play, including higher borrowing rates (mortgages rates are now at a 7 year high)

Coming up

• New Zealand gets trade and residential lending data, the IFO and GFK Consumer Confident Surveys are out in Germany and the US gets durable goods orders, inventories and jobless Claims.
• The ECB meets tonight and although no change in policy guidance is widely expected, a degree of cautiousness seems likely given US/China trade tensions, recent equity sell-off plus Brexit/Italian uncertainties.
• We think the ECB confidence in Core Inflation picking up has increased amid stronger wage indicators and we may get some guidance on the Bank’s reinvestment policy, although we suspect this is more likely to be a focus at the following meeting in December.
• Our BNZ colleagues expect New Zealand’s merchandise trade report for September to reveal further evidence of a growing trade deficit (~$1.4bn mark in line with consensus) – not because exports are weak, but because imports continue to outpace exports.

Market prices

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