October 31, 2018

Daily Observations:

Asian stock markets were largely higher on the last day of a bruising month after a topsy-turvy U.S. session that eventually saw equities rally. Treasury yields pushed higher and the dollar edged up. Earlier, the S&P 500 Index twice erased gains that topped 1% before finally securing a rebound in the last hour of trading. China PMI and Australian CPI came in weaker than expected, while the BOJ kept its monetary policy unchanged.

US Stocks Rebound:

US stocks ended a tumultuous day sharply higher, with all major averages rising at least 1.4% as volatility continues to grip equity markets during earnings season. The S&P 500 Index twice erased gains that topped 1% before finally securing a rebound in the final hour of trading. All 11 main groups rose, with consumer and commodity shares pacing gains. The S&P 500 Index flirted with a correction earlier Tuesday and is still down more than 8% in October, on track for its worst month of the bull market, although the gauge has found some support just above the 2,600 handle. Facebook edged higher in after-hours trading following its earnings report.

BOJ Keeps Policy Unchanged:

The Bank of Japan concluded its 2-day October monetary policy review meeting earlier and left the monetary policy settings unadjusted, as expected, holding rates unchanged as it updated price forecasts that confirm it won’t meet inflation targets for years to come. The central bank forecast in its quarterly outlook report that inflation will remain below its 2% target through until at least early 2021.

This will see it fall even further behind its global peers in shifting away from crisis-era monetary policies, as the Fed raises interest rates and the ECB halts its bond-purchase program. While continuing with ultra-low borrowing costs and a massive asset-purchase program contributes to rising debt and financial risks in Japan, it is also capping gains in the yen, which helps exporters and the stock market.

China PMI Disappoints:

An official gauge of activity in China’s manufacturing sector worsened in October as the effects of an ongoing trade war with the US hit home.The manufacturing PMI fell to 50.2 this month from 50.8 in September, missing the median prediction of 50.6 in a Bloomberg survey of forecasters. A gauge of new orders for export fell further into contraction territory, to 46.9, the lowest reading since early 2016.

The non-manufacturing PMI, which reflects activity in the construction and services sectors, also worsened to 53.9 from September’s 54.9 reading. The service-sector component dropped 1.3 points to 52.1, the lowest level since mid-2016, while the construction component rose to 63.9, matching the December 2017 record high.

The government this month introduced a raft of measures to stabilize sentiment, adding to steps to boost liquidity in the financial system, tax deductions for households and targeted measures aimed at helping exporters. Those measures have yet to have much effect, and in particular the export orders gauge signals that the economy will see more downward pressure in the months to come.

Top officials including President Xi Jinping also sought to bolster investor confidence, commenting on the fundamental strength of the economy and attempting to talk up the stock market, which has fallen 9% this month. Those attempts have yet to prove successful, according to a set of early indicators compiled by Bloomberg Economics, which had suggested that sentiment among executives and investors continued to deteriorate in October.

Australian Inflation Weaker Than Expected:

Australia’s annual core inflation was weaker than forecast in the three months through September, suggesting the central bank’s prolonged interest-rate pause has further to run.

Quarterly trimmed-mean inflation, the key core measure, rose 0.4% from last quarter and in line with expectations, while headline inflation gained 0.4% over the same period and lagging behind the predicted gain of 0.5%.

Australia is in a fourth year of subdued inflation, with headline prices only boosted by a spike in oil – Brent crude averaged 45% higher in the three months through September than the same period a year earlier. Governor Philip Lowe expects consumer prices will only gradually return to the midpoint of the Reserve Bank of Australia’s 2-3% target as the economy grapples with weak wages that have been the bane of much of the developed world.

Lowe is relying on an acceleration in wage growth as the impact of key recent inflation drivers, tobacco and electricity, begins to wane. Policy makers are banking on a record-low cash rate of 1.5% to help boost hiring and tighten the jobs market; traders see little chance of a hike in the next year.

Brexit Worry Leads to Lowest UK Business Optimism in 1 Year:

UK businesses are getting increasingly nervous about Prime Minister Theresa May’s ability to pull off a Brexit deal. Optimism in Britain’s economy slumped in October to the lowest level this year, with confidence falling in almost all parts of the country, Lloyds Bank said in a survey published on Wednesday. The concern is spread across firms of sizes, with both bigger and smaller companies more worried about UK’s impending exit from the European Union, according to the survey.

Brexit negotiations remain deadlocked as differences within May’s own party prevent any compromise at home. There’s still no clear road-map on future trading conditions with the bloc, while a no-deal divorce could result in chaos after March 29, the formal date of exit.

FX Updates:

USD/SGD:

Spot: 1.3857

USDSGD is set for its biggest monthly decline since June this year, amid a surging greenback and broad risk-off market sentiment. The pair traded closer to its key resistance of 1.3873 Wednesday, adding as much as 0.1% to 1.3861. A break higher is likely to lead to further weakness of the Singapore dollar against the US dollar, with a possible year-end target of 1.4000.

AUD/USD

Spot: 0.7084

AUDUSD fell back below 0.7100 earlier today on the back of slower-than-expected Q3 inflation. The currency pair’s downward trend since the start of the year continues to hold, and looks on track to reach its 9-year low at 0.6828 by year-end.

USD/CAD:

Spot: 1.3121

USDCAD remained little change earlier today, with the pair maintaining comfortably above its 1.3100 handle. The Canadian dollar strengthened slightly following BOC Governor Poloz’s testimony last night, in which  he reiterated key themes from last week’s interest rate hike decision, including the need to return borrowing costs back to neutral levels.

A point of inflection seems to be coming up for USDCAD. A break above 1.3326 would confirm the breakout the upside of the 33-month old wedge triangle pattern.

USD/CNH:

Spot: 6.9754

USDCNH rose briefly to a fresh 21-month high earlier today, as the pair continues to edge close to the keenly-watched 7.000 level. The PBOC announced today that it will sell bills worth 20 billion yuan in Hong Kong next week, a move which could tighten the yuan’s liquidity in the offshore market.

USD/JPY:

Spot: 113.21

Following the BOJ’s decision to keep rates and other policy tools unchanged earlier, USDJPY’s immediate reaction was largely muted, as the pair maintained most of its gains from its overnight session. The pair looks to have regained upside momentum after climbing above 113 for the first time in 3 weeks; the key resistance remains at 114.55, a level that has held 3 times since July last year.

GBP/USD:

Spot: 1.2707

The pound remains the weakest currency across the board, as GBPUSD fell by as much as 0.4% last night to 1.2696, its lowest since mid-August. Broad US dollar strength, political woes in the EU, and the absence of progress in Brexit negotiations all combined to weigh on the pound.

From a technical point of view, the pair is oversold in the short-term; a rebound off the 2018-low at 1.2662 is expected. However continued Brexit woes is likely to push the pair back to sub-1.2500 levels by year’s end.

Sources: Bloomberg