China Data Surprise has Markets Keeping Its Powder Dry

Tuesday November 1: Five things the markets are talking about

There are probably three potential events that could overturn this market’s expectations of a December Fed hike (fed funds are pricing in a +75% chance) – a Trump presidency, a disappointing NFP and/or a volatile equity market.

Now that the FBI is reopening its inquiry into Clinton’s use of a private e-mail server has the odds narrowing for a Trump victory – they are still long, but so was Brexit – his victory would certainly bring about heightened market volatility. And with that, don’t be surprised to see fixed income dealers cutting their odds for a hike next month very quickly.

This year the Fed has constantly being looking for reasons not to hike, and the two remaining obvious ones would be a problem with U.S jobs data and stock market volatility.

If either this Friday’s non-farm payroll (NFP) report, or next months, comes in significantly below expectations (exp. +176k and +4.9% unemployment), again a Fed hike would be priced out very quickly.

If Trump reigns supreme on Nov. 8 and and/or jobs disappoint, global stock markets would quickly bear the brunt – a scenario that would have the Fed proceeding with caution for awhile yet!

1. Central Banks do what’s expected, China surprises

The Bank of Japan (BoJ) kept its policies mostly unchanged overnight. Governor Kuroda stated that the deposit rate remains steady at -0.1% and that officials would continue to target a zero yield for 10-year JGB’s. The BoJ confirmed its assessment for the overall economy, exports, housing, and business investment, but noted its inflation expectations remained in weakening phase as it shifted its forecast for achieving its +2% inflation target by another half a year to H2 of FY18.

The Reserve Bank of Australia (RBA) kept its cash rate target unchanged at +1.5% in a widely expected decision, stating that the current rate was “consistent with its growth and inflation targets.”

AUD/USD has rallied to A$0.7665 and Australia 3-year bond yields have backed up +3bps on a ‘neutral’ RBA policy statement. While the RBA largely reiterated prior month’s policy statement in their second decision for Governor Lowe, it did add more bullish passages in terms of China growth as well as on inflation outlook.

The RBA upgraded its China view to “steadied recently” from “moderating”, and also added “inflation is expected to pick up gradually over next two-years”.

Other data overnight showed that China’s official manufacturing PMI rising to 51.2 (highest level in two-years) last month from 50.4 in September, proof that the world’s second-largest economy is perhaps stabilizing.

2. Global stocks boosted by China data

Not a surprise to see Asian and European markets trading higher after the release of stronger data from China and decisions by the BoJ and RBA holding policies steady.

In Asia, HK’s Hang Seng Index was up +1.2% and the Shanghai Composite +0.6% higher. The Hang Seng China Enterprises Index (tracking large mainland Chinese companies) was trading up +2.0% – all indexes boosted by better Chinese manufacturing activity. Elsewhere, Japan’s Nikkei Stock Average inched up +0.1%.

In early Euro trading, equities are on the front foot now that the market is more confident that China’s economy may stabilize in Q4. The Stoxx Europe 600 Index has rallied +0.4%, currently snapping its six-day losing streak. The FTSE 100 is currently seeing some early pressure from financial stocks and energy names.

Futures on the S&P 500 Index have added +0.3% ahead of the release of U.S manufacturing data for October.

Indices: Stoxx50 -0.3% at 3,052, FTSE -0.2% at 6,940, DAX -0.2% at 10,649, CAC-40 -0.4% at 4,491, IBEX-35 -0.1% at 9,139, FTSE MIB flat at 17,122, SMI -0.1% at 7,822, S&P 500 Futures +0.3%

3. Crude rallies from its one-month lows

Crude prices have edge higher ahead of the U.S open after OPEC agreed late yesterday on a long-term strategy on managing production that would mean, “returning to its role managing the market and being more proactive in anticipating market changes.”

However, overnight gains are somewhat limited, weighed down by further indications of record glut problems.

Brent Jan. futures (new front-month contract) is up +29c at +$48.90 a barrel. Yesterday, the previous front-month contract fell nearly -3% before expiring.

West Texas Intermediate futures are up +10c at +$46.96 a barrel. Yesterday, they plunged nearly -4% to settle at +$46.86 a barrel.

A percentage of the market is expecting any price advances to meet resistance as the lack of progress on implementing production quotas and the growing discord between OPEC and non-OPEC producers may suggest a declining probability of reaching a deal at the end of the month.

Base metal prices are also on the rise overnight, supported by stronger Chinese economic data, which is supporting shares of resource companies. Copper and nickel advanced for a seventh day, while gas jumped by the most in almost eight-years.

Gold prices have inched higher (+0.13% to $1,278.99) as the ‘mighty’ dollar comes under some pressure as investors wait for cues from both the BoE and Fed and on U.S. economic data.

4. Carney boost to pound seen limited

Coming as a relief and benefiting the pound overnight (£1.2249) was yesterday’s afternoon’s announcement that Bank of England (BoE) Governor Carney would remain at the helm until June 2019. There had been strong speculation over the weekend that Carney would step down early on the back of too much political interference.

Current market sentiment believes that sterling’s gains may be short lived given that the BoE has already eased monetary policy to temper the impact of the Brexit vote. The Bank’ delivers its monetary policy decision on Thursday where no move is expected.

Ahead of the open stateside, sterling is little changed despite this morning’s U.K manufacturing PMI coming in above consensus at 54.3 in October, down from 55.5 in Sep.

5. Forex tame ahead of the open

The majority believes that ahead of next week’s U.S presidential election, this week’s Fed meeting is unlikely to cause any big forex moves.

The “big” dollar is trading relatively steady across the board as futures traders price in a +75% probability that the Fed will hike in December. With U.S 2/10’s spreads widening out to +100bps is expected to continue to support the dollar on rate differentials (€1.0997, £1.2249, ¥105, C$1.34, A$0.7670).

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