Although Wednesday’s equity bloodbath rolled over into Thursday, financial markets calmed somewhat overnight, with Asian stock indices closing in positive territory and US equity futures rebounding by more than 1.0%. Among the G10 currencies, the biggest winner was SEK, which surged after Sweden’s inflation data surprised to the upside.
The dollar traded lower or unchanged against most of the other G10 currencies on Thursday. The main gainers were SEK, AUD and NZD in that order, while the only currencies that stayed on the back foot against their US counterpart were the safe havens JPY and CHF. The greenback traded virtually unchanged against GBP and NOK.
The strengthening of AUD and NZD combined with the weakening of JPY and CHF suggest some calmness in the market. That said, the relative calmness came only overnight. Following Wednesday’s equity bloodbath, the risk averse sentiment rolled over into Thursday, with all major EU and US indices ending their sessions in the red. During the Asian morning Friday, most Asian indices closed in positive territory, while US equity futures rebounded more than 1.0%, perhaps helped by media reports that the US Treasury Department will not label China as a currency manipulator in its semi-annual report, which is expected to be released on Monday, as well as by headlines that US and Chinese Presidents Trump and Jinping will meet in November.
As we noted yesterday, market chatter suggests that the main catalyst behind the turbulence may have been the latest rally in US Treasury yields, due to concerns of too aggressive hikes by the Fed. Even US President Trump accused the Fed for the stock market rout. Higher borrowing costs could erode the profitability of companies and thus, investors jumped out of stocks and since Tuesday, it seems that they look for shelter in the more alluring bond market. Indeed, 10-year yields declined another 0.88% yesterday, suggesting that more participants have now decided to park their money in bonds.
Even the weaker-than-expected US inflation data was not enough to change market expectations with regards to the Fed’s future plans. The headline CPI slowed to +2.3% yoy in September from +2.7%, missing expectations of a slowdown to +2.4%, while the core rate remained unchanged at +2.2% yoy, instead of rising at +2.3% as the forecast suggested. According to the Fed funds futures, the market still assigns an 80% chance for the Fed to deliver its 4th hike for this year in December, while it fully prices in two more for 2019. Based on the Fed’s latest “dot plot”, the Committee expects rates to rise three more times next year, while Chair Powell made it clear that they plan to keep their future decisions data driven, instead of trying to figure out where precisely the neutral level of interest rates is.
In our view, this suggests that there is room for the market to bring its forecasts closer to the Fed’s if future data come in on the strong side, something that could support the dollar and the yields, but keep equity investors on guard.
Now moving to the metals' sphere, gold surged 2.23% yesterday, with many suggesting that the precious metal regained its safe-haven appeal. The rally brought the price above the key resistance zone of 1213, which suggests a positive reversal from a technical stand point. However, we have to note that we remain somewhat skeptical with regards to gold’s future performance. The metal has not been acting as a safe haven for months now, while in an environment of rising interest rates, a commodity offering no yield appears less attractive. What’s more, a strong dollar makes gold even more expensive to holders of other currencies and this hurts demand. In order to trust further recovery in gold, we would like to see it accompanied by a decent correction in the dollar, as well as in treasury yields.
Yesterday it was another red day on the S&P 500, as the selling continued. Certainly, the selling was not as strong as on Wednesday, but nevertheless, the US stock market closed in the negative zone. Looking on the daily chart, the S&P 500 cash index dropped to the 2709 zone, but was quickly lifted back up by the bulls. This tells us that there is still some fight left on the buyer-side, which could potentially lead towards a small correction higher, before the bears could take control of the index again.
As mentioned above, we could see the S&P 500 cash index correcting a bit higher and potentially testing the 2795 area, marked by yesterday’s high, or slightly above that, the psychological 2800 zone. This is where it could become more interesting for the bears, as we could see them stepping in again to try and pull the index back down. Again, this is where we will start looking at the 2740 level that was already tested yesterday, but still plays a key role, as it was the inside swing high of the 3rd of July. Further decline could set the stage for another test of the 2709 hurdle, which was the yesterday’s low, a break of which could lead to a drop towards the 2676 barrier, marked by the low of the 29th of May.
For us to get comfortable with the upside in the longer-term, we would have to wait until the S&P 500 lifts itself back inside the rising channel formation that was running from the end of March, the lower bound of which got broken on Wednesday. But for a better confirmation, we would like to see a close above the 2877 level, marked by the low of the 17th of September. Slightly above lies another potential area of resistance, the psychological 2900 mark, which was the inside swing low of the 27th of September. If the buying does not stop there, the further move up could lead to a test of the all-time high at the 2941 barrier.
The Swedish Krona was the main gainer among the G10 currencies yesterday, surging after Swedish inflation data showed that both the CPI and CPIF rates accelerated by more than anticipated in September. What’s more important though in our view, is that the core CPIF metric, which excludes the volatile items of energy, accelerated to +1.6% yoy, its highest pace this year.
At its latest policy meeting, the Riksbank kept interest rates on hold and noted that rates will be held unchanged at the October gathering, and then raised either in December or February. Therefore, the better than expected inflation prints, and especially the strong rebound in the core CPIF rate, make a December hike even more likely and may have raised some bets that at its upcoming gathering, scheduled for the for the 23rd of October, the world’s oldest central bank may dismiss the February option and make it clear that rates are likely to be raised in December.
Yesterday’s good inflation numbers from Sweden helped the Swedish krona to strengthen against the common currency, hence we saw a sharp slide in the EUR/SEK. Those bears that missed the drop yesterday could try and join in today, where we could see the pair continuing to sail south, at least for a while.
Initially, a move below the 10.393 zone could lead EUR/SEK towards a test of the 10.373 level, marked by yesterday’s low, a break of which could put the bulls on hold. Because the Swedish krona is feeling strong right now, we could see the pair breaking yesterday’s low and heading lower to the 10.338 hurdle, which was the intraday swing low of the 1st of October. If the bears remain in the driver’s seat, that hurdle could be just a temporary stop for the bears to refuel, in order to drive EUR/SEK towards the medium-term flat-looking upside support line taken from the low of the 5th of July. The rate could stall there for a while, until the bulls and the bears figure out who takes control from there.
The RSI and the MACD are currently in support of the downside scenario, at least for now. The RSI is below 50 and is pointing towards the 20 zone. The MACD has now shifted into the negative area, is below the trigger line and also points to the downside.
Alternative, for us to start looking north, we would like to see EUR/SEK breaking the 10.432 barrier, which could open the path to the 10.481 obstacle that acted as good resistance on the 9th of October. If the buyers remain strong, this could lead the pair higher to meet this week’s highest point near the 10.536 level. This is where the bulls were not able to continue pushing higher and were forced to capitulate in favour of the bears.
During the European day, we get Germany’s final CPI for September and it is anticipated to confirm its preliminary estimate of +2.3% yoy. Eurozone’s industrial production is forecast to have risen 0.4% mom in August, after sliding 0.8% in July. However, this is likely to drive the yoy rate down to -0.3% from -0.1%.
In the US, we have the preliminary UoM consumer sentiment index for October, which is expected to increase to 100.5 from 100.1. The 1-year and 5-year preliminary UoM inflation expectations are also due to be released.
As for the speakers, we have two on today’s agenda: Chicago Fed President Charles Evans and Atlanta Fed President Raphael Bostic.
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