This is a busy week on many fronts; there are geopolitical risks in Spain (Catalonia) and the US, a plethora of Central Bank meetings and a busy season of corporate earnings along with US data that will keep capital markets on its toes.
The Fed (Wed. Nov. 1), the Bank of Japan (Mon. Oct 30) and Bank of England (Thu. Nov. 2) will announce their respective monetary policy decisions this week. No change is expected from the Fed or BoJ; however, Governor Carney and
Elsewhere, updates on employment in the US and Canada along with initial estimates of Q3 GDP in the eurozone will be announced. There are a number October manufacturing PMI’s to be released from Asia,
Speculation continues around who US President Donald Trump will choose as the next Fed chair, with Governor Jerome Powell said to be the front-runner.
Note: Trump is expected to announce his choice ahead of his Asia trip this Friday
And today in Washington it’s rumored that special counsel Robert Mueller’s probe into Russian meddling in the 2016 US election and possible collusion with Trump’s election campaign could see an ‘arrest.’
1. Pound gains as BoE is expected to raise rates
Sterling (£1.3162) starts the week firmer ahead of a Bank of England (BoE) policy meeting on Thursday (Nov. 2 08:00am EDT), where it is widely expected to raise interest rates by +25 bps to +0.5%. EUR/GBP is down -0.1% to €0.8838.
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Events in Catalonia are trying to put pressure on an otherwise strong EUR (€1.1637), but the single unit has started the week steadily. In response to the Catalan parliament’s declaration of independence last week, Madrid has triggered article 155 – stripping the region from its autonomy- and called for snap regional elections on Dec. 21.
Note: The Spanish government is hoping that the new elections would return an administration that is less “pro-independence.” However, uncertainty remains high given ‘pro’ and ‘anti’ -independence parties are roughly neck-and-neck in the polls.
The ‘mighty’ US dollar is expected to be driven by Wednesday’s Fed meeting, which should not alter market expectations of a December interest rate increase, and by Friday’s non-farm payrolls, which is expected to come in strong (+311k expected headline print).
2. Stocks mixed results
Japan’s Nikkei share average made little headway in choppy trade overnight, with gains in suppliers to Apple offset by selling in financials and caution ahead of Tier I Central Bank meetings this week. The Nikkei ended flat, after hitting a fresh 21-year intraday high, while the broader Topix was also little changed.
Down-under, Australia’s S&P/ASX 200 Index rose +0.3%, while South Korea’s Kospi index gained +0.2%.
In Hong Kong, shares fell overnight, opposing the trend in Asia markets, with sentiment hurt by a slump in mainland stocks that was triggered by liquidity concerns. The Hang Seng index fell -0.4%, while the China Enterprises Index lost -0.7%.
Note: Increasing cross-border flows have made Hong Kong more vulnerable to swings in China markets.
In China, Shanghai stocks posted their biggest one-day slide in nearly three months, hurt by expectations of a new wave of initial public offerings (IPO’s) and a further rise in bond yields, signaling tighter liquidity. The Shanghai Composite Index dropped -0.8%, while the blue-chip CSI300 index fell -0.3%.
Note: Overnight, China’s 10-year yield climbed +6 bps to +3.90%, touching the highest print since 2014.
In Europe, regional indexes are trading mixed with notable outperformance from the Spanish Ibex, which trades over +1% higher while the Swiss SMI and FTSE 100 trade slightly weaker.
In the US, stocks are set to open in the ‘red’ (-0.2%).
Indices: Stoxx600 flat at 393.4, FTSE -0.1% at 7498, DAX +0.1% at 13229, CAC-40 +0.1% at 5495, IBEX-35 +1.4% at 10339, FTSE MIB +0.3% at 22739, SMI -0.3% at 9158, S&P 500 Futures -0.2%
3. Oil prices rise on expected extension of output cuts, gold lower
Oil prices start the week better bid, with Brent crude prices remaining above the psychological +$60 per barrel on expectations that an OPEC-led production cut due to expire next March would be extended, although rising exports from Iraq continues to cap most price gains.
Brent crude futures are trading at +$60.73 per barrel, +29c or +0.48% above Friday’s close and atop of their highest level in two-years.
Note: Brent has rallied more than +36% since June’s 2017 lows.
US West Texas Intermediate (WTI) crude futures are up +16c, or +0.3% at +$54.06 a barrel.
OPEC plus Russia and nine other non-OPEC producers have agreed to hold back about -1.8m bpd to get rid of a supply glut. The pact runs to March 2018, but Saudi Arabia and Russia have both voiced their support to extend the agreement.
Note: OPEC is scheduled to meet officially at its headquarters in Vienna, Austria, on Nov. 30.
Capping price gains is the +900k bpd export capacity increase from Iraq’s southern ports to +4.6m bpd, reported on the weekend.
Gold prices start the week under pressure, as the market remains cautious ahead of Tier I Central banks policy Meetings, while keeping an eye on the appointment of the next US Fed chair. Ahead of the US open, spot gold has dipped -0.3% to +$1,269.23 per ounce.
4. Sovereign yields fall on flight to safety
By extending its QE program last week, the ECB is prolonging the “hunt for yield” theme in bond markets.
Bond yields have fallen to record low levels in the past few years on the back of the ECB’s generous monetary stimulus, greatly reducing the borrowing costs of many eurozone members.
Also providing pressure is uncertainty in Catalonia, which is boosting ‘flight-to-safety’ flows into German Bunds. Yields on the 10-year German Bunds trade at +0.383%, down from +0.48% before last week’s ECB meeting.
Note: The Spanish central government has taken control of the region and there are signs “anti-separatists” maybe gaining momentum.
Elsewhere, the yield on 10-year US Treasuries decreased less than -1 bps to +2.40%, while in the UK 10-year Gilt yield increased +1 bps to +1.348%.
5. UK consumer credit slowed in September
Data this morning showed growth in UK unsecured borrowing slowed in September, but remained above the six-month average, as UK consumers continued to rely on cheap credit to fund their spending amid accelerating inflation.
New consumer credit stood at £1.6B, down from the £1.8B seen in August, but still the streets expectations.
The Bank of England has previously said that speedy growth in consumer credit represents “a pocket of risk” in an otherwise benign borrowing environment.
Note: The UK economy accelerated in Q3, according to a preliminary estimate, and inflation hit a five-year high in September.