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I. Market focus:
The beginning of the Tuesday session was marked by a moderate strengthening of the U.S. dollar in the foreign exchange market, which, however, was rather limited due to the absence of factors capable of supporting the U.S. currency at the beginning of the European session.
Overall, the news background was fairly neutral at the beginning of the European session. Better-than-expected New Zealand’s inflation data and the minutes of the last RBA meeting, which were released overnight, as well as the North Korean diplomat's warning that a nuclear war may break out at any time, did not have a significant impact on market dynamics.
The situation around Catalonia remains uncertain. The regional leader Carles Puigdemont did not reply clearly to Madrid’s question about whether he has declared independence from Spain but repeated his calls for negotiations. The Spanish government, in turn, extended the ultimatum deadline until Thursday for the Catalonia’s leader to clarify his position, noting that otherwise, it could trigger Article 155 of the Spanish constitution, under which it can suspend the political autonomy of a region if it breaks the law.
Market participants are expecting the UK’s inflation data, set to be released at 08:30 GMT. Other important data today will be the European ZEW indices (09:00 GMT) and the U.S. industrial production statistics (13:15 GMT). In addition, attention will be paid to the comments of the Bank of England (BoE) governor Mark Carney (10:15 GMT) and Philadelphia Federal Reserve Bank President Patrick Harker (17:00 GMT).
II. The market highlights are:
Statistics Canada reported Monday that foreign investment in Canadian stocks slowed in August as foreign investors bought CAD 9.85 billion worth of Canadian securities in the period, compared to a revised CAD23.97 billion in July. According to the report, foreigners purchased CAD8.15 billion of Canadian bonds, by adding CAD6.05 billion worth of government bonds and CAD2.10 billion worth of corporate bonds to their holdings. Non-resident investors also resumed their acquisitions of Canadian money market instruments by adding CAD1.46 billion to their holdings in August, following two straight months of divestment. Meanwhile, foreign investment in Canadian equities totaled only CAD0.23 billion in August. From January to August of 2017, foreign investment in Canadian securities amounted to CAD133.84 billion, compared with CAD120.39 billion for the same period in 2016. At the same time, Canadians’ net investments in foreign securities reached CAD12.04 bln in August and CAD49.91 in the eight-month period. As a result, international transactions in securities generated a net outflow of funds of CAD2.20 billion from the Canadian economy in August and a net inflow of funds of CAD83.93 in January-through-August period.
The report from the New York Federal Reserve showed Tuesday that manufacturing activity in the New York region rose solidly in October. According to the data, NY Fed Empire State manufacturing index stood at 30.2 in this month compared to an unrevised 24.4 in September. That was the highest level since September 2014. Economists had expected the index to come in at 20.7. Anything below zero signals contraction. According to the report, the shipments index increased 11.3 points to 27.5 in October, and the employment index rose 5.0 points to 15.6. At the same time, the new orders index fell 6.9 points to 18.0 this month and delivery time index dropped 11.5 points to 3.1, while inventories index declined by 14.3 points to -7.8. Both prices paid index (-8.5 points to 27.3) and prices received index (-6.8 points to 7.0) rose at a somewhat slower pace than last month.
Statistics New Zealand reported Monday that consumers price index (CPI) rose 0.5 q-o-q in the third quarter of 2017, following the flat q-o-q performance in the second quarter. Economists had forecast the CPI would rise 0.4 percent in July-September period. In y-o-y terms, New Zealand’s CPI increased 1.9 percent in the latest quarter, compared with a 1.7 percent surge in the previous three-month period and economists’ expectation for 1.8 percent gain. According to the report, housing-related costs had the largest upward contribution in the third quarter, slightly offset by falls in transport prices. Housing and household utilities rose 1.0 percent q-o-q, while transport prices fell 1.1 percent q-o-q. At the same time, food prices grew 1.1 percent q-o-q, influenced by higher prices for vegetables (+6.2 percent q-o-q). Annually, the largest downward contributions came from lower prices for telecommunication services (-4.5 percent) and equipment (-22 percent), while prices for housing and household utilities (+3.0 percent) and food prices (+2.8 percent) were the main triggers behind the headline CPI’s annual increase.
The Australian Bureau of Statistics (ABS) announced Tuesday new motor vehicle sales in the country fell 0.5 m-o-m in September in seasonally adjusted terms. That followed a revised 0.1 percent m-o-m decrease recorded in August (originally a 0 percent m-o-m change). In y-o-y terms, sales dropped 0.8 percent last month after growing 1.6 percent in the previous month (revised from a gain of 1.7 percent). According to the report, sales of sports utility vehicles fell 1.2 percent m-o-m in September and sales for other vehicles, which include utes, buses and trucks, declined 0.9 percent m-o-m. At the same time, sales of passenger vehicles rose by 0.4 percent m-o-m in September.
The Reserve Bank of Australia (RBA) published minutes from its October 3 policy meeting, at which the benchmark cash rate was expectedly left unchanged at a record-low 1.5 percent. The minutes said that the country's economy was growing in line with the Bank’s forecast, while price pressure remained subdued, due in part to the appreciation of Australian dollar and a lower U.S. dollar. The RBA also reiterated that the low level of interest rates is continuing to support the Australian economy. The Bank’s officials continued expecting inflation to rise gradually over time, while the wage growth was forecast to increase gradually as spare capacity in the labour market diminished. At the same time, the minutes noted, that a material further appreciation of the exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.
III. Market Situation
The currency pair EUR/USD fell slightly, refreshing almost one-week low, as the U.S. currency strengthened in response to the U.S. President Donald Trump’s reiteration of his promise to overhaul the U.S. tax code. Donald Trump and the Senate Majority Leader Mitch McConnell appeared side-by-side in the Rose Garden after lunch at the White House on Monday in a show of solidarity, stating that they are “fighting for the same thing”, including “lower taxes, big tax cuts, the biggest tax cuts in the history of our nation”. The U.S. dollar also received support from Bloomberg’s report that Stanford University economist John Taylor, is the most probable candidate for Federal Reserve chairman, as he made a favorable impression on President Donald Trump after an hour-long interview at the White House last week. Meanwhile, former Fed board governor Kevin Warsh has seen his star fade within the White House, the Bloomberg said. Trump plans to interview current Fed Chair Janet Yellen on Thursday. The other potential candidates to lead the Fed are Trump’s chief economic adviser Gary Cohn and Fed governor Jerome Powell. Today, the focus will be on the final data on the Eurozone’s CPI in September, ZEW’s economic sentiment gauges for Germany and Eurozone, as well as the U.S. industrial production statistics. Resistance level - $1.1880 (high of October 12). Support level - $1.1669 (low of October 6).
The currency pair GBP/USD consolidated near the opening level, as investors were cautious ahead of the release of the UK’s inflation data for September and the speech of the Bank of England (BoE) governor Mark Carney. Economists expect that the UK’s annual consumer inflation in September rose to 3.0 percent after gaining 2.9 percent in August, hitting almost five-year high. Such data would increase the probability that the Bank of England (BoE) could increase interest rate soon. In addition, market participants also await the official data on earnings and retail sales, which will be released on Wednesday and Thursday, respectively. The pound, however, continued to remain under pressure due to yesterday's report by the Financial Times that UK prime minister Theresa May had decided not to increase her EUR20 billion Brexit offer to the EU. “There will probably have to be a crisis in November,” said the FT one senior British official. Brussels talked of a EUR60 billion net settlement. Resistance level - $1.3453 (high of September 28). Support level - $1.3017 (low of September 6).
The currency pair AUD/USD fell slightly at the beginning of the session but then recovered to the opening level on the back of the publication of the minutes from the RBA’s October meeting, at which the benchmark cash rate was expectedly left unchanged at a record-low 1.5 percent. The minutes said that the country's economy was growing in line with the Bank’s forecast, while price pressure remained subdued, due in part to the appreciation of Australian dollar and a lower U.S. dollar. The RBA also reiterated that the low level of interest rates is continuing to support the Australian economy. The Bank’s officials continued expecting inflation to rise gradually over time, while the wage growth was forecast to increase gradually as spare capacity in the labour market diminished. At the same time, the minutes noted, that a material further appreciation of the exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast. Resistance level - AUD0.7897 (high of October 13). Support level - AUD0.7734 (low of October 6).
The currency pair USD/JPY traded mixed, reacting to the dynamics of the U.S. dollar, the North Korean diplomat's warning that a nuclear war may break out at any time, as well as the uncertain situation around Catalonia. Market participants also closely watch the election campaigning in Japan and await the announcement of new BoJ governor, as Haruhiko Kuroda’s term ends in April. There are high chances that Mr. Kuroda will be reappointed. Resistance level - Y112.82 (high of October 10). Support level - Y111.48 (low of September 25).
U.S. stock indexes closed higher on Monday, notching new record highs, supported by gains in oil prices, recovery in financial stocks and expectations of further flow of corporate earnings reports this week. UnitedHealth (UNH), Morgan Stanley (MS), Goldman Sachs (GS), IBM (IBM), American Express (AXP), Verizon (VZ), General Electric (GE) and Procter & Gamble (PG) are among the companies, set to release their Q3 financials this week. The focus also was on the report from the New York Federal Reserve, which showed that manufacturing activity in the New York region rose solidly in October. According to the data, NY Fed Empire State manufacturing index stood at 30.2 in this month compared to an unrevised 24.4 in September. That was the highest level since September 2014. Economists had expected the index to come in at 20.7. Anything below zero signals contraction.
Asian stock indexes closed mainly higher on Tuesday, tracking gains on Wall Street overnight, stronger commodity prices and improved investor sentiment. Market participants also await the start of the Chinese Communist Party's Congress (due on Wednesday), where President Xi Jinping is expected to lay out new policy initiatives and further consolidate his power for his second five-year term. The Japanese market’s benchmark advanced, hitting the highest level since November 1996, as a stable yen supported the export-oriented companies.
European stock indexes are expected to trade higher in the morning trading session.
Yields of US 10-year notes hold at 2.31% (0 basis points)
Yields of German 10-year bonds hold at 0.38% (0 basis points)
Yields of UK 10-year gilts hold at 1.34% (0 basis points)
Light Sweet Crude Oil (WTI) futures traded lower. Crude oil for delivery in November settled at $51.77 (-0.19%). The crude oil prices fell slightly, correcting after yesterday's surge, triggered by concerns over escalating tensions in Iraq. The dispute between Baghdad and an autonomous Kurdistan region over oil-rich city of Kirkuk intensified after Kurdish referendum on independence on September 25. The Iraqi government, the United States, Turkey and Iran opposed the vote. Market participants are awaiting data on oil inventories in the U.S. Today, the American Petroleum Institute (API) will publish its weekly data on the U.S. crude oil stockpiles. Tomorrow, the focus will be on official report on crude inventories in the U.S. from the U.S. Energy Information Administration (EIA).
Gold traded at $1291.80 (-0.25%). Gold prices fell slightly, following sharp decline a day before on reports of a meeting between the U.S. and North Korean diplomats. Additional pressure on the gold prices was put by the broad strengthening of the U.S. dollar. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, rose 0.11 percent to 93.42. Since gold prices are tied to the dollar, a stronger dollar makes the precious metal more expensive for holders of foreign currencies.
IV. The most important news that are expected (time GMT0)
MPC Member Ramsden Speaks
MPC Member Tenreyro Speaks
ECB’s Vitor Constancio Speaks
Producer Price Index - Output
Producer Price Index - Input
HICP ex EFAT
Retail Price Index
Harmonized CPI ex EFAT
ZEW Economic Sentiment
ZEW Survey - Economic Sentiment
ECB's Peter Praet Speaks
BOE Gov Mark Carney Speaks
Import Price Index
NAHB Housing Market Index
FOMC Member Harker Speaks
Gov Council Member Wilkins Speaks
Net Long-term TIC Flows
Total Net TIC Flows
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