I. Market focus
The beginning of Monday’s session was marked by the weakening of the pound. The UK’s currency was under pressure due to fears over Brexit negotiations. The market negatively reacted to the information that the sides had decided to suspend talks until Wednesday, October 17, when the EU summit begins in Brussels. Many expected that London and Brussels would make more progress before the start of the summit, but the reluctance to make concessions on the Irish border did not allow the sided to move further in the negotiations. As a result, the chances of an orderly Brexit decreased, and market participants focused on the EU summit, the outcomes of which can have a very strong impact on the pound’s performance.
In the stock markets, negative sentiment continued to predominate, despite the Friday pullback. Major equity indexes in Japan and China recorded significant losses on Monday, and the U.S. stock futures also traded lower in the morning. This week, the attention of stock market participants will shift from the global issues to the companies’ quarterly reports, as the third-quarter earnings season started last week.
The Monday session will be busy with important macroeconomic reports, the main ones of which will be the U.S. statistics on retail sales (12:30 GMT), as well as the New Zealand data on the consumer price index (21:45 GMT).
II. The market highlights are:
The U.S. Labor Department reported on Friday the import-price index, measuring the cost of goods ranging from Canadian oil to Chinese electronics, rose 0.5 percent m-o-m in September, following a revised 0.4-percent m-o-m decrease in August (originally a drop of 0.6 percent m-o-m). That marked the first monthly rise since May. Economists had expected prices to edge up 0.2 percent m-o-m last month. According to the report, the price index for import fuels surged 3.8 percent m-o-m in September after declining 2.2 percent m-o-m in August, while the price index for nonfuel imports recorded no change last month after a 0.2 percent drop m-o-m in August. Over the 12-month period ended in September, import prices rose 3.5 percent. At the same time, the price index for U.S. exports was flat m-o-m in September, following a revised 0.2 percent m-o-m decline in August (originally a drop of 0.1 percent m-o-m). In September, lower agricultural prices (-1.4 percent m-o-m) offset increasing non-agricultural prices (+0.2 percent m-o-m). Over the past year, the price index for exports rose 2.7 percent last month after a 3.6 percent gain in the prior month.
A report from the University of Michigan revealed on Friday the preliminary reading for the Reuters/Michigan index of consumer sentiment decreased to 99.0 early October, although it remained at quite favorable levels and just above the average reading during 2018 (98.5). Economists had expected the index would increase to 100.4 this month from September’s final reading of 100.1. The report noted that small decline was due to less favorable assessments by consumers of their personal finances. According to the report, the index of current U.S. economic conditions dropped to 114.4 in October from 115.2 in the previous month. Meanwhile, the index of consumer expectations fell to 89.1 this month from 90.5 in September.
The weekly report from Baker Hughes, which was released on Friday, showed that the number of active U.S. rigs drilling for oil jumped by eight to 869 during the week ended October 12. That was the largest weekly increase in the reading since the week ended August 10. In the prior week, the oil-rig count dropped by two. Meanwhile, the total active U.S. rig count, which includes oil and natural-gas rigs, also surged by 11 to 1,063, as the gas rig count rose by four to 193 last week, and the miscellaneous rig count decreased by one to 1. The U.S. rig count is up 135 rigs from this time last year when it stood at 928.
The Reuters poll found that the confidence among Japanese manufacturers improved in October from September and is expected to remain unchanged over the coming three months, suggesting caution over the impact of global trade tensions on the economic outlook. The monthly poll, which tracks the Bank of Japan's (BoJ) closely watched tankan quarterly survey, found non-manufacturers confidence falling to its lowest in nearly two years as recent natural disasters hurt consumers and some companies. But the Reuters Tankan showed that non-manufacturers' mood was expected to recover, endorsing the views that a hit from natural disasters should be temporary, although external risks to the outlook are raising. According to the survey taken September 27 to October 10, the sentiment index for manufacturers rose to 28, up two points from the previous month, led by metal products/machinery and textiles/paper. Meanwhile, the non-manufacturers' index declined to 24 in October from 33 in the prior month, dragged down by the transport/utility and retail/wholesale sectors.
III. Market Situation
The currency pair EUR/USD consolidated near the opening level, due to the lack of new catalysts capable of setting the direction of movement. One of such catalysts may be the U.S. retail sales data for September, scheduled to be released at 12:30 GMT. In August, retail sales rose by 0.1 percent m-o-m, missing economists’ forecast for a 0.4 percent m-o-m gain. The August modest advance reflected lower purchases of motor vehicles and clothing. Excluding auto, retail sales rose 0.3 percent m-o-m. It is expected that retail sales probably increased 0.6 percent m-o-m in September. Resistance level - $1.1651 (high of September 28). Support level - $1.1432 (low of October 9).
The currency pair GBP/USD fell sharply, responding to the news the UK and the EU had suspended Brexit talks until Wednesday when the EU summit begins in Brussels. The backstop on the Irish border remained an unresolved issue despite efforts from both sides. The pound was also weighed down by the comments of Britain's former foreign secretary Boris Johnson, who said that the UK should resist “being ruthlessly pushed around by the EU” and insist on the deal. With an empty economic calendar in the UK ahead, traders will focus on the dynamics of the U.S. currency and the general market sentiment toward risky assets. Resistance level - $1.3257 (high of October 12). Support level - $1.3003 (low of October 5).
The currency pair AUD/USD traded near the opening level, as a support from rising commodity prices was offset by the strengthening of the U.S. dollar. The focus of investors was gradually shifting to the minutes from the latest meeting of the RBA, set to be released tomorrow at 00:30 GMT. The minutes contain a detailed description of the situation in Australia's economy, its financial sector, the global economy, as well as examines the employment situation, lending and inflation, which provides an in-depth understanding of the conditions that affected the RBA’s decision. The Australian central bank expectedly did not make any changes to the parameters of its monetary policy at its October meeting, leaving its cash rate unchanged at 1.5 percent. Resistance level - AUD0.7240 (high of September 28). Support level - AUD0.7041 (low of October 5).
The currency pair USD/JPY demonstrated a moderate decline, due to the increased demand for safe-haven assets. The pair was also impacted by the statements of the U.S. Treasury Secretary Steven Mnuchin, who said on Saturday that Washington wants to include a provision to deter currency manipulation in future trade deals, including with Japan. According to Reuters’ report, the remarks drew concern in Japan, where local media ran front-page stories questioning whether this would give Washington the right to label as currency manipulation any future foreign exchange market interventions by Tokyo to keep sharp yen rises in check. Resistance level - Y113.37 (high of October 9). Support level - Y111.62 (low of September 18).
U.S. stock indexes closed solidly higher on Friday after falling sharply on Wednesday and Thursday, supported by a rebound in technology stocks and Q3 earnings from JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC). The focus also was on the preliminary estimate on the consumer sentiment for October. A report from the University of Michigan revealed the preliminary reading for the Reuters/Michigan index of consumer sentiment decreased to 99.0 early October, although it remained at quite favorable levels and just above the average reading during 2018 (98.5). Economists had expected the index would increase to 100.4 this month from September’s final reading of 100.1. The report noted that small decline was due to less favorable assessments by consumers of their personal finances.
Asian stock indexes closed steeply lower on Monday on the back of concerns about global economic growth and the escalation of rising diplomatic tensions between Saudi Arabia and the West over a disappearance of Jamal Khashoggi, a well-known Saudi Arabian journalist and Washington Post columnist, who was critical of his country’s government. Japan’s Nikkei fell, as the yen strengthened against the dollar, putting pressure on the Japanese export-oriented companies.
European stock indexes are expected to trade lower in the morning trading session.
Yields of US 10-year notes hold at 3.15% (-1 basis points)
Yields of German 10-year bonds hold at 0.49% (-1 basis points)
Yields of UK 10-year gilts hold at 1.50% (0 basis points)
Light Sweet Crude Oil (WTI) futures traded higher. Crude oil for delivery in November settled at $71.89 (+0.77%). The crude oil prices rose amid fears about geopolitical risks in the Middle East after the disappearance of Jamal Khashoggi, a well-known Saudi Arabian journalist and Washington Post columnist in Turkey. The U.S. senators called for sanctions against Riyadh over Khashoggi case. Saudi Arabia, the world’s largest oil exporter, vowed retaliation against the U.S. sanction threats. Market participants also continued to digest the latest data from Baker Hughes, which showed that the number of active U.S. rigs drilling for oil jumped by eight to 869 during the week ended October 12. That was the largest weekly increase in the reading since the week ended August 10. In the prior week, the oil-rig count dropped by two. Meanwhile, the total active U.S. rig count, which includes oil and natural-gas rigs, also surged by 11 to 1,063, as the gas rig count rose by four to 193 last week, and the miscellaneous rig count decreased by one to 1. The U.S. rig count is up 135 rigs from this time last year when it stood at 928.
Gold traded at $1,223.70 (+0.56%). Gold prices rose moderately on the back of higher demand for safe-haven assets due to resumed declines in stock markets and rising diplomatic tensions between Saudi Arabia and the West. However, further growth was limited by the strengthening of the U.S. currency. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, rose 0.06 percent to 95.27. 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 scheduled events (time GMT 0)
Producer & Import Prices
Retail sales excluding auto
NY Fed Empire State manufacturing index
Bank of Canada Business Outlook Survey
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