Dollar Bulls Await Fed Speakers' Support

Monday October 24: Five things the markets are talking about

With less than three-weeks until the U.S. elections, concerns over a “hard” Brexit and earnings season underway, is expected to see market volatility slowly pick up.

Despite current U.S election polls indicating that Ms. Clinton is consolidating her Democratic lead over Trump, there are number of risks:

1. A Brexit repeat – where the polls have got it completely wrong. Under this scenario, a massive equity rout is almost guaranteed and safe haven assets to initially thrive.

2. Ms. Clinton’s lead actually widens, resulting in the Democrats winning the House, which could lead to a massive fiscal spend, and inflation resulting in a more troubled U.S bond market.

For this week, the main events include U.S. Q3 GDP, U.S. core-durable goods, German business climate index, U.K’s Q3 GDP, U.S. consumer confidence and sentiment and new home sales, ECB President Draghi speaks.

1. Asian stocks eek out gains, Euro and U.S futures trade higher

Overnight, Asian stocks edged higher along with European and U.S. equity index futures as the corporate earnings season gets a tad busier.

This week is expected to be a slower week for stocks given that next week brings the BoJ, Fed and BoE monetary policy meetings.

However, as noted above, there is a plethora of data in the U.S, Japan and Eurozone, along with a deluge of U.S, Euro and Asian corporate earnings that could have an impact (three of the world’s four biggest companies by market value are due to announce results this week stateside).

The MSCI Asia Pacific Index rose +0.2%. The Shanghai Composite Index rallied to a nine-month high amid speculation that China will boost their fiscal spending. Hong Kong’s Hang Seng Index rose +0.4% as trading resumed following a typhoon on Friday.

In early European trading, Euro Stoxx 50 Index futures have rallied +0.9%, while the U.K.’s FTSE 100 Index is up +0.2%.

S&P 500 Index futures are set to open up +0.5%.

Indices: Euro Stoxx 50 +0.9% at 3,102, FTSE +0.2% at 7,033, DAX +0.8% at 10,797, CAC-40 +0.7% at 4,567, IBEX-35 +1.3% at 9,216, FTSE MIB +0.9% at 17,321, SMI flat at 8,035, S&P 500 Futures +0.5%

2. Oil under pressure from supply, gold tarnished

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Crude Oil is trading a tad softer overnight after the Iraqi Oil Minister suggested that his country (OPEC’s second-largest producer) should be exempt from OPEC production cuts because of its war with ISIS.

Crude rallied +0.8% on Friday on hopes that Russia and OPEC would reach a price agreement, nonetheless, persistent worries of oversupply continue to be a drag on the market.

Brent crude futures are trading down -1c at +$51.78 a barrel, while U.S. crude is down -0.6% at +$50.55 a barrel ahead of the open stateside.

Gold prices are little changed ($1,266.30 an ounce) after climbing +1.5% last week. The precious metal’s price swings are expected to become more volatile in Q4 on the back of the U.S. presidential election as investors will look to gold as a hedge against financial uncertainty.

Elsewhere, silver was up +0.1% at $17.63 an ounce, while platinum was up nearly +1% at +$938.00 an ounce.

3. U.S yields await today’s Fed speeches

Fixed incomes traders will turn their attention to four Fed speakers today -Dudley, Powell, Bullard and Evans – a week ahead of the Nov. 2nd FOMC meet. A hike next month has been written off due to the U.S Presidential election a week later (Nov. 8).

Currently, with the market pricing in a stronger possibility of a Fed hike in December (+70%) investors are looking for further confirmation that this hike remains on course. The market will pay particular attention to James Bullard comments, a voter who did not dissent at the last meeting.

U.S 10-year notes are starting the week little changed, currently yielding +1.73% after falling -6bps last week.

4. Dollar straddles multi-month highs

The U.S dollar index trades atop of its seven-month high before Fed official’s speeches today.

The ‘mighty’ buck remains better bid across the board, supported by rate differentials from a December Fed hike. Currently, there are few immediate incentives to reduce dollar exposure with the exception of a Republican victory at next months U.S Presidential election.

Against the EUR (€1.0888), ECB’s Draghi last week ruled out any short-term possibility that European policy makers would consider trimming the size of its asset purchases, thus providing no new support for the single unit.

Against the JPY (¥103.91), the dollar has gained more moderately. A stronger rally in U.S rates is required for further dollar support outright. Any dollar advance could become exposed by possible dollar selling from Japanese exporters and/or a U-turn in market risk sentiment.

Against sterling (£1.2230), two words dominate the pounds moves – “hard” Brexit. There is no love lost between Europe and the U.K currently. Sterling is finding it very difficult to get up off the floor. Pound bulls are finding no love being ‘long.’

5. Eurozone picks up speed

Data this morning revealed that eurozone economic activity accelerated at the beginning of Q4, led by an upturn in Germany.

IHS Markit’s measure of private-sector activity, the Composite Purchasing Managers Index, rose to 53.7 in October from 52.6 in September, a ten-month high – this beat the street’s expectations of a flat reading and is the strongest expansion thus far for this year.

The headline print should be good news for the EUR, however, the initial reaction, ahead of the U.S open has been somewhat disappointing (€1.0892) with market selling ahead of the psychological €1.09 handle.

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Written By: MarketPulse