Dollar Steadies as Equity Markets Calm

  • The stock market rout has taken a pause even as US yields are recovering at the long end
  • Some in the Trump administration have tried to walk back criticism of the Fed
  • Italy’s parliament voted yesterday in favor of the government’s draft budget
  • Sterling bulls got a cold dose of reality from the Democratic Unionist Party
  • China reported September trade; Trump and Xi may meet on the sidelines of the G20 meeting
  • MAS tightened policy at its semiannual meeting with a slight increase in the slope of its S$NEER trading band
  • Moody’s is scheduled to review South Africa’s rating today

The dollar is mostly firmer against the majors as equity markets calm.  The Scandies are outperforming, while sterling and Swissie are underperforming.  EM currencies are mostly firmer.  KRW and ZAR are outperforming, while CNY and SGD are underperforming.  MSCI Asia Pacific was up 1.2%, with the Nikkei rising 0.5%.  MSCI EM is up 2.2% so far today, with the Shanghai Composite rising nearly 1%.  Euro Stoxx 600 is up 0.5% near midday, while US futures are pointing to a higher open.  The US 10-year yield is up 2 bp at 3.17%.  Commodity prices are mostly higher, with Brent oil up 0.4%, copper up 0.3%, and gold down 0.3%.

The stock market rout has taken a pause.  Even though US stocks slid into the close for the second straight day, Asian and then European equity markets were able to get some traction.

At the same time, US yields are recovering at the long end.  The 10-year yields is up 2 bp to 3.17% and the 30-year is up 2 bp to 3.34%.  This has helped the dollar get some limited traction.  However, the greenback is still down on the week against every major currency except the Loonie, with yen and Stockie doing the best.  The greenback is mixed against EM, though the soft dollar has allowed perennial weaklings ARS, TRY, BRL, RUB, and ZAR to all outperform this week.

Some in the Trump administration have tried to walk back criticism of the Fed.  Advisor Kudlow said the Fed is independent and that Powell is “on target.”  Trump himself said he has no plans to fire Powell but continued to criticize the Fed’s tightening cycle for a second straight day.  We still believe that this is all noise.  When all is said and done, Chairman Powell will continue to tighten policy due to the strong performance of the US economy.  The Fed will not be bullied.

There are no major US data reports today.  September export and import prices will be reported, as will preliminary October Michigan sentiment.  Neither are market-movers.  There are several Fed speakers today, including Evans, Bostic, and Quarles.

Italy’s parliament voted yesterday in favor of the government’s draft budget.  Both houses passed motions backing the plan, which sets a 2019 deficit target equal to -2.4% of GDP, -2.1% in 2020, and -1.8% in 2021.  It assumes a reduction in the debt/GDP ratio in this period.  However, the growth forecasts have already been criticized for being too optimistic.  The plan now goes to the EU.

Italy is already paying a price for its budget shenanigans.  At its 3-year auction yesterday, the government had to offer a yield of 2.51% to attract demand, nearly double compared to last month’s auction.  The bid to offer ratio fell to 1.26 from 1.67, which shows demand waning.

The euro made a marginal new high for this move today near $1.1610 before falling back.  Break of the $1.1670 area is needed to set up a test of the September high near $1.1815.

Sterling bulls got a cold dose of reality from the Democratic Unionist Party.  DUP leader Foster warned that her party cannot accept the Irish backstop compromise that’s currently being discussed.  This comes after relatively upbeat remarks from Foster earlier this week.  This will go right down to the wire.  While we lean towards an eventual compromise, Foster’s warning is sobering.  Sterling made a marginal new high today near $1.3260 before falling back but is nearing the September high near $1.33.  After that is the June high near $1.3445.

USD/JPY continues to find some support at the 112 area.  This is a key level and a break below would set up a test of the September low near 110.40.  There has been little fundamental news out of Japan to help give markets direction, and so we believe external conditions will be the major factor near-term.  With equity markets calming, the yen should go back to its softening trend.  Recall that USD/JPY was trading near 114.55 just a week ago.

China reported September trade.  Exports rose 14.5% y/y vs. 8.2% expected while imports rose 14.3% y/y vs. 15.3% expected.  The trade surplus widened to $31.7 bln from $27.9 bln in August and this is likely to inflame tensions that are already high.  However, we do not think such strong export growth can be sustained given the negative global backdrop.

Press reports that Trump and Xi will meet on the sidelines of the G20 meeting next month in Buenos Aires.  Right now, relations are pretty much frozen and there is ill will building on both sides as tariffs have taken effect on both sides.

In related news, press reports suggest that US Treasury staff have advised Secretary Mnuchin that China is not manipulating its currency.  The semiannual report to congress will be released next week, and speculation is building that the US will name China as a manipulator, something Treasury has never done before for any country.  While designating China would not trigger any sanctions or penalties, it would certainly ratchet up tensions even more.

The Monetary Authority of Singapore tightened policy at its semiannual meeting with a slight increase in the slope of its S$NEER trading band.  Market was evenly split between this move and no move.  This comes after the MAS tightened modestly in April by also increasing the slope slightly.  The MAS was upbeat about global growth, calling it “resilient” in the face of headwinds.  Singapore earlier reported that Q3 GDP grew 2.6% y/y vs. 2.4% expected and a revised 4.1% (was 3.9%) in Q2.

India reports September CPI and August IP.  The former is expected to accelerate to 4.0% y/y from 3.7% in August, while the latter is expected to decelerate to 3.9% y/y from 6.6% in July.  The RBI delivered a dovish surprise and kept rates steady last week.  Most, including us, thought that they would hike 25 bp.  INR weakened after the decision but has since recouped some of its losses.  RBI sent a bad signal to the markets and we expect further rupee underperformance.

Moody’s is scheduled to review South Africa’s rating today.  Of the three major agencies, Moody’s is the most generous with its Baa3 rating.  Our model views South Africa as BB, which lines up with S&P but not with Fitch’s BB+.  However, with new Finance Minister Mboweni about to unveil the government’s mid-term budget statement in a little less than two weeks, Moody’s may continue to give South Africa the benefit of the doubt and hold off on a downgrade.