Equity Rally Extends on China Optimism, Dollar Correction Continues

  • Optimism over US-China trade tensions is the latest driver for improved market sentiment
  • October US jobs report will be the data highlight
  • Canada also reports October jobs data
  • Final eurozone PMIs were reported
  • Australia reported September retail sales
  • MSCI EM has staged an impressive comeback, rallying nearly 8% from the October 30 low

The dollar is mostly weaker against the majors as equity markets continue to rally.  Aussie and the Scandies are outperforming, while the yen and sterling underperforming.  EM currencies are mostly firmer.  KRW and INR are outperforming, while RUB and RON are underperforming.  MSCI Asia Pacific was up 2.6%, with the Nikkei rising 2.6%.  MSCI EM is up 3.1% so far today, with the Shanghai Composite rising 2.7%.  Euro Stoxx 600 is up 0.9% near midday, while US futures are pointing to a higher open.  The US 10-year yield is up 4 bp at 3.17%.  Commodity prices are mostly higher, with Brent oil up 0.3%, copper up 1.6%, and gold up 0.2%.

Global equity markets remain on the upswing.  The S&P 500 has rallied three straight days for the first time since September 18-20.  Global equity gains have been broad-based, with MSCI EM back above 1000 and trading at its highest level since October 5.  The improved sentiment has taken some toll on the dollar, though we noted that the correction was likely after the greenback was unable to take out some key chart points against some of the major currencies during the last leg of its rally.

Optimism over the US-China trade war is the latest driver for improved market sentiment.  Press reports suggest President Trump wants to reach a deal with President Xi at their planned meeting on the sidelines of the G20 summit at the end of this month.  Reports say that Trump has asked his cabinet to begin drafting some possible terms.

It remains to be seen how sincere these efforts really are.  Cynics would say that this is an easy way to boost sentiment ahead of mid-term elections next Tuesday.  Optimists would say that Trump is responding to the need to ratchet down tensions between the two largest economies.  Only time will tell but for now, markets are being dominated by the optimists.  Not surprisingly, CNY rallied to its firmest level since September 28.  However, this is due mostly to the broad rally in EM FX rather than official machinations.

October US jobs report will be the data highlight.  Consensus sees a 200k gain in nonfarm payrolls, up from the 134k gain in September that was impacted by the hurricane.  The clues to NFP have been mixed.  ADP reported that a higher than expected 227k private sector jobs were added last month.  However, the employment component in ISM PMI fell to 56.8 from 58.8in September.

More importantly, average hourly earnings are expected to rise 3.1% y/y vs. 2.8% in September.  This would be a cycle high and the highest since April 2009.  Such a reading would feed into the notion that the Fed remains on track to tighten in December regardless of stock market gyrations.

The US also reports September trade and factory orders.  Because of the FOMC meeting next Thursday, the press embargo for Fed officials is in place until the day after that when Quarles speaks.

Canada also reports October jobs data.  Employment is expected to rise 15k vs. 63.3k in September.  However, the breakdown is expected to be solid, with full-time jobs seen up 20k and reversing last month’s -16.9k reading.  BOC delivered a hawkish hike last week, signaling further tightening ahead.

Final eurozone manufacturing PMIs were reported earlier.  The headline eurozone reading for October fell to 52.0 from the 52.1 flash reading.  France was steady at 51.2, while Germany fell to 52.2 from the 52.3 flash.  Of note is Italy, whose reading slid to 49.2 from 50 in September.  This is yet another warning sign that its economy is slowing even as the draft budget assumes strong growth over the next three years.  Lastly, Spain rose to 51.8 from 51.4 in September.

Despite the data, the euro has continued to firm.  It bounced nicely off the $1.13 low and is trading at the highest level since October 24.  A break of $1.1455 is needed to set up a test of the October 22 high near $1.1550.  Looking further out, a break of $1.15 is needed to signal a larger correction back to the October 16 high near $1.1620.

UK construction PMI was reported at 53.2 vs. 52.0 expected.   Yesterday, the UK reported much weaker than expected October UK manufacturing PMI of 51.1 vs. 53.0 expected and 53.8 in September.  This was the lowest since July 2016, right after the Brexit referendum.  Services and composite PMIs will be reported Monday.

Sterling continues to gain on Brexit optimism and is trading at the highest level since October 23.  A clean break of the $1.3030 area is needed to set up a test of the October 16 high near $1.3235.  After that is the October 12 high near $1.3260 and then the September 20 high near $1.33.

Australia reported soft September retail sales.  Headline sales rose 0.2% m/m, half the expected 0.4%.  This comes after solid trade report yesterday.  Still, AUD is trading at the highest level since September 27.  Clean break of the .7200 area now sets up a test of the September 26 high near .7315.

MSCI EM has staged an impressive comeback, rallying nearly 8% from the October 30 low.  It is trading above 1000 for the first time since early October.  Break of 1006 is needed to signal a larger bounce back to the September 28 high near 1053.