by Pinchas Cohen
Key Events
- Both China and Japan manufacturing reach multi-year highs, but Japan’s outlook still pessimistic
- Euro beset by political uncertainties, but that only boosts exports, spurring stocks
- USD, yields move higher
Today’s market is influenced by different, at times conflicting, forces.
US equity markets—as well as global stock markets—remain in thrall to positive investor sentiment on promised, albeit murky tax reform and a Fed Chief bent on an interest rate hike this December. Indeed, S&P 500 Futures climbed to a record this morning even as Australia’s equity benchmark saw its largest one-day gain in nearly two months driven by Friday's news that its biggest trading partner, China, beat official manufacturing estimates. It was the strongest result for this particular metric in the last five years, as, remarkably, the increasingly capitalist-tilting Chinese communist party has also been instituting aggressive financial and environmental regulations.
China’s economic growth, despite tighter regulations, may play a role in the ongoing efforts of US Republicans to tighten up US-China trade regulations that their political rivals, the Democrats, instituted.
While Australian investors are enjoying China’s economic success today, Chinese investors both on the mainland and in Hong Kong aren't taking advantage of the good news. Both area markets are closed for holidays, along with markets in India and South Korea.
Global Financial Affairs
Not to be outdone by its neighbor, Japan’s Large Manufacturers Index rose to 22 from 17 QoQ. This is the highest level for the benchmark since September 2007, suggesting the country's economy has overcome the devastating effects of the Great Recession.
This growth has been fueled by a weak yen and a stronger global economy, notwithstanding trade tensions and North Korean threats. Still, Japan’s equity market was mixed on longer-term forecasts which were less upbeat. More than two-thirds of large manufacturers viewed conditions as “not so favorable,” and households are still waiting to see Japan’s longest expansion in a decade make its way into their paychecks.
European equity markets opened higher on a weaker euro, the worst performer among major FX peers today, except for Spanish stocks, both affected by yesterday's violence-marred Catalonia independence vote, an effort by the regional government to press toward a unilateral declaration of secession from Spain.
This latest political development adds an additional layer to the conflict-ridden dynamic of the single currency. Whereas, the eurozone's economy leads global growth, it is, at the same time, beset by political turmoil. Yesterday's Spanish chaos follows last week's resignation by German Finance Minister Wolfgang Schauble who had to step down in order to allow the country's newly weakened Chancellor, Angela Merkel, the potential to form a coalition that wouldn’t include the now third-largest, far-right, eurosceptic, AfD populist party.
Nevertheless, there's yet another level of irony at play: the weaker currency should boost eurozone exports, driving regional stock markets to additional rallies.
The dollar and Treasury yields, already rallying on the prospects of US tax cuts and a hawkish Fed chief, were primed to enjoy the euro weakness. In addition, investors may have gone “all-in” on speculation that US President Donald Trump would appoint a Fed chief in his own image, someone who would lead the central bank through a more aggressive tightening policy, after he met last week with Fed governor Jerome Powell and former Fed governor Kevin Warsh.
In addition to yields rising on the more favorable outlook for interest rates and optimism on tax reform, investors are once again rotating their capital from protection to risk assets. In that vein, gold has extended its slide since last week – during which it crossed 1.75-percent below the $1,298 resistance-turned-support since April, which was protected by the 50 dma (green).
Now, at $1,275, the price found support by the 100 dma (blue), during which time it may bounce back toward the 50 dma, currently at $1,298. A break of the 100 dma would suggest another leg in the decline toward the 200 dma (red), guarding the 1,250 level.
Oil is range-bound between the $51 level and its May $52 peak.
Up Ahead
- Manufacturing PMIs for September are due for most of the world’s major economies. The U.S. ISM measure will be released later today.
- Investors will monitor progress toward forming coalition governments in Germany and New Zealand after elections last month left no party in either country with a majority. Also in focus: Japanese political polls ahead of the snap election expected later this month.
- U.K. Prime Minister Theresa May’s Conservative Party holds its annual conference October 1-4 in Manchester, England.
- US data this week includes trade, factory orders and Friday’s September Nonfarm Payrolls report, which may have less predictive power than usual for the economic outlook due to likely distortions from hurricanes that hit the country beginning in late August.
- Australia’s central bank on Tuesday is forecast to keep its benchmark interest rate unchanged at a record low of 1.5 percent.
- The Reserve Bank of India on Wednesday is projected to keep benchmark rates unchanged.
- Fed speakers this week welcome remarks by Yellen at an event on Wednesday, a speech on the Treasury market by board member Jerome Powell (considered a candidate for Fed chair), and New York Fed President William Dudley.
Market Moves
Stock
- Japan's TOPIX dropped 0.1 percent.
- Australia’s S&P/ASX 200 Index gained 0.8 percent, with resources companies climbing on optimism that China’s growth slowdown will be modest.
- The Stoxx Europe 600 increased 0.3 percent, on a weaker euro, as of 8:21 London time (3:21 EDT), hitting a 15 weeks high on its eighth consecutive advance.
- Germany’s DAX increased 0.5 percent, reaching a record-high on its sixth consecutive advance.
- The FTSE 100 moved +0.3 percent to its highest in almost three weeks.
- S&P 500 Futures climbed 0.1 percent to a record high for the futures index.
- The MSCI All-Country World Index fell 0.1 percent.
- The MSCI Emerging Markets Index gained less than 0.05 percent.
Currencies
- The Dollar Index leaped 0.50 percent, stalling at the September 28, 93.67, the highest price of the rally since the September 9, 91.01 low, after a cross above the 50 dma (green), which has been tracing the downtrend line since April but still stopped by the top of the falling channel since then.
- The euro declined 0.6 percent to $1.1749, the biggest fall in a week.
- The British pound decreased 0.4 percent to $1.3344, its weakest in almost three weeks.
- The Japanese yen declined 0.4 percent to 112.94 per dollar, the weakest in more than 11 weeks.
Commodities
- Gold decreased 0.5 percent to $1,273.27 an ounce, the weakest in almost seven weeks.
- West Texas Intermediate crude declined 0.4 percent to $51.46 a barrel, the lowest in more than a week.
Bonds