â€˘ UK consumer confidence rises to highest since Jan 2008
â€˘ Can equities close the week on a high?
Opening levels ()
ÂŁ/$: 1.6551, â‚¬/$: 1.4830, $/Y: 91.03
UK 5y sw: 3.28%, US 5y sw: 2.75%, EU 5y sw: 2.83%
- UK Oct consumer confidence rises to -13, strongest since Jan 2008
- German Sep retail sales unexpectedly fall 0.5% in September
- US 7y note auction tails 2bps, b/c 2.65; indirects take 59.3%
Better than expected and a broadly (government sponsored) based rebound in US Q3 GDP data were greeted with a relief rally in risk assets, but we are reserving judgement on the sustainability of the bounce or whether this is an opportunity to sell. We have pointed out how the early data points for October have disappointed and testify to a more somber mood among US households, risking deflating output in Q4. With that and unchanged Fed fund futures in mind, we are torn between profit taking and backing further gains in equities and pro-risk currencies (curve flatteners in bonds). We pin our hopes on next weekâ€™s blockbuster calendar to lift the fog. In the meantime, we are going along with the trend and favour a bounce in the S&P-500 up to 1,075 area following the bounce off trend line support (1043).
Ahead today: the Chicago PMI will offer a first read on October manufacturing activity. The PMI fell surprisingly back below 50 last month and is forecast to have edged back up to 48.5. Personal income spending data for October is expected to be weak. The flash October CPI estimate for the EU-16 is expected to show a rise to -0.1% y/y from -0.3%.
FX: The bounce in AUD and NZD cannot be ignored ahead of the RBA next week and thebullish set-up for equities favours further upside in AUD/USD and NZD/USD. For AUD/USD, a move over 0.92 puts the pair on target for 0.9250. For GBP/AUD, we target adecline back towards the 1.7875 area as AU/UK 2y spreads approach the high at 369bps.
For EUR/GBP, the EU/UK 2y spread looks set to finish the week where it started at 45bps. We look for positive correlation to resume next week. Key support runs at 0.8900. Rates: UK 5y swaps bounced sharply yesterday on better paying interest and opened a shade lower this morning at 3.277%. Resistance comes in around 3.31%, followed by 3.36%. Month-end buying should cap upside in longer duration yields though the end to the Fedâ€™s buyback programme will be a test for the US curve. For US 10y, follow-through buying in stocks could push yields back up towards last weekâ€™s 3.58% high.
Paul Rodriguez, Senior Technical Analyst
â€˘ A short covering bounce in equities yesterday was expected, the extent and aggressiveness of the rally was not. Despite this, I remain broadly bearish on the equity markets, but look to pick sell levels strategically until the bullish sentiment subsides. Bullish sentiment leaped yesterday, but I canâ€™t help feeling that this has come towards the end of an extended equity run - implying a reversal of trend. Pro-risk has won the battle, but not the war and in fairness many markets are simply back at Wednesdayâ€™s trading levels rather than zooming off into the stratosphere. To reiterate yesterdayâ€™s comments, a bumpy ride is par for the course when sentiment in a market changes, but I continue to look for evidence of a developing downward trend, with S&P target initially at 1,019. If we break back over the 1,100 high, I will be proved wrong, but for now, the safest play looks to be buying volatility. DAX index futures target 5,442 key support - a break completes a key top.
â€˘ The FX market rushed into the arms of risk yesterday, but I still believe this is misplaced. The bounce in EM and commodity currencies simply gave another chance to buy dollars and sell these risk related currencies. From a risk/reward perspective, stops have been hit as per the table below - yesterday was not a comfortable day for my view. The market picture could look very different by early next week and, indeed, by the end of the day as I believe the market is now vulnerable to bad news. We could therefore see a dramatic reversal of the NZD, AUD and CAD rebound, together with EUR and CHF weakness â€“ basically a reversal of risk. EM currencies have come back, but again, I am not convinced and see longer term opportunities aside from the short term volatility. Sterling remains a buy, but mainly against the EUR and CHF (although it should perform well against the EM /commodity currencies and grind higher against the dollar). This should also put a bid under government bonds and see yields edge lower.
Quantitative Market Analysis
Naeem Wahid, Quantitative Strategist
The Japanese PMI survey, released overnight, has remained firm at 54.3 marking the fourth consecutive month of expansion in the manufacturing sector. The jobless rate fell further to 5.3%, having peaked at 5.7% in July. Whilst the Tokyo CPI was slightly disappointing, the firm PMI (following the rise in the flash EZ PMIs reported last week) should continue to provide some upside risk for equity markets, given leading indicators have, so far, held up in this latest round.
GfK consumer confidence, released overnight in the UK, was also reported better than market expectations. The series rose to -13, itâ€™s highest since January 2008.
The data focus today lies around the US Chicago PMI and the final University of Michigan consumer confidence report. Whilst the Chicago PMI has generally been undershooting the ISM, the end of the cash-for-clunkers programme leaves the Chicago PMI vulnerable to a correction lower in the coming period.
Month-end order flow signals, from our models, are relatively weak this morning, reflecting the small change in US equities over the month. The change in commodities over the month (the CRB is 6.5% higher) does suggest some USD negative order flow â€“ this favours only small short USD positions against the AUD and CAD today.
The trend following model has been flipped out of its short GBP/USD position this morning - the strength in price action yesterday left the short position untenable. In emerging market currencies, USD/PLN has been in a range (2.76-3.00) for approximately three months now. The inability to break-out leaves trend following models vulnerable to whipsaw â€“ our model has jumped into a short position this morning.
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