Earnings, Bank of Canada ensure risk slip

• DuPont misses massively causing supply chain concerns

• Bank of Canada hints at “stimulus withdrawal”

• Aussie inflation will limit near term RBA action

• PMIs from Europe key ahead of FOMC meeting

Most days when we see a more than 2% drop in equity markets around the world and currency pairs push to multi-week records you can pin the reason down to one event or another; a speech from Spain, poor data from China or a bank rumoured to be teetering on the precipice of an enormous funding problem. Yesterday’s market was different in so much that while a fair few negative things occurred none exclusively had the power to drive markets lower. In combination, however, they were.

The day had already started uneasily following the decision of Moody’s to downgrade five Spanish regions. This was followed by the Bank of Spain confirming that the Q3 GDP in Spain was -0.4%, the same as Q2 and therefore the 5th consecutive month of contraction. This figure wasn’t unexpected but reinforced the negativity that dripped from the Moody’s statement and kicked all peripheral bond yields higher and EURUSD off the highs.

Earning season in the US has been pretty hit and miss, with large tech companies like Microsoft and Google getting a lot of column inches last week for missing estimates by a country mile. Yesterday it was a more primary industry company that dragged sentiment lower. DuPont is a chemical manufacturer and therefore sits at the head of the supply chain for everyone from textiles and technology to mining and industrial processes. Its Q3 numbers saw a whiff on earnings and also the need to cut 1,500 jobs to increase competitiveness. If ever you wanted a corporate canary in the coalmine then this is it.

It was left to a central bank to deliver the final blow with the Bank of Canada arguing for something that no Western central bank has spoken about in years. While they decided to hold rates at 1.00% the accompanying statement included the new phrase: “Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. Over time, some modest withdrawal of monetary policy stimulus will likely be required.” A modest withdrawal? Only a month after the Fed has gone unlimited? The move saw another leg lower in equities and the CAD gain some 80pips against its US counterpart. We will have to wait and see whether the dynamic of the carry trade now includes CAD flows away from AUD for example.

AUD has lead a bit of a resurgence over the course of the Asian session following a strong Australian inflation number and a good manufacturing PMI from China. Aussie CPI hit 1.2% vs an expectation of 0.9% and the market began to price out expectations of any rate movement from the RBA at its November meeting. Chinese PMI rose to 49.1 against last month’s number of 47.9 reinforcing hopes that the dip in Chinese fortunes has now passed.

As a result, Europe is opening up in a better position than we left it last night but risks remain.

A German newspaper is reporting this morning that Greece will be allowed an extra 2 years to bring its deficit below 3% with reforms to energy and labour markets also pushed back. A German official has re-emphasised this morning that we must wait for troika report in mid-November but the news has continued the risk push higher.

GBP has managed to keep its resolve following another negative speech from Governor Mervyn King in which emphasised that the UK economy will continue to suffer until banks further write-down debts.

Today’s calendar features flash PMIs from Europe and an FOMC rate decision that is likely to be a bit of a damp squib. We may see some language change from the Fed following the recent improvement in data, but focus will be on sustained and not sudden growth.

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