Q3 earnings dictate sentiment - and likely to do so again today


MAJOR HEADLINES – PREVIOUS SESSION

  • CA Aug. Int’l Securities Transactions out at +5.082b vs. +2.5b expected and revised +0.37b prior

  • US Oct. NAHB Housing market Index out at 18 vs. 20 expected and 19 prior

  • JP Aug. Final Leading Index out at 83.2 vs. 83.3 previously

  • JP Aug. Final Coincident Index out at 91.2 vs. 91.4 previously

  • JP Sep. Final Machine Tool Orders out at -62.1% vs. -61.9% previously


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • GE Producer prices (0600)

  • JP Convenience Store Sales (0700)

  • UK Public Finances (0830)

  • UK M4 Money Supply (0830)

  • EU Construction Output (0900)

  • CA Wholesale Sales (1230)

  • CA Leading Indicators (1230)

  • US PPI (1230)

  • US Housing Starts (1230)

  • US Building Permits (1230)

  • CA BOC Rate Announcement (1300)

  • US Treasury’s Sperling to testify (1430)

  • US Treasury’s Feinberg to speak (1500)

Market Comments:

As the European and Us sessions went on yesterday, it became apparent that it was going to be a “risk-on” day – the reverse of Asian sentiment - as Q3 earnings continued to beat forecasts (including a stellar performance from Apple after the bell). The dollar was back on the skids again and most Asian players found themselves stopped out of what they viewed to be the trade of the day.

An almost blank data slate yesterday, and that data that was scheduled was largely ignored (US NAHB Housing Index, one of the more forward-looking indicators, slipped to 18 from 19 and failed to match the expected 20 reading). Comments from Fed Chairman Bernanke also failed to give the dollar much relief when he said that the US needs to cut its budget deficit and that Asia needs to do more to raise domestic consumption to prevent a return of the conditions witnessed before the financial crisis. Note also that rumblings from the European region on the inflexibility of the Renmimbi exchange rate seem to be re-emerging.

Overnight the Brazilian government announced a tax on capital inflows heading towards fixed income and stock investments, though would not be levied on foreign direct investments. The 2% tax is intended to prevent an “excessive” strengthening of the Real and is a reversal of last year’s decision. While the move had been much talked about, the BRL weakened yesterday and the additional costs involved in investing might make the BRL less attractive compared to other commodity currencies like the AUD, NZD, CAD and NOK. Another factor underpinning yesterday’s moves.

Today’s action in Asia centred around the AUD with the minutes of the October 6th meeting reading generally more hawkish at the margin than anticipated. The central bank noted that the current very expansionary setting was no longer needed and possibly imprudent. It suggested that keeping interest rates as excessively low levels for an extended period could threaten hitting the inflation target over the medium-term and could result in the build-up of other imbalances in the economy. The rise in the AUD was attributed to the generally improving sentiment in financial markets, the relative outperformance of the Australian economy and the strength of commodity prices and, as a result, appeared to sanction ( or at least not decry) the strong rebound. AUD hit new marginal highs after the minutes but ran into steady selling from Japanese names.

Looking ahead to the North American session, the bank of Canada’s rate announcement grabs the attention.
The market will be looking for no change to the 0.25% interest rate and strong, if toothless rhetoric complaining about the loonie's strength. Canada's latest batch of numbers - especially employment and the most recent Ivey PMI - has been extraordinarily strong and the rise in oil is another key development in support of the loonie. If the S&P 500 is shooting above 1100 later today and the BOC fails to throw out interventionist rhetoric, USDCAD may soon swoop to the parity level the market is abuzz about at the moment. If risk markets are easing back and the BOC decides to get tough, however, then we could see a go at the 1.0400+ resistance. Were it not for its dependence on its neighbor to the south, the bank could easily justify beginning to indicate when it will withdraw monetary accommodation, but with its currency already so strong, it may choose instead to view that strengthening as an effective reducer of inflation risk. We would be surprised if the bank made a terribly strong statement at this point - leaving risk appetite in the driver's seat, as usual.

Prior to this we will see the state of the UK’s finances and EU construction output. The US session features housing data, with housing starts and building permits on tap and, if the NAHB data yesterday is anything to go by, may disappoint. Regardless, it will undoubtedly be Q3 earnings reports from Wells Fargo, Morgan Stanley, Eli Lilly and others that dictate risk sentiment and the fate of the dollar overnight.