Better markets in Asia
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Market focus continues to be on equity market sentiment, developments in Italy and the US-China trade war, which got a slight relief from the message yesterday that US President Donald Trump and Chinese President Xi Jinping will meet at the end of November during the G20 Summit in Buenos Aires.
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There is not much on the data front today. Euro industrial production and US import prices are not likely to move the markets.
Selected market news
The sell-off in global equities continued last night and all the major indices in the US ended the day with sizeable losses. The slump in US equities is now the biggest under Trump's presidency. Volumes continue to be very high and the VIX index surged further to a level not seen since February when we had the last stock rout. The verdict is still out as to why global equity markets are under pressure. Is this 'just' a correction, especially in tech stocks, after the strong rally earlier this year or is the Fed to blame as Trump claims?
The answer is probably that equities face a wave of negative factors at the moment. Global trade jitters continue, Italy continues to spook investors and the Fed seems inclined or forced to hike as the labour market continues to tighten. Furthermore, US treasury yields are being pushed higher by weak international demand due to the expensive FX hedge and supply is booming and will continue to do so as the growing US budget deficit needs to be funded.
One of the factors that can probably stabilise risk markets is a setback or at least a stabilisation in US longer yields. Ten-year yields moved above the psychologically important 3% level at the beginning of October and have stayed there since, despite the recent turmoil. This said, note that equities in Asia are more stable and that US equity futures are now in green. These could be the first signs that the worst of correction is now behind us. Also noteworthy is that Bloomberg is reporting that the US Treasury department will not label China a currency manipulator when the semi-annual report on trading partners is due next week. This should ease trade concerns, together with news that Trump and Chinese president Xi Jinping will meet at end-November.
One comforting signal that should ease concerns that US yields will end the year significantly higher was the muted US CPI data that came in 0.1 percentage point below consensus. If we look at the annualised level for the past three to six months, it is well below 2%. In contrast to the 10Y US treasury auction on Wednesday, yesterday's 30Y treasury auction was characterised by strong demand.
In the European market, Italy continues to take centre stage. Last night, Reuters reported from 'ECB sources' that the ECB will not come to the rescue if the Italian government or bank sector runs out of money as the article puts it, unless the country secures a bailout from the EU. This is nothing new but underlines the current stand-off between Italy and first and foremost the EU, as the new budget is up for approval in Brussels next week.
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