Calm on the surface

Summary

A clear pause in risk aversion also has clear flaws.

A rare beast

It’s becoming a rare beast for financial markets but is in sight on Tuesday: a relatively uneventful session. If the rest pans out like the earlier part of the global day, which saw continued yuan stability enabled enough of the recent dark cloud cover to lift to attract bargain hunters, at least early on. In the end, softer than forecast factory gate inflation was too much of a reminder of China’s unmistakeable economic downshift, making Shanghai and Shenzhen index gains look incongruous so stock markets there closed lower. Other markets in the broad region with fewer impediments – notably in Tokyo – took the baton, providing a spark for opportunity hunters to get a look in Europe as well.

Total totally exits Iran oil

Only France’s CAC-40 toyed with a loss among larger continental indices due to its direct conduit to Iran via Total. The group looks increasingly isolated as it announce complete cessation of oil purchases from Tehran last week. It had been the country’s biggest customer, having bought 10% of Tehran’s output the year before. Other projects have also been stopped in their tracks. Sanctions set to resume within weeks impact the European No. 3 oil and gas company’s medium-term production plans. The stock’s 1.5% fall by mid-session played a part in keeping the sector firmly on the wrong foot. Data suggests remaining buyers of Iranian crude are Turkey and Italy outside of China, India and the Middle East and whilst any waivers – none have been granted so far – will be highly conditional. The murk about how things will look when such deals are settled is also price-negative for crude.

Crude oil set for October fall

Forecasts of a sizeable build in U.S. crude inventories in the API’s weekly update later help account for benchmark oil prices maintaining an essential falling trend in October. Brent is down 8% since 3rd October, suggesting little uplift should be expected when most Iran supply is officially restricted from 4th November. Since buoyant oil has been a much-needed equity market prop during recent bearish undercurrents, all else being equal (which seldom happens) weaker energy prices could leave stocks less supported if, or probably when, stock market downdrafts resume, which we expect to happen shortly.

Italian bonds face static pressure

Green mostly prevails elsewhere, but the weak energy complex is a link to ongoing realities that poses challenges for revived risk appetite. Progress by markets to reduce problematic yields has been halting in Europe and is reversing in the States, though at least volatility appears to have phased out for now. Italy has sent its defiant Budget to Brussels where the Commission will consider it for a week before responding. Consequently, the 10-year BTP yield is 26.4 basis points easier than a week ago, though it has not really been below the 3.5% marker since. Italy’s budget is not on the agenda of the latest of numerous EU summits in recent months. A Eurogroup official also sought to downplay suggestions of wider EU contagion from soaring Italian borrowing costs. But the EU is still as far away from endorsing the proposals as Rome is of softening them. A showdown still looks to be on the cards next week.

10-year Treasury yield creeps

As for Treasurys, they have yet to offer lasting relief for growth shares in the U.S. and beyond. The 10-year’s rate was last on steady course back toward a top marked on 11th October at 3.187%. It’s broken the upper side of a continuation pattern in recent days. Nasdaq and S&P futures were holding their ground in positive territory, also benefitting from a relative lull after technology shares faced further turbulence at the start of the week. Protracted dollar consolidation of its near-10% February-August rise resumes, also creating some leeway for riskier assets, as it removes some of the base for U.S. borrowing costs to rise. U.S. industrial production at 14.15 BST should be the next sensitive data for the greenback, whilst Brexit headlines could throw off another setback for sterling at any time. Most parts constituting last week’s disquiet are present. Confluence that triggered a flight to safety is difficult to rule out in this one.