Markets shake and dollar goes bid

Overview: A combination of the surging virus, threatening the slow recovery that was already losing momentum, the lack of new stimulus in the US, and market positioning is seeing risk unwind in a big way today. Equities are selling off. Led by a 2% drop in Hong Kong, Asia Pacific equities tumbled, with the exception of Australia, where signals from the central bank suggested more easing may be around the corner. The Dow Jones Stoxx 600 is off for a third day, but the nearly 2.2% decline is the largest drop since September 21. US shares are also lower. The S&P 500 closed the gap from Monday's higher open yesterday, and next is the gap from last Friday (~3447.3-3458.0). Benchmark 10-year yields are lower, led by Australia's seven basis point decline. Core bonds in Europe are outperforming the periphery with a 3-4 bp decline yields. The US 10-year Treasury yield is slipping below 0.70% to reach its lowest level since October 2. The dollar is gaining across the board. The Antipodeans and Scandis are the weakest (off ~0.4-1.2%). Even the yen is softer. The liquid accessible emerging market currencies lead the retreat, and the JP Morgan Emerging Market Currency Index is off (~0.3%) for a fourth consecutive session. Gold is heavy and unable to sustain gains above $1900, and November crude oil is pulling back from its push above $41.

Asia Pacific

China's price pressures are more subdued than economists expected. September CPI slowed to 1.7% from 2.4% in August. It is the lowest since February 2019 and was helped by a further relaxation of food prices. The upward pressure on pork prices subsided to 25.5% from 52.6%. Core prices were unchanged at 0.5%. Producer prices were also weaker than expected. The 2.1% decline from a year ago was even more than in August (-2.0%) and snaps a three-month increasing trend. The base effect contributes to the lower inflation as the year-ago swine flu impact is dropping from the year-over-year comparisons. Officials continue to emphasize supply-side efforts, but the disinflation risks are rising.

There were two developments in Australia to note. First, the employment data was soft. Jobs were lost for the first time in three months, even though the loss of jobs (29.5k) was less than economists projected. Two-thirds of the job loss were full-time positions. The unemployment rate ticked up to 6.9% from 6.8%, and the participation rate slipped as the impact of the Victoria shutdown was evident. Second, the RBA Governor Lowe suggested that the central bank is considering lower rates and buying longer-term bonds, which, even with today's decline, are the highest among the high-income countries.

The dollar held JPY105 yesterday, and there is a $1.1 bln option expiring there today. It has recovered to JPY105.35. The week's high is near JPY105.85. Initial resistance is seen in the JPY105.45-JPY105.60 band. The Australian dollar is off about 1.25% (~$0.7070), its biggest loss in three weeks. The loss of $0.7100 undermines the outlook, and a break of $0.7060 sets the stage for a test on more significant support near $0.7000. The PBOC set the dollar's reference rate at CNY6.7374, which in line with bank projections. The broader dollar gains help the PBOC if it wanted to slow the yuan's ascent. The PBOC injected liquidity into the banking system, more than is rolling off tomorrow. The 10-year bond yield edged to a new high of 3.22%.

Europe

The UK's chief negotiator will inform Prime Minister Johnson that a trade deal with the EU is still possible. This will allow Johnson to step away from the ultimatum. It now looks as if negotiations will continue for the next couple of weeks and possibly into early November. The November EU summit was to discuss relations with China, against whom the EU has levied punitive tariffs in recent weeks on some steel and aluminum products and is squeezing Huawei. The IMF revised down its forecast for next year's growth to 5.9% from 6.3% in June. This is the highest in the G7 and incidentally is in line with the median forecast in the Bloomberg survey (6.0%). However, a hard exit, which means a reversion to the WTO standards, could shave growth by 1.0%-1.5%.

The euro was pushing above $1.18 at the start of the week and now is threatening to fall below $1.17 for the first time since October 2. There is an option for nearly 650 mln euros at $1.1695 that expires today, which is also the (61.8%) retracement of the bounce since the September 25 low near $1.1610. While the intraday technical readings are stretched, the euro needs to reclaim $1.1720 to steady the tone, and ideally, $1.1740. It has not been below $1.16 since late July. The surging virus, new restrictions are weighing on sentiment. Sterling is trading within yesterday's wide range and is almost a cent range today (~$1.2935-$1.3030). It too looks to have found a bid in early European turnover, and the option for roughly GBP615 mln at $1.2980 that expires today may still be in play. The euro had approached GBP0.9300 in mid-September approached GBP0.9000 yesterday, the low since, and is consolidating today.

America

It seems that the market has reacted several times to fading hopes of a stimulus effort ahead of the election. Yet more stimulus after the election still appears to be a safe bet. The election, as we have been saying, will likely determine the size and scope of the effort. The US is likely to have the largest deficit among the high-income countries next year as it did this year.

On tap today are the weekly jobless claims. A decline to 825k (from 840k) is expected. Still, the data remains marred by California's continued problems, where its numbers will remain frozen at mid-September levels for possibly a couple of more weeks as it works through backlog and identity verification issues. Estimates suggest that there are as many as 600k backlog initial claims and a million continuing claims. The point is that the labor market remains stressed, and improvement is slow. The NY and Philadelphia Fed manufacturing surveys for October will be reported, and both are expected to have softened slightly. It would be the fourth consecutive month that the Philly Fed's survey has softened. The Fed's speaking calendar remains busy with six officials speaking today, including Barkin at the Economic Club of New York.

ADP reports Canada's payroll data, and the government reports September's existing-home sales. However, the driving force of the Canadian dollar today is the broader risk appetites, and the lack thereof is helped the US dollar recover to CAD1.32 in the European morning after testing CAD1.31 earlier this week. The near-term potential extends into the CAD1.3220-CAD1.3260 area. The greenback is also recovering against the Mexican peso. The move above MXN21.45 warns of the risk toward MXN21.65 and possibly the MXN21.80 area