Sentiment will continue to play a crucial role in trading

KBC Market Research Desk KBC Bank

Markets

Equities faced a sell-off at the start of the week. The trigger came from reports that Chinese developer Fantasia missed a $206 million debt payment, sparking fears that the unfolding real estate crisis is spreading. A flurry of other risks and uncertainty only added to the risk-off. These include the debt ceiling and spending plans in the US, the raging energy crisis with searing commodity prices as a result (Brent oil back above $80/b after amid OPEC+ refrained from accelerating output) and inflation. (Big) tech (Nasdaq -2.14%) underperformed amid a global outage of several social media platforms and whistle-blower accusations of disregarding user’s safety. European stocks finished <1% in red. Core bond yields faced contradictory drivers from sentiment and jumping commodities. The US yield curve eventually added 1.4-1.8 bps across the curve. German yields inched 1-1.2 bps higher (10y-30y). The dollar extended Friday’s correction though recouped some of the losses during a grimier US session. USD/JPY lost the 111 and DXY the 94 nevertheless. EUR/USD closed north of 1.16 though it surely isn’t thanks to the euro. EUR/GBP went south to 0.854 even as sentiment was hurt and Lord Frost raising the stakes. At the Tory party conference, the UK Brexit minister threatened to trigger Article 16 as the UK and EU fail to agree on how to replace the NI Protocol with a permanent solution.

Asian markets (ex. China) copy WS’s performance. Japan and South Korea underperform with losses mounting to 2%+. Core bonds decouple and are headed south. Energy prices take a breather after yesterday, giving the opportunity for the USD to fully bank on its safe haven status. EUR/USD risks losing 1.16 again already. DXY doesn’t lose sight of the 94. The Aussie dollar loses marginal ground in the wake of the RBA policy decision (see below).

Today’s economic calendar contains final PMIs in Europe (including UK) and the US services ISM which is seen easing from 61.7 to 59.9. Last week’s manufacturing ISM showed an unexpected rise but almost solely on the back of lengthier supplier delivery times. This particular subseries might also affect today’s reading as it accounts for 25% in the composite number. We expect the market reaction to be muted ahead of Friday’s September payrolls report anyhow. Sentiment will continue to play a crucial role in trading. Equity futures suggest some of the dust has settled after yesterday but it’s still early. In such a case we’re looking for yields to recover further from their (minor) repositioning last week. EUR/USD doesn’t look good technically. It still struggles with first resistance around 1.1603.

News headlines

The Reserve Bank of Australia (RBA) kept its policy rate unchanged at 0.1%, while maintaining the 0.1% target on the Apr2024 government bond under its yield curve control programme. The RBA will continue buying government bonds at a weekly pace of €4bn until at least mid-February 2022. The forward guidance remains very dovish with the RBA committing to highly supportive conditions until actual inflation is sustainably in the 2%-3% target range. The central bank doesn’t expect that to happen before 2024 as this requires the labour market to be tight enough to generate sufficient wage growth. The economic assessment takes into account a Q3 GDP decline because of the Delta-outbreak. The bounce back afterwards will be slower than earlier this year with the economy expected to be back around its pre-Delta path in H2 2022. The RBA flags continuously rising housing prices, but hints at macroprudential action to tackle the issue. The Aussie dollar trades a tad weaker this morning near AUD/USD 0.7265 after failing to recapture 0.73 yesterday.

US Senate Majority Leader Schumer said he will proceed with a vote on suspending the debt limit until December 2022 this week. Senate GOP leader McConnell said that Republicans by no means would help Democrats get the required 60 votes in the split Senate. He told US President Biden that Democrats should raise the debt limit on their own, using the same filibuster-bypassing reconciliation procedure used to enact the $1.9tn pandemic-relief bill and they intend to use for the proposed (but likely be watered-down) $3.5tn social-spending bill. Lawmakers have until October 18 to solve the issue or risk facing a (technical) default.

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KBC Market Research Desk

KBC Bank

KBC's Market Research Desk publishes a number of short-term reports.

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