No Relaxation of US-China Tensions, Japanese Political Challenges, and a Rise in UK Unemployment, Send Ripples Through the Capital Markets

[Redator]

Overview: The markets wanted to believe that the President Trump and Treasury Secretary Bessent were right, China overreacted with the broadening and tightening of export licensing requirements for critical materials and de-escalation would result. But this does not seem to be the case. The risk-off mood has sent stocks tumbling and bonds rallying. The dollar is mostly firmer. The dollar-bloc currencies, and especially the Australian dollar, and the Scandis, are lower, where the sell-off in oil (Nov WTI is off more than 2%) to its lowest level in four months (~$58) has taken a toll on the Norwegian krone. Most emerging market currencies are lower, led by the Mexican peso's 0.65% pullback. Note that France's Prime Minister Lecornu will present the budget to the National Assembly around 9:00 am ET today, and the euro may be sensitive to its reception.

Despite the US equity rally yesterday, Asia Pacific equities sold off sharply today. The Nikkei is off almost 2.6%, and the Hang Seng was taken for 1.7%. China's CSI 300 fell 1.2%. The only large bourse to gain was Australia's. Europe's Stoxx 600 is giving back yesterday's 0.4% gain, The S&P 500 futures are off around 0.8% and the Nasdaq futures are off a little more than 1%. Benchmark 10-year yields are off most 3-4 basis points in Europe, though the rise in UK unemployment has seen the 10-eyar Gilt yield slide more than six basis points. The 10-year US Treasury yield is nearly three basis points lower to flirt with the 4%, which it has closed below once this year (April's "Liberation Day"). Gold reached a new record near $4180, though silver has reversed lower after reaching almost $53.55. 

USD:   Last Thursday's range in the Dollar Index (~98.70-99.55) is still key. The inside days recorded last Friday and yesterday looks like a continuation pattern rather than a reversal. The daily momentum indicators look stretched but do not rule out a push higher. The August 1 high was near 100.25. With the US government still closed, the data calendar has been thinned. Today’s calendar features the NFIB measure of small business confidence and tomorrow sees the Empire State Fed survey. Meanwhile, the US begins collecting tariffs on imported timber, lumber, kitchen cabinets, vanities, and upholstered furniture today. The levy is set at 25% for some products and 10% for softwood timber and lumber. And increase in January has been pre-announced. The National Association of Home Builders estimates that 7% of all goods in new residential construction are imported. Note the exemptions, Wooden furniture imports from the UK have a 10% tariff, while a 15% tariff is assigned to such imports from Japan and the EU. 

EURO: The euro is trading heavily. It has tested last Thursday's low slightly above $1.1540. There may be some support in the $1.1515-20 area, but the risk extends to the August 1 low a little below $1.1400. It seems caught between the US and China on one hand, and Russia's war on Ukraine and its hybrid war on Europe. Poor economic data does it no favor, and the Dutch control of China-owned Nexperia set a dangerous precedent given the number of European and American companies with operations in China. Germany's October ZEW survey was reported earlier today. The current assessment deteriorated for the third consecutive month, and at -80.0 it is the weakest since May. The expectations component improved to 39.3 (from 37.3). The peak since Russia's invasion of Ukraine in 2022 was in May at 52.7. Meanwhile, France's President Macron has a new government but has not made fresh concessions to secure a majority. It is still not clear that Prime Minister Lecornu will survive a confidence vote, likely later this week. He is to speak to the National Assembly at 9:00 AM EST to present the budget draft. 

CNY: The dollar remains in the range set last Thursday and Friday against the offshore yuan (~CNH7.1240-CNH7.15). Beijing has not weaponized the exchange rate. Yesterday, the PBOC set the dollar's reference rate at its lowest level since last November (~CNY7.1007). Today's fix was at CNY7.1021. The US administration is claiming that China made a mistake on broadening and tightening controls on the export of critical minerals. Instead, it seems like the 100% tariffs that President Trump threatened before the weekend was mistake, and yesterday US Vice President Vance suggested that the tariffs may not have to be implemented. Moreover, before the weekend, President Trump saw no need to meet with President Xi on the sidelines of APEC, but now it seems he does. As we have suggested since earlier this year, China has found it easier to replace US demand and US goods, including soy, beef, and energy, than it is for the US to replace China's supply of processed rare earths. China's exports to the US have fallen by more than a quarter, while overall exports have risen by 8.3%. The fact that semiconductors and AI need these processed rare earths would seem to give China escalation dominance, at least for the time being. While the focus has been on rare earths, the levies on port calls went into effect today, and China targeted five US entities of Hanwha Ocean. Turning to China's domestic data, September CPI and PPI will be reported the first thing tomorrow. Deflationary conditions are expected to have persisted. 

JPY: The key downside reversal the dollar posted against the yen before the weekend proved for naught yesterday. The greenback settled near JPY151.20 at the end of last week and opened yesterday around JPY151.65, which was also yesterday's low. It reached almost JPY152.45 yesterday, nearly the (61.8%) retracement of last Friday's sharp drop. Today, the dollar has traded on both sides of yesterday's range but remains within last Friday's range (~JPY151.15-JPY153.25). and the close is important from a technical point of view Japan's market reopened today from yesterday's holiday. Japan's domestic politics are in disarray after the quarter-of-a-century coalition between the LDP and the Komeito party collapsed over funds in politics. Komeito is threatening not to support Takaichi's bid for prime minister and will not encourage members to vote for LDP candidates. It is not clear that the opposition can unite behind a single candidate. She will likely still become prime minister but passing legislation may be more difficult. 

GBP: Sterling gave back about half of its pre-weekend gains yesterday at around $1.3315. The (61.8%) retracement is near $1.3300. The disappointing jobs data today has sent sterling slightly below $1.3255, its lowest level since August 1. Support is seen in the $1.3180-$1.3200 area. The UK reported steady average weekly earnings growth accelerated to 5.0% from a revised 4.8% (from 4.7%) three-months year-over year, while excluding bonuses, it slipped to 4.7% from 4.8%). The ILO measure of unemployment ticked up to 4.8% from 4.7%, its highest since Q1 21. Employment growth slowed to 91k over the months through August compared 232k previously, its slowest since April. September jobless claims rose by 25.8k after falling a revised 2k in August (revised from 17.4k). In the swaps market, the odds of a rate cut this year from about 28% yesterday to almost 39% today.

CAD: The dollar has settled above CAD1.40 for the past three sessions. Today, it reached slightly above CAD1.4065, a new six-month high, and approached initial resistance near CAD!.4080. Potential may exist into the CAD1.4150-65 area. The daily momentum indicators are stretched but have not turned down. With US equity indices selling off after yesterdays, gain, a risk-off mood may also be a drag on the Canadian dollar. Canada's stronger than expected September jobs data reported before the weekend had marginal impact at best. And despite the mostly firmer greenback yesterday, when both Canadian and US banks were closed, the Canadian dollar traded in the middle of the G10 currency pack, performing worst within the dollar bloc. The swaps market downgraded the chances of a Bank of Canada rate cut to about 40% from almost 58% before the employment data, but the impact on the exchange rate has been minimal. 

AUD: The Australian dollar tumbled from around $0.6610 last Thursday to slightly below 0.6475 before the weekend. Yesterday's recovery overshot the (38.2%) retracement of the two-day decline, found near $0.6525. It peaked in front of $0.6535 and spent most of the North American session chopping between about $0.6505 and $0.6525. As it is clearer today that US-China tensions continue to escalate, the Australian dollar has been sold to $0.6450, its lowest level August 22. The next area of support is seen in the $0.6415-30 area The minutes from the recent Reserve Bank of Australia meeting failed to have much impact on the futures market. The odds of a rate cut next month were shaved to about 43% from a little more than 50% yesterday. from almost 43% before the weekend. Whether it is sustained may depend on the September jobs data due early Thursday. 

MXN: The risk-off that sent the greenback to almost MXN18.64 before the weekend, subsided yesterday, with a surge in US stocks. The dollar fell to nearly MXN18.43 yesterday. This practically the (6.18%) retracement of the dollar's rise from last Thursday's low near MXN18.30. But risk-off is back today and the US dollar has approached MXN18.60 in European turnover today. Initial resistance above last Friday's high is seen near MXN18.66. Most of the major currencies in Latam rallied yesterday, led by a 5.3% rally in the Argentine peso, amid speculation that the US assistance reduces the tail risks ahead of the parliament election on October 26. The Brazilian real rose by over 1%. It had been slammed for 2.8% before the weekend, amid the risk-off mood and fiscal concerns. The US dollar reached a two-month high slightly above BRL5.52 before the weekend and retreated to almost BRL5.45 yesterday. 

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