Fear Grips the Capital Markets

[Redator]

Overview: The pendulum between fear and greed is swinging toward the former today. The large write-downs at a couple of US regional banks follow high-profile collapses of Tricolor and First Brands. They play on fears of mounting late-cycle stress. US bank reserves have also fallen through a key threshold ($3 trillion) and some fear a repeat of 2019. Washington and Beijing have ramped up the trade tensions, and the US federal government remains closed. US rates have fallen sharply, and the Dollar Index is having its worst week in a little more than two months. The greenback is mixed against the G10 currencies, with the Antipodeans and Scandis nursing losses, while the Swiss franc and are the leaders. Emerging market currencies are mostly lower, while the PBOC set the dollar's fix at a new low for the year. 

Equity markets are under pressure. Japanese, Chinese, Hong Kong, and Taiwanese indices tumbled 1%-2.7% today. South Korea's Kospi and India's main indices were notable exceptions. If sustained, the 1.65% loss being posted by the Stoxx 600 in Europe would be the largest loss since August 1. US index futures are threatening to gap lower at the opening. Benchmark 10-year yields are as much as three basis points lower in Europe. The US 10-year Treasury yield is near 3.95%. The risk-off mood looks set to challenge the US-Argentina resolve. Gold climbed to a new record near $4380. It settled last week slightly below $4018. December WTI has extended its recent losses and approached $56 today, its lowest since May 5. 

USD: The Dollar Index's upside momentum since the September 17 FOMC meeting appears to have ended last week near 99.55. It recorded a low yesterday around 98.40 and almost 98.00 today. The Dollar Index recovered to test the 98.30 area in the European morning, which is where the 20-day moving average is found. DXY has not settled below it since September 23. The market remains convinced that the Federal Reserve will cut rates late this month (99%+ in the futures market) and another cut in December (95%+). Net-net, including comments by various Fed officials, including Chair Powell, there has been virtually no change this week. The write-off at two regional banks saw US rates tumble yesterday, and key levels have been taken out. The two-year yield is below 3.40% to its lowest level in three years. The 10-year yield has fallen to almost 3.93%, its lowest level since "Liberation Day" in April. The US government remains closed, with both Washington and Beijing feeling aggrieved, tensions continue to run high. 

EURO: The euro appears to have forged a near-term base near $1.1540, its lowest level since August 1. It reached a seven-session high yesterday a little above $1.1685. The gains were extended today to almost $1.1730, the (50%) retracement of the losses since the September 17 FOMC meeting is found. The (61.8%) retracement is around $1.1775. The US two-year premium over Germany was pushed back to the lower end of the 150-162 bp range since the day before the Fed cut last month. The daily momentum indicators appear to be turning higher from over-sold territory. 

CNY: One of the important takeaways this week is that despite the elevated trade tensions between the US and China, Beijing has not weaponized the exchange rate. In fact, the PBOC set the dollar's reference rate at its lowest level this year. It was set at CNY7.0949 today, third consecutive decline and the third consecutive sub-CNY7.10 setting. Against the offshore yuan, the dollar has been in a range of mostly CNH7.12-CNH7.15 this month. After approaching the lower end yesterday, it fell slightly below CNH7.1170 today before recovering to around CNH7.1325 to trade on both sides of yesterday's range. Starting Monday and running through Thursday next week is the Communist Party Congress 4th Plenum, which is typically where the next five-year plan is broadly outlined, and personnel decisions are made. Over the past five-year, Xi has reportedly instructed that China should increase others dependence on it, while reducing China's dependence on others. And despite his ideological differences with Deng Xiaoping, Xi has operationalized his 1992 insight: “The Middle East has oil. China has rare earths." 

JPY: The dollar was sold to JPY150.25 yesterday and follow-through selling took it slightly through JPY149.40 today. The (61.8) retracement of this month's gains is near JPY149.15. Options for more than $1 bln at JPY150.46 expire today. Another technical target is the gap from the higher opening on October 6. The gap is between the October 3 high (~JPY147.80) to the October 6 low (~JPY149.00). Japanese politics are particularly fluid now. Having precipitated a break-up of a 26-year coalition with the Komeito Party, Takaichi is negotiating with the Japan Innovation Party (Ishin). This appears to have outflanked the effort by the opposition parties to see if they could put together a single candidate to take on Takaichi. They appear to have failed. 

GBP: Sterling has had an impressive bounce. Tuesday it reached $1.3250, its lowest level since August 1 and yesterday reached $1.3455. Today, it traded briefly above $1.3470. It settled above the 20-day moving average (~$1.3420 today) for the first time since September 18. Sustaining a push above the $1.3460 area could lift sterling with the $1.3500-$1.3525 the next interesting chart area. The odds of a cut this year have crept up this week from nearly 25% at the end of last week to a little over 45% now. News that Pensana has indicated that it will no longer build a GBP250 mln rare earths refinery in the UK, but instead build it in the US, who apparently will be providing more assistance than the UK, cannot sit well at 10 Downing Street. 

CAD: The greenback reached a six-month high at CAD1.4080 on Tuesday and has been consolidating above CAD1.4020 in the last couple of days. Recall that the CAD1.4020 area had previously offered resistance and was the (38.2%) retracement of this year's decline. The momentum indicators are over-extended but still rising, as are the five- and 20-day moving averages. Option for almost $540 mln at CAD1.4035 and another set for around $460 mln at CAD1.40 expires today. Canada reports August portfolio capital flows today. In the H1 25, there was a net divestment of almost C$8 bln. In July, there was a net inflow of nearly C$26.7 bln, turning the year-to-date balance positive. In the first eight months of 2024, foreign investors bought C$113 bln of Canadian bonds and stocks. 

AUD: This week's range was set Monday-Tuesday, almost $0.6535 and $0.6440, respectively. It was pushed back toward Tuesday's low, reaching ~$0.6445 today. It has recovered to almost $0.6470 in European turnover. Around A$800 mln in options at $0.6460 expire today. The deterioration of the labor market reported yesterday undermined the assessment of central bank's Governor Bullock and spurred the market to upgrade the odds of a rate cut next month. The futures market now discounts about a 70% chance of a cut, up from about 36% on Wednesday and about 43% at the end of last week. The Australian and Canadian dollars are the only two G10 currencies that are still lower on the week. 

MXN: The dollar was sold to new lows for the week yesterday against three of the most actively traded Latam currencies, the Mexican peso, the Brazilian real, and the Colombian peso. The dollar fell to around MXN18.3565 yesterday. The (61.8%) retracement of the greenback's gains since the September 17 low for the year (~MXN18.20) is about MXN18.3675. However, the as US stocks sold off after European markets closed yesterday, the risk-off stance helped fuel the dollar's recovery against the Brazilian real and Colombian peso, as well. The Argentine peso weakened for the third consecutive session, but the 3.3% loss was the largest in over a month. The risk-off mood is weighing on the emerging market currencies today, and the greenback is bid above MXN18.51. The week's high is almost MXN18.63 and last week's high was closer to MXN18.64. 

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