As market sentiment turns a little sour on Monday morning, the question is whether the fears of inflation are going to dominate the broader outlook once more.
- Main drivers: Sentiment turning sour again; China data disappoints, inflation indicators rising again; US Industrial Production data later.
- Sentiment sours again: The sentiment recovery seems to be failing once more as bond yields rise again, USD regains strength and equity indices fall back. This could be another turning point for markets.
- Chinese GDP and Industrial Production disappoints: GDP falls to 4.9% (5.0% exp), Industrial Production also disappoints at +3.1% (+3.9% exp). On the plus side, Retail Sales were better than expected at +4.4% (+3.5% exp). [On balance, marginally risk negative]
- Inflation fears growing again: The oil price continues to move higher, now joined by sharply higher base metals (such as copper). New Zealand’s CPI has jumped to a decade high. Bank of England’s Governor Bailey has said that the BoE may need to act the counter inflationary impact.[All negative for risk appetite]
- Central bank speakers due today: Just one from the Fed today. FOMC’s Quarles (permanent voter, very slightly hawkish) at 0930GMT.
- Data watch: US Industrial Production at 1315GMT show monthly growth of +0.3% Prelim Michigan Sentiment for October at 1500GMT expected to improve again slightly to 73.5 (from 72.8 in September)
- Broad outlook: Is the risk rebound seen last week now deteriorating once more? If yields continue higher and USD sustainably regains strength, then this would be negative for market sentiment.
- Forex: US dollar holding 93.70 as support on Dollar Index, 94.56 is resistance now. EUR/USD rally has fallen over 1.1625/40. A close back under 1.1560 re-engages selling pressure. A sense that this is an important moment for any recovery. We remain medium-term sellers into near-term strength. GBP/USD recovery now testing the resistance band 1.3730/1.3800. Momentum indicators suggest this is a crucial moment for the medium-term outlook. AUD/USD recovery trend could now be tested as resistance forms around 0.7440. Reaction around the initial support at 0.7370 will test the recovery.
- Commodities: Gold bull failure at $1800 and back under $1780 shows how uncertain the market is. Reaction to $1780 (resistance again) and $1745/$1750 support will be key now for the outlook. We are neural within a $1722/$1834 trading band. Silver reaction around $23.18 is important for any potential to continue recovery. Under $22.90/$23.00 would be disappointing. Brent Crude oil breaking to new multi-year highs again. The next resistance is the 2018 high of $86.95.
- Indices: A crucial test of the recovery potential will be seen in the coming days. S&P 500 futures need to build another higher low between 4385/4420 to lay solid foundations for further recovery. However, resistance at 4470 is growing. DAX as the rally eases back, the bulls will be looking to build support above 15,450 which is the mid-range pivot. Resistance is growing at 15,600. FTSE 100 resistance is mounting at 7246 but the bulls still hold control for now. Support needs to form around 7150/7200 to sustain the improving outlook.