What we are looking for
- USD drops back, for now: The USD is falling against major forex as US Treasury yields have ticked lower this morning.
- Indices find support: Markets fell yesterday, but with more positive sentiment this morning, US futures are almost +1% higher. This is setting up for strong early moves higher on European indices.
- Commodities rally with a risk-positive move: A weaker USD and a more risk-positive bias to sentiment are enabling a strong rally on Silver. Oil is also decisively higher. Gold is positive but characteristically lagging in a risk rally.
- Data traders: GBP traders will be looking for any surprise revisions to the final Manufacturing PMI. CAD traders will be watching for the Canadian Manufacturing PMI. USD traders will react to the ISM Manufacturing PMI, whilst the JOLTS are announced at the same time and maybe therefore initially lost.
After yesterday’s early caution amidst renewing USD strength, there has been a flip-around this morning. With lower Treasury yields and a weaker USD, the scene is set for a risk rally. This is playing out through decisive gains in equity markets and commodities. US index futures have rebounded following losses yesterday and this is translating well for European indices early today. We are also seeing the usual moves on commodities in a risk rally, where silver is strongly outperforming gold in a rally.
The question is, how long does this last? The two-day FOMC meeting begins today and tomorrow’s decision will likely define market moves over the coming days. There has been a suggestion from US investment banks that the Fed could even hike by “only” 50bps. We see this as unlikely and a 75bps hike that does not contain a decisive signal to slowing rates in future meetings would see flow back into the USD.
The first trading day of the month is always packed with manufacturing PMIs on the economic calendar. PMIs are expected to continue to deteriorate in October. The UK Manufacturing PMI is a final reading of the flash data from just under two weeks ago. A confirmed deterioration to just under 46 would reflect solid contraction. The Canadian Manufacturing PMI is also expected to deteriorate slightly and remain in mild contraction under 50. The US ISM Manufacturing is expected to fall back under 50 for the first time in almost two years. Traders will also be watching the US JOLTS jobs openings, with the ratio of openings to unemployed expected to still be at a rate of around 1.7.
Market sentiment swings positive: An overnight swing to more positive sentiment. However, with the Fed meeting tomorrow, it may only be short-lived.
Treasury yields tick lower: Having gained decisively on Friday and Monday, yields have swung back lower early today. The US 10-year yield has dropped -8bps to back under 4%.
Japanese Manufacturing PMI in line with forecasts: The PMI fell slightly to 50.7 (from 50.8) which was as forecast.
China Caixin Manufacturing PMI recovers but still contracting: China’s unofficial PMI of the manufacturing sector improved to 49.2 (from 48.1 in September). This was above the expected improvement to 48.4.
Reserve Bank of Australia hikes by 25bps as expected: The RBA has hiked by 25bps for the second month in a row. It expects to increase interest rates further over the period ahead. There were no hawkish hints in the statement. The central GDP forecast has been revised slightly lower. The AUD has been volatile since, but is lacking a decisive direction since the decision.
Russia suspends the Ukrainian grain deal: President Putin has suspended the agreement that allows Ukrainian cargo ships safe passage through the Black Sea. Grain prices increased yesterday as a result.
Cryptocurrencies react positively: Positive risk appetite tends to be met with crypto rising. Bitcoin is +0.9% at $20580. Ethereum is +1.4% at $1586.
- UK final Manufacturing PMI (at 09:30 GMT) Consensus is not expecting any revision to the 45.8 October flash PMI (down from 48.4 final September)
- Canada Manufacturing PMI (at 13:30 GMT) Analysts are expecting a slight decline to 49.0 in October (from 49.8 in September)
- US ISM Manufacturing PMI (at 14:00 GMT) The consensus is expecting the ISM to drop to 49.9 in October from 50.9 in September
- US JOLTS jobs openings (at 14:00 GMT) Consensus is expecting the jobs openings to remain at similar levels at 10.00m in September (slightly down from 10.05m in August).
Major markets outlook
Broad outlook: A swing to risk positive sentiment. The USD is underperforming, helping commodities and equities higher.
Forex: The USD is underperforming across major forex. The NZD is the best performer, with EUR a slight laggard in the rally.
- EUR/USD has fallen decisively in recent days and yesterday closed back under the support band between 0.9900/1.0000. This leaves a growing sense of renewing USD strength and questions the recovery outlook for the pair. The early rebound today will be a gauge as to whether the correction is a chance to buy. Given the extent of the pullback in recent days, we are cautious. Subsequent support is 0.9806. Resistance is mounting at 1.0000.
- GBP/USD has dropped back into the support between 1.1380/1.1500, but has rebounded once more this morning. We continue to view 1.1500 as a gauge for the outlook, given how important the breakout was. Having rebounded back above it this morning, if the market once more turns lower to close back below for a second day, the warning signals will begin to sound. Under 1.1380 would renew the downside. The resistance is firming between 1.1625/1.1645.
- AUD/USD pulled back into the breakout support at 0.6345/0.6390 but has ticked higher again this morning following the USD weakness. Moves are a little choppy in the wake of the RBA decision and we continue to see the 0.6345/0.6390 band as a key gauge. The resistance between 0.6425/0.6450 is strengthening.
Commodities: Precious metals are rebounded after recent weakness. Oil has rallied once more from a five-week uptrend.
- Gold has been falling again following the failure around resistance at $1670, under the old resistance between $1680/$1690 and the primary downtrend. The price has ticked higher this morning from $1630 which keeps the support at 1615/$1617 intact. However, given the failure of the RSI under 50, falling moving averages and downtrends, we see rallies remain a chance to sell.
- Silver has been very choppy for the past week and a half since breaking out above. $18.80/$19.20. The breakout support has held and a sharp move higher this morning is looking to test $19.77 once more. Given the uncertainty on the RSI (oscillating around 50) and mixed configuration on moving averages, we are cautious with chasing any breakouts now until a more decisive trend develops.
- Brent Crude oil pulled back from $97.60 and has picked up this morning from what is now a five-week uptrend. Momentum retains a mild positive bias with the daily RSI above 50. And the bulls will be eyeing initial resistance at $97.60. The key medium-term resistance is around $99.50. Initial support is at $93.40.
Indices: Wall Street has been slightly more cautious in recent days, but European indices are taking off.
- S&P 500 futures have pulled back from 3923 in the past couple of days but the uptrend since the low three weeks ago is intact and the bulls will be eyeing the next breakout. The base pattern from 3820 implies c. +250 ticks towards 4070 as a target. The uptrend is now around 3806 as a basis of rising support. The initial support is around 3872. The next resistance is 3935/3980.
- German DAX continues to move higher having decisively broken the big 10-month downtrend on Friday. The technicals suggest a strong recovery is in place and a test of the next important resistance at 13560 is developing. Yesterday’s low at 13211 is initial support.
- FTSE 100 has struggled to get going but with a run of positive candles, the move higher has now broken decisively through the resistance at 7106/7128. A recovery uptrend is supportive at 7040 today. With the daily RSI accelerating above 60, this is a strengthening move with upside potential. The next resistance of note is at 7333.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.