Lack of Middle East escalation and falling yields soothe markets

Headlines

* US bond yields fall from 16-year high pulling USD lower

* Oil and gold drop as diplomatic moves in Gaza ease tensions  

* S&P 500 holds its ground amid recent wild Treasury moves

* Busy event week kicks off with PMIs and UK jobs data, plus tech earnings

FX: USD held up for the first part of the day above 106.20 but then got sold as the US session began. That was chiefly down to the 10-year Treasury yields which hit 5.01% before sinking below 4.85%. The 5% mark is both a key psychological level and a July 2007 milestone. The surge in yields has helped lift the DXY more than 6% but the index is back to early October levels now. We note stretched long dollar positioning.

EUR surged north through the sessions, breaking higher past mid-October resistance around 1.0634/39. Eurozone economic surprises are picking up positively. This reflects seasonal trends. Positioning may also be helping with the first increase in net speculative longs since August. The 50-day SMA sits at 1.0684. We await the PMI data and Thursday’s ECB meeting.

GBP advanced for a third straight day, which hasn’t been seen since the start of the month. Cable pushed up above minor resistance at 1.2217/19. September jobs figures and October PMIs are released tomorrow. There looks like solid support around 1.21. The top of the long-term bear channel sits just below 1.23.

USD/JPY traded in a narrow range once again around 150. The more prices consolidate in a tight range, the bigger the range breakout will potentially be. The slump in Treasury yields weighed on stronger buying as the US Treasury-JGB difference rose close to the BoJ’s 1% cap. Interestingly, there is little pricing of major moves in the yen options markets.

AUD posted the first green candle in four days. Prices remain just above 0.63. CAD continues to trade soft near recent range lows with oil dipping. The BoC rate decision on Wednesday should be quiet with no change expected.

Stocks: US equities concluded a volatile session with mixed results. The three major indices closed at their lowest level since early June. The benchmark S&P 500 lost 0.17% to settle at 4217. The tech-dominated Nasdaq finished 0.3% higher at 14,604. The Dow closed down 0.58% at 32,936. Tech and consumer discretionary outperformed as yields eventually retreated. Energy and materials dragged the most. Nvidia jumped 3.8% as it revealed plans to make Arm-based computer chips to challenge Intel. Alphabet and Microsoft announce their results after the US close.

Asian futures are mixed currently.

Gold fell for the first time in four trading days. Last week saw bullion rise to an 11-week high on safe-haven buying. Those Middle East tensions eased slightly with another day without any further escalation.

Day Ahead – PMIs and UK Jobs  

Flash PMIs will be released later today for the euro area and the UK. These are survey-based economic indicators that provide insight into business conditions. Expectations are for both to remain in contractionary territory across the board. The data for the eurozone has historically caused some volatility in recent months. This is because poor sub-50 figures have raised deep worries about a recession. An upside surprise could cement yesterday’s break higher in the euro.

We also get the rest of the UK labour market report on Tuesday after wage numbers were released last week. Those and services inflation are the most important data points for the BoE. Consensus forecasts a continuation of weakness in the labour market as slack is set to gradually increase. The stage is set for another on-hold decision by the MPC at its next meeting in the first week of November.

Chart of the Day – S&P 500 grapples with the 200-day SMA

The benchmark US equity index fell for a fifth straight day. That is the longest losing streak in around 10 months. Stocks did retrace bigger losses earlier in the US session. But the bounce tailed off as investors eye upcoming earnings reports, inflation data, and some key technical levels. Valuations remain elevated at around 18 to 19 times.

Geopolitical concerns hit the index in the latter part of last week. That selling saw long-term trendline support broken. Prices have fallen below the 200-day SMA at 4235 and are hovering around early October lows. This technical zone also features the 50% point of the March – July 2023 rally at 4211. Yesterday’s low was 4189, a level last seen in June.