Risk markets breathe a sigh of relief on reduced war premium

Headlines

* US stocks jump by more than 1% with yields muted

* Dollar falls as some of Friday’s risk premium is unwound

* Yen rallies sharply on reports BoJ to mull lifting yield cap

* Gold and oil fall as war-driven gains are given back

FX:

USD was lower to start a hectic week of major risk events. The DXY dipped below its 21-day SMA. News flow was relatively light but some of the geopolitical concerns eased over the weekend amid a lack of major escalation between Israel and Hamas.

EUR jumped higher as risk sentiment improved. Germany reported slightly better than forecast GDP. CPI prints were softer than expected ahead of the region’s data today. A big positive surprise is needed to sustain any rally in the euro. The 50-day SMA is resistance at 1.0653.

GBP underperformed its peers after UK mortgage approvals fell to an eight-month low. Cable remains firmly in a long-term bear channel. The top sits roughly around 1.22 with the cycle low at 1.2037.

USD/JPY dropped for a second day to a low of 148.80 before closing above 149. Yen's strength stemmed from Nikkei sources ahead of the BoJ meeting today. They noted that the bank is reportedly set to change policy again to allow 10-year JGB yields to rise above 1%. The 50-day SMA is 148.29.

AUD rose for a third straight day after stronger-than-expected retail sales kicked off the week. The improved risk mood also helped cyclical currencies. The 50-day SMA has been resistant recently and is now at 0.6393.

CAD was a laggard versus the dollar as oil prices closed lower by 2-3%. A strong monthly close will be important for USD/CAD buyers above the March high at 1.3862. Prices around 1.37 have also been an important level for the major in recent years.

Stocks:

US equities closed higher after three days of aggressive selling. The benchmark S&P 500 added 1.20% to settle at 4166. This buying halted a streak of just one positive day in the last nine. There is a very widely watched zone of support/resistance around 4200. The tech-dominated Nasdaq finished 1.09% higher at 14,335. The Dow outperformed settling 1.58% higher at 32,928.

Major indices had dropped into correction territory last week. That means prices were 10% away from their July highs. A lot of this has been driven by the “Magnificent Seven” tech stocks which have suffered on mediocre earnings published recently. If the S&P 500 was equally weighted, it would be in negative territory for the year. But the broad benchmark is still up around 7% in 2023 on the handful of tech names. Meta announced it is to offer subscriptions with no ads in Europe. McDonald’s earnings were strong. The Detroit  “Three” carmakers have all reached a tentative agreement with the UAW.

Asian futures are in the green. APAC stocks traded in the red on Monday as weekend geopolitical news dominated headlines. This came ahead of month-end flows and high-risk events. Losses were stemmed in mainland China on a hoped-for Biden-Xi meeting in November.

Gold sold off after a decent break to the upside on Friday. That pushed its gains from the October low up above 10%. Prices are overbought on the daily RSI so a correction has been due. Initial support is around $1983. The $2000 psychological level is worth watching too.

Day Ahead – BoJ meeting

The Bank of Japan delivers its latest policy decisions on Halloween with increasing speculation that some spooky headlines will be delivered at the meeting. No policy changes are generally expected but tweaks to the yield curve control range around the 10-year JGB yield target of 0% and an upper tolerance range of 1% have been telegraphed. Yesterday it hit 0.9% for the first time in over a decade. Remember that the Bank of Japan has a history of surprising markets recently, having done it twice in the past year alone.

Governor Ueda may decide not to stand in its way and raise the yield cap above 1%. This would see global bonds face a tough week ahead and the yen advance. If not, there could be a relief rally, so yields turn lower. New forecasts will be delivered at this meeting with recent firm inflationary pressures possibly forcing upward revisions to inflation forecasts. Speculation around policy normalisation has been rampant for a while now that year-end into 2024 could bring just such a moment. The -0.1% policy balance rate is presently priced by being abandoned by about March of next year. Of course, any tweaks now could be dressed up as ensuring smooth market conditions.

Chart of the Day – GBP/JPY below 100-day SMA

The major ticked up above 150 last week and is now back below with next support around 148.15/30. We focus on GBP/JPY with the upcoming BoE meeting on Thursday to contend with as well. The pair had been in a steady uptrend for most of the year, from it early January low at 155.35. It topped out in late August at 186.76 but has tracked sideways since then. Prices spiked lower at the start of this month near 178 before oscillating around the 100-day SMA. That now sits at 182.49 with the midpoint of the July rally at 181.53. A doji printed yesterday as we await the BoJ meeting and potential volatility. 

((Chart & Data from IG)