Tuesday Giveth What Monday Taketh Away

Where We Stand – A bit of an odd one for markets, yesterday, as most of Monday’s moves were unwound across the board, despite a dearth of external catalysts, and a barren data docket.

Largely, this speaks to a continued lack of conviction among participants, perhaps unsurprisingly given the relatively uncertain geopolitical and macroeconomic backdrops. Furthermore, it’s useful evidence of the continued rather flippant and volatile nature of price action when markets lack a defined impetus.

Crude was perhaps the most notable mover on the day, with both Brent and WTI sinking around 4% amid some fairly brutal selling pressure. The move came despite participants continuing to await an Israeli response to last week’s Iranian missile barrage, though reports that such a response may target primarily military installations, avoiding energy and nuclear infrastructure, may have soothed a few nerves.

Still, with tensions this high, and the situation remaining incredibly fluid, I still think it folly to be running short crude positions for any length of time.

Perhaps crude was also pressured by market disappointment over what proved to be a nothingburger of a press conference from the China State Planner. As China returned from Golden Week holidays, ‘Mr Market’ had hoped that another stimulus bazooka could well be unleashed. Instead, the Planner held a press conference simply to confirm the measures that had already been announced, and stress ‘full confidence’ in achieving this year’s economic goals. That latter part, of course, is easy when you’re making the data up anyway.

Nevertheless, while Chinese and Hong Kong equities endured a torrid Tuesday, as the Hang Seng sunk over 9%, follow-through into other markets was perhaps more limited than one would’ve expected. This, in my view, speaks to the relatively idiosyncratic nature of the China theme at the moment, with broader markets not particularly perturbed by developments in the world’s second largest economy. The RRR cut, last week, itself also evidenced this – gone are the days that a 10bp RRR cut would spark a 1% rally in the SPX.

While European luxury names were pressured, and drinks makers suffered as a result of Chinese-imposed tit-for-tat anti-dumping tariffs, the broader story was one of sentiment proving relatively positive throughout Tuesday – with the S&P and Nasdaq both adding around 1%.

Elsewhere, it was a quiet, choppy, and ultimately directionless day across much of the G10 FX space, though notable softness again came through in the AUD – likely due to a combination of soft China trade, and more dovish than expected RBA minutes very early in the session.

The dollar was pretty much flat for the second day running, with the DXY seemingly content between 102.30 – 102.60 for now. Fed pricing, though, still leans rather too hawkish for my liking – with just 20bp of cuts priced for next month, and 46bp by the end of the year, likely leaving room for the greenback to surrender some of its recent advance, particularly with a 25bp cut at each of the remaining 2 FOMC meetings in 2024 still my base case.

Treasuries, finally, briefly sold-off across the curve before paring losses, led by the front-end, as the session progressed. Both the front- and long-ends look attractive here, with a 4% 2- and/or 10-year yield likely to prove too alluring for many participants, particularly with the FOMC likely to take the fed funds rate back to neutral by the tail end of next summer. I’d hence expect buyers to emerge sooner rather than later, though the dovish repricing touched on above nods towards the curve re-steepening.

Look Ahead – Another quiet-ish docket ahead today, as we move slowly but surely towards tomorrow’s US CPI data which stands as the main event of the week.

In the ‘here and now’, though, the calendar gives participants little to chew over once more. Minutes from the September FOMC meeting may be of interest, though are naturally somewhat stale given the stronger than expected September jobs report which dropped on Friday. Any pertinent comments from one, or more, of today’s 6 FOMC speakers is likely to have much more of a lasting impact on price action.

Elsewhere, a couple of ECB speakers are due to squeeze in some final hints as to an October cut, before the pre-meeting blackout period kicks-off tomorrow. The US also sells 10-year notes later, with the auction coming after a relatively soft 3-year sale yesterday, which tailed the when issued by 0.7bp.