China in focus

China once again takes centre stage today, after yesterday’s disappointing September trade data, with the market awaiting inflation reads both at a consumer and business level at 12.30pm AEDT.

Looking at the reaction to China’s trade data, there hasn’t been a huge fallout from the 10% drop in exports, or the sub-par import print, although perhaps one shouldn’t be too surprised given the weakness seen in the recent Korea and Taiwan export data. Copper perhaps has the purest read through, with price dropping 2% from yesterday’s ASX 200 cash close. Today’s producer price inflation read is largely expected to improve a sizeable 50 basis points to -0.3%, which would be the lowest levels of deflation seen at a business level since 2012 and a remarkable move from -5.9% seen in late 2015. At the risk of sounding like Donald Trump, the weakness in China’s currency, married with a sizeable fiscal stimulus is helping China export it deflation to its trading partners.

The S&P 500 rallies off key support

One should also pay attention to US bank earnings tonight, with JP Morgan, Citi and the new bad boy of banking Wells Fargo set to report numbers. Looking at the S&P 500, price is starting to turn more bearish trading through 2140, where good buyers were seen from 25 September, and onto the September lows of 2116. A break of 2116 and I suspect we will see the bears really come out to play and market volatility ramp up, so this is the line in the sand. A closing break of 2116 and I would expect stronger downside risks at a time when US corporates are not allowed to buy back stock.

Keep an eye on the XLF (US financial sector ETF) as a guide towards sentiment in the banks, but while earnings are one input, traders are really using the banking sector as a vehicle for trading a steeper US yield curve and will keenly buy when US rate hike expectation increase. If you feel the Federal Reserve (Fed) will hike in December (current probability is 65%) and perhaps more aggressively than 21 basis points of hikes priced in for 2017, then the US banks are a buy. The XLF ETF would be my weapon of choice.

With US equities finding buyers off strong technical support, we should see modest buying support in Asia, with the ASX 200 likely to open at 5445. A close above 5467 would mean we close higher on the week, but there doesn’t seem like too many bullish catalysts today. SPI futures are up 15 points from the re-set (5pm AEDT), with the various ADRs suggesting slight weakness in BHP, while there are better days in the Aussie banks, largely as a result of a fall in bond yields.

Currency markets are where the action is

It seems that while US equity markets could be finding an increase in volatility, we are already there in FX land. There have been some excellent trading opportunities of late, with the USD flying high, although the USD failed to really push through the July highs overnight, which would have suggested adding to long positions. The GBP has been smashed, but I wouldn’t be surprised, given everyone in the world is short to the hilt, to find short covering into the $1.2450 area. CNH (Chinese offshore yuan) is trading at the weakest levels of the year (highest closing levels since 2010) and having the real potential to spur on greater volatility from here in emerging markets, especially now Donald Trump will have to pull something huge to win the November election and Hillary Clinton taking a far softer stance on China’s currency weakness.

AUD/USD has rallied nicely off the 75 level, largely as a result of better buying in the US bond market (removing some USD valuational support). Comments from Philadelphia Fed president Patrick Harper talking about his concerns around the election and the side effects around a drop in confidence has been noted. Commodities certainly haven’t really assisted any feel good factor, with copper and iron ore under pressure, while US crude has seen a whippy session.

Oil has a whippy night

The oil market has reacted to a messy weekly Department of Energy inventory data release, with US crude futures falling 1.7% in five minutes. Crude inventories rose by the most since April (+4.85 million barrels), however gasoline and distillate inventories fell sharply, seemingly causing the oil market to reverse and rally. Watch for a break of the June highs ($52.00) next week, as it seems the bulls still have the upper hand here.

Strange goings on

While not necessarily relevant to markets, I stepped off a plane from Dubai this morning only to see much talk about Marmite rationing in the UK and a gorilla breaking out of a zoo…it all sounds like London has stepped back into a post-World War II era. Brexit is seemingly having side effects.

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