Risk takes a backseat

Market participants are taking a break from risk assets, preferring to square positions ahead of several events. Investors were digesting seemingly mixed earnings reports as well as await incoming ones. 

Federal Reserve Front
Source: Bloomberg

Looming central bank meetings also discourage fresh positioning. The Federal Open Market Committee (FOMC) will begin its two-day meeting on Tuesday, 27 October, while the Bank of Japan (BOJ) meets later this week on Friday, where the markets are looking for any signals of more easing.

There were not much trading cues from the economic data either. US new home sales for September disappointed estimates, shrinking -11.5% from the previous month to 468,000 when the market was looking for a steady growth at -0.6%. This soft reading added to the recent flurry of weak data out from US, which would weaken the Fed’s case to raise interest rates.

Meanwhile, news that the Congress and the White House are close to an agreement on the budget may have helped sentiments. But the fact that the deal is not inked yet reined in optimism. An accord would avert yet another episode of catastrophic default from the US government on its debt.

The New York Times noted that the deal would call for cuts in expenditure on Medicare and Social Security disability benefits. Time is running out for the federal government. They will default on its debt if the statutory borrowing limit is not increased by next Tuesday, 3 November.


Equities traded mixed

European and US shares were decidedly sedated. The DAX ended near flat at +0.1% on Monday after chalking up two sessions of very strong rally last Thursday and Friday. Prospects of more ECB stimulus lifted European shares late last week. The index is up 12% so far this month. The FTSE 100 was lower by -0.4%, after gaining +1% last week.

In the US, the S&P 500 started in negative territory as investors started the week on a cautious tone, ahead of another batch of earnings and FOMC. The index traded sideways within a narrow 10-point band, before closing down -0.2% at 2071.18.

Apple was sold off ahead its earnings report on Tuesday; the stock dropped -3.2% to $115.28. Apple has rallied +7.5% for the first three weeks of October, and investors might be taking some profits as expectations that the giant technology company may underperform in the last quarter.

However, it is worthwhile to note that Apple has a track record of beating its quarterly earnings estimate, surpassing the earnings-per-share (EPS) forecasts in the previous eight quarters. On the data front, new home sales disappointed consensus, reinforcing the view that we are seeing a slowdown in the uptrend since 2011. 


Fixed income still in favour

US treasuries were up modestly, with the 10-year yields slipping 3.2 basis points to 2.055%. Rising expectations that the Fed rate hike would be pushed to next year, are enticing bond traders back into the treasury markets.

European bonds were also higher, helped by hopes of more ECB expansion in the bond-purchase programme. Germany’s 10-year yields dipped below key 0.50% again on Monday. The 10-year German bunds have been testing this level since the bond rout in April-May lifted yields to almost 1%


Currencies and commodities

G10 currencies are not doing much, underscoring the waning risk appetite ahead of key event risks. The dollar index was capped below 97, trading at high-96 levels, which also pulled USD/JPY below 121. EUR/USD moving sideways; last seen around 1.1050. AUD/USD remained trapped between the 50-day and 100-day moving averages at 0.7147 and 0.7321 respectively.

Meanwhile, oil prices remained near two-month lows, with Brent slipping towards $47. Fundamentals re-exerted themselves, as oversupply issues stay in the forefront. Furthermore, there is a belief that US inventories are on the rise, which would prolong a global glut.

Bloomberg reported that Algeria is supporting Venezuela’s call for a meeting from OPEC and other oil-producing nations to discuss on ways to increase crude prices. The oil rally earlier this month is likely to have waned, and prices may retest recent lows at $37.75 for WTI and $43.83 for Brent.


Asia ahead

Australia and Japan started Tuesday on a soft footing, reflecting overnight weakness. I expect the rest of Asia to follow the cautious tone. On the data docket, investors will eye China’s industrial profits for September, after the -8.8% tumble in August. In Singapore, Prime Minister Lee cautioned that Singapore must brace for economic slowdown amid decelerating global growth, according to Business Times.


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