Summary
It’s not quite a ‘perfect storm’ but one could certainly be brewing.
Oil and mining buyers show up
10-Year Treasury yields continue to strain higher. Now on the 3.25% handle for yet more seven-year records. The route there remains sequential. Pain is being added gradually; alarming volatility cannot be ruled out but is currently lacking.
Heavyweights Shell (LON:RDSa) and BP (LON:BP), and big London miners even kept the FTSE 100 above the flat line for a spell before all shares retreated, though oil and basic resources cling to smaller gains, tracking the sector’s outperformance in Asia overnight, as the Iran-supply debate veers more towards the bullish side again, with help from Hurricane Michael.
Corresponding STOXX sub-indices outperform too.
USD/CNY 7.00 in play
It helps that resources markets and corresponding equities anticipate further simulative attempts from Beijing. The People’s Bank of China, finally, conspicuously, stood aside from onshore yuan trade above the psychological 6.90 yuan per dollar mark, just ten fen away from 7.00, which is supposed to carry the biggest behavioural charge for markets. The Shanghai Composite managed to close slightly higher—on solid bounces by energy, mining and metals and consumer shares. The main Shanghai-Shenzhen gauge was also off lows.
APAC index falls were muted, aside from Nikkei due to yen strength. The key sticking point to further stock index gains in China is the dollar. It’s run now looks more solid as majors, including sterling, Aussie, franc, Loonie, fall into line. This is circumstantial evidence that the greenback, like Japan’s currency is again seeing safety flows. The dollar is certainly now toppling weaker current account currencies that were spared earlier this week. These are incompatible conditions for a Chinese stock market revival.
U.S. sellers keep exit in sight
Despite overnight demand for U.S. ‘value’ names though, perceived to be safer—Walmart (NYSE:WMT), Coca-Cola (NYSE:KO), JPM (NYSE:JPM), others— lifting the Dow, the broader VIX gauge is slightly firmer than most of the day before. There is after all, no guarantee that volatile Wall Street upsets can be avoided. True, profit booking should still have some way to run, Nasdaq futures, for instance, are down for a fourth straight session, increasing the chance that a bounce like the one seen across markets earlier could sustain.
Time for the technocrats
Similar, though more conditional thoughts for Italy’s MIB, which also saw temporary relief. Deputy Prime Minister Salvini’s attempts to keep the confrontation with Brussels going are seeing diminishing returns in the press and markets. Relative quiet on Wednesday suggests an understanding that rhetorical cards can be overplayed. Technocrats got a word in edgeways in the interim. PM Conte called for “reasonable” dialogue. Overruled economy minister Tria sought “constructive” dialogue. On balance, compromise from Rome before the 15th October Budget deadline would still require fancy footwork.
BTP/Bund benchmark spread eyes 3.20%
Meanwhile, BTPs continues to back up all the way up the curve. Everything above a 5-year maturity now yields more than 300 basis points, widening the 10-year bund/BTP spread to the widest since 2013. Simple technical analysis suggests any transgression beyond 3.20% is now in speculative crosshairs. A break will clearly signal a return to more intense Italian market tumult.
It is unlikely Italian shares can return to a sustainably firm footing under such conditions. Wednesday’s industrial data could provide a prop though, if output bounces to 0.8% from minus 1.8% in July. The yield complex also squashes the euro’s attempts to regain momentum after the early-week run stalled near $1.15. $1.145, where the single currency staged numerous bounces since 3rd October, beckons again.
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