Global stocks smoked

DXY took off last night. EUR was down and looks precarious. CNY firmed:

AUD was hit against the USD but held up against the tumbling EUR:

EMs were mixed:

Gold held on aided by worries over EUR:

Oil fell:

Base metals were OK:

Big miners tumbled anyway:

EM stocks were smoked:

Junk was dragged in but was decent all things considered:

Aided by falling US yields:

And German:

Italy is still hot:

DM stocks capitulated into the close:

Westpac has the wrap:

Market Wrap

Global market sentiment: The risk averse mood persisted, depressing US equities (S&P500 down 1.5% currently) and bond yields, and lifting the US dollar. Canada’s central bank hiked rates.

Interest rates: The US 10yr treasury yield fell from 3.16% to 3.12%, the 2yr yield from 2.89% to 2.85%. Fed fund futures yields continued to price the chance of another rate hike in December at 75%.

FX: The US dollar index is up 0.5% on the day, at a two-month high. EUR fell from 1.1465 to 1.1380. USD/JPY ranged between 112.40 and 112.75. The Canadian dollar was the day’s outperformer after its central bank hiked by 25bp and delivered hawkish guidance, USD/CAD falling sharply from 1.3095 to 1.2970. AUD fell from 0.7100 to 0.7061. NZD fell from 0.6565 to 0.6518. AUD/NZD drifted higher from 1.0820 to 1.0840.

Economic Wrap

The BoC hiked rates 25bp to 1.75%, as widely tipped but delivered a more determined hawkish message on the future path for rates, jettisoning the pledge to take a “gradual approach” with a more medium term objective that, “the policy interest rate will need to rise to a neutral stance”. The BoC has been notably buoyed by the resolution of NAFTA trade tensions and continued solid growth momentum both in the US and Canada. The BoC has estimated neutral to be around 3.00%.

US new home sales fell by more than expected in September, slipping 5.5% to their lowest levels in two years. Sales fell across all four key US regions, underscoring weakness beyond hurricane disruptions in the South. The weak read was compounded by significant downward revisions to prior months, adding to the impression of a US housing market that is losing steam under the weight of higher rates and less generous tax provisions in last year’s tax reforms.

Markit preliminary US PMIs were relatively robust, highlighting ongoing resilience in the face of tariffs and firming input costs; the manufacturing PMI held solidly at 55.9 (55.6 last month) while the services sector PMI firmed to 54.7 from 53.5.

Markit flash Eurozone PMIs underwhelmed, both manufacturing and services missing expectations, underscoring a continuing loss of growth momentum across the region. The composite flash PMI fell to a two year low of 52.7, from 54.1 last month, with the manufacturing PMI coming in at 52.1 from 53.2, while the hitherto more resilient services PMI slipped to 53.3 from 54.7.

Event Risk

NZ: Trade balance for Sep is estimated to risen slightly from -$1.5bn to -$1.4bn. Aug and Sep are seasonal low points for NZ exports.

Euro Area: The ECB meeting is expected to repeat forward guidance signalling net asset purchases will conclude this Dec and rates will remain on hold “at least through the summer of 2019”. A focus of Draghi’s press conference will be the ECB’s assessment of risks relating to the Italian budget.

Germany: Oct IFO business climate survey is released after last week’s ZEW financial market survey indicated a weakening in sentiment.

US: Sep durable goods orders (preliminary) are expected to decline 1.5% in the month but core capital goods orders are seen to rise 0.5%, continuing a moderate uptrend. Sep pending home sales data is released. Fedspeak involves Clarida on the economy – first speech since being sworn in as Vice Chair of the Federal Reserve – and Brainard at a financial literacy event.

The big data that spooked markets was rapidly fading European PMIs which are painting weakness ahead in growth:

The US, on the other hand, is still strong if pulling in a little:

The juxtaposition drove the EUR down and USD up. The chart looks rather like more EUR weakness is coming as the ECB is forced to backtrack:

That will aid the AUD in further falls despite the huge short.

But the US is not without its problems. Housing markets are worrying the market now. Via Calculated Risk:

New home sales for September were reported at 533,000 on a seasonally adjusted annual rate basis (SAAR). This was well below the consensus forecast, and the three previous months were revised down significantly. A very weak report.

Sales in September were down 13.2% year-over-year compared to September 2017.   This was a large YoY decline, although some of the decline might be related to the impact of the hurricanes. However the largest declines were in the North East and the West, and those declines were not hurricane related.

It is not time to panic – or start looking for a recession – but this was a very weak report.

Yet earnings are still fine. Boeing printed a huge beat and growth is still strong, via Reuters:

U.S. company earnings growth is slowing after a bumper start to the year, and the reality of an escalating trade war between two of the world’s largest economies is starting to weigh on companies ranging from Caterpillar Inc to Ford Motor Co.

While earnings growth is still high at 22 percent so far this quarter, the amount by which S&P 500 index companies are beating analyst estimates is nearly half of what it was during the first quarter, according to Refinitiv data.

EPS growth was always going to slow from the crazy tax cut levels but it is still excellent.

We have long held the view that we’re late cycle and have allocated well below normal to equities. I still don’t think that this sell-off is the “big one”. Fundamentals in the US remain strong. Europe is always lousy. China is stimulating moderately.

Nonetheless, for now, the sentiment worm has turned. There are just too many unknowns in Fed tightening, the trade war, European fracturing, Kashoggi killing, Chinese and European slowing, EMs in the gun, plus pipe bombs sent to Democratic favourites!

That’s a bad day and risk markets reflected it.

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