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Key Market News
Japan PM Kishida’s LDP party secured a surprise majority in the lower house of parliament following Sunday’s general election, boosting the prospect for further fiscal stimulus before the end of the year. Sunday saw the release of official Chinese PMI numbers; Manufacturing PMI fell to 49.2 from 49.6, worse than the expected modest rise to 49.7 and its lowest since February 2020 – under 50 implies the sector was in MoM contraction. Economists cited power shortages and high input costs are major reasons for the continued poor performance in the sector. Meanwhile, the official non-manufacturing PMI fell to 52.4 from 53.2. Note that the alternative Caixin Manufacturing PMI saw a small improvement to 50.6 from 50.0, however.
In politics, its looks as though the US House of Representative could vote on President Biden’s economic agenda early this week (including the $1.75T social spending package and the $550B bipartisan infrastructure package). Meanwhile, the G20 summit took place over the weekend and the US and EU agreed to ease some tariffs on bilateral steel trade. Despite meetings between French President Macron and UK PM Johnson, tensions between the UK and France over-fishing have not shown signs of de-escalation and France is expected to impose trade and fishing-related restrictions on the UK this week, while the UK will respond by opening legal action. Elsewhere, leaders at the G20 agreed a new climate deal, but the deal underwhelmed expectations as the agreement on the phasing out of coal was not as aggressive as anticipated, and the group did not reiterate the pledge made at the 2015 Paris accord to limit global warming (versus pre-industrial levels) to 1.5 degrees. The COP26 climate summit got underway in Glasgow yesterday and will likely dominate the headlines as it continues over the next two weeks, though is unlikely to impact market sentiment much.
Equities
The positive election outcome in Japan boosted the Nikkei 225 2.6% on Monday, though poor Chinese PMI numbers and concerns about an outbreak of Covid-19 in the Shanghai Disneyland park weighed on markets there (Hang Seng -0.8%). US and European equity markets are on the front foot on the first trading day of November, with traders citing a positive APac handover and ongoing optimism about earnings – note that 168 S&P 500 companies report this week and 85 Stoxx 600 companies. The S&P 500 closed above 4600 for the first-time last Friday and futures are up a further 0.4% this morning to the mid-4610s, while the Stoxx 600 is currently trading at recent levels above 477.00, with the banking sector doing particularly amid the rising yields environment and on more hawkish ECB bets.
Bonds
As noted, European yields are on the front foot and the German 10Y yield is testing recent highs around -0.07%. European yields were boosted at the back end of last week after ECB President Lagarde disappointed market expectations for a strong pushback against an increasingly hawkish shift in ECB money market pricing in recent weeks. Money markets are now priced for a 10bps rate hike from the ECB as soon as July next year and another 20bps hike in October. US yields are more subdued and trade within recent ranges with the 2Y yield hovering above 0.5% and the 10Y yield not far below 1.60%, with trading conditions likely to remain subdued ahead of this week’s key US risk events in the form of the FOMC meeting, where the bank will announce its QE taper plans, and Friday’s October jobs report, where we will see if the return of kids to schools and the end of enhanced unemployment benefits has eased labour market shortages that have slowed the pace of hiring in recent weeks.
Commodities
Oil markets are buoyant on the first trading day of the week, with front-month WTI futures back above $84.00. The risk on environment being seen in equities is helping, but oil traders are also looking ahead to this week’s OPEC+ meeting. There have been no indications from the various OPEC+ oil ministers that have spoken recently that suggest the cartel will opt to deviate from their current plan to increase output by 400K bbl. output increase per month, despite escalating pressure from the G20 over the weekend. OPEC+ cuts continue to mean oil markets are undersupplied and oil stocks continue to be draw down globally, a trend which is now being exacerbated by high gas prices which is encouraging power generates to switch to crude oil fuel.
FX
JPY is weaker amid risk on and likely due to some of the election related optimism in Japan, and USDJPY has crept back above 114.00. Things in FX markets are otherwise quite subdued given the plethora of risk events that await later in the week. Aside from the aforementioned FOMC meeting and US jobs report, we also have a BoE policy decision (markets are split over whether or not there will be a 15bps hike or not), an RBA policy decision (market expect them to drop their yield curve control policy and perhaps sound more hawkish) and labour market data out of New Zealand and Canada, both of which are key inputs in the formulation of BoC and RBNZ rate hike expectations. DXY for now is holding onto last Friday’s gains that saw its rally above 94.00.
Day Ahead
Today the main event is the US ISM Manufacturing PMI at 1400GMT (one hour earlier than usual given that the UK reverted back from daylight saving time on Sunday, one week ahead of the US). The data should show that US economic growth remained robust at the start of Q4, though manufacturing output remains hampered by supply chain issues/bottlenecks.
