Equities Rebound on Debt Ceiling Optimism
Risk appetite improved during the US session yesterday, after Senate’s top Republican said his party would support an extension of the federal debt ceiling into December. What may have also helped equities to rebound may be the pullback in oil and gas prices, after Russian leaders indicated that supply to Europe could increase. However, we are still reluctant to call for a change in the broader fundamental background of the financial world.
Signs of Common Ground in US Senate Lift Sentiment
The US dollar traded lower against most of the other major currencies on Wednesday and during the Asian session Thursday. It lost ground against AUD, JPY, CHF, and CAD in that order, while it gained only versus EUR and GBP. The greenback was found virtually unchanged against NZD.
The simultaneous weakening of safe-haven and risk-linked currencies paints a confusing picture with regards to the broader market sentiment and therefore, in order to clear things up, we prefer to turn our gaze to the equity world. There, major EU indices traded in the red, but later, all three of Wall Street’s main indices closed in positive waters. The recovery in investors’ morale rolled over into the Asian session today as well.
It seems that EU shares took the torch from the Asian ones on Wednesday, which slid after the RBNZ hiked interest rates and signaled that more is very likely to come, reminding market participants that other major central banks may also tighten their respective policies faster than previously thought. That said, risk appetite improved during the US session, after Senate’s top Republican, Mitch McConnell, said his party would support an extension of the federal debt ceiling into December. Although this has far from diminished the chances over a government shutdown, it is a first sign of compromise in the latest standoff between Democratic and Republican lawmakers over the matter.
Without any action, the Treasury Department has forecast that it will run out of ways to meet all its obligations by October 18th, something that could result in delayed salaries for millions of federal employees, as well as delayed unemployment insurance and medical payments. Still the matter may need to be addressed again in December and therefore, even if equities trade higher for a while more, we are reluctant to call for a positive switch in the broader outlook. The other fundamental themes that have pushed equities lower recently remain well on the table as well. Those are fears over the impact of Evergrande’s potential default to the global economy, as well as concerns over persistently high inflation, which could lead to faster-than-previously thought tightening by major central banks.
What may have also helped equities to rebound yesterday may be the pullback in oil and gas prices, after Russian leaders indicated that supply to Europe could increase. However, with only talks and no concrete action yet, and with energy prices staying in steep uptrends, we believe that market participants may stay concerned over high energy prices translating into further acceleration in inflation. Therefore, we stick to our guns that the path of least resistance for stock indices may still be to the downside, and that the recovery late yesterday and overnight may be just a corrective bounce. At the same time, we do see the case for the US dollar to continue trending north, especially if tomorrow’s NFPs add extra credence to the case of a November tapering by the FOMC.
Euro Stoxx 50 — Technical Outlook
The Euro Stoxx 50 cash index traded lower during the early European morning yesterday, but hit support at 3964, and rebounded sharply later in the day. Overall though, the price structure continues to suggest a choppy short-term downtrend and thus, we would consider the latest rebound as a corrective move before another potential leg south.
The bears may take charge again from near the 4068 barrier, marked as a resistance by the high of October 5th, with the forthcoming slide perhaps resulting another test at 3964. If that barrier surrenders this time, we may experience extensions towards the 3904 zone, near the low of July 19th.
In order to abandon the bearish case, at least for a while, we would like to see a recovery above the peak of September 30th, at 4117. This could initially target the inside swing low of September 24th, at around 4150, the break of which could carry extensions towards the high of the day before, at 4205.
USD/CHF — Technical Outlook
USD/CHF traded lower after it hit resistance at 0.9307. However, the rate remains above the upside support line taken from the low of August 4th, and thus, we would consider the near-term outlook to still be cautiously positive.
The current retreat may continue for a while more, but the bulls may jump back into the action from near the upside support line. This could result in another test at 0.9307, the break of which could target the peak of October 1st, at 0.9337. Another break above 0.9337 could pave the way towards the peak of September 30th, at 0.9369.
We will start examining a bearish reversal upon a dip below 0.9220, a zone which acted as a temporary floor for the rate between September 22nd and October 4th. This will confirm a forthcoming lower low as well the break below the aforementioned upside support line. The bears may get encouraged to push the action towards the low of September 15th, at 0.9163, where another break may pave the way towards the 0.9115 territory, marked by the lows of August 31st and September 3rd.
As for Today’s Events
During the EU session, we get the minutes from the latest ECB monetary policy meeting. At that meeting, the Bank announced a “moderately lower pace” of PEPP purchases for the following quarter, but President Lagarde made it clear that this was not a tapering move, and that when PEPP is over, they have all other tools available. In our view, this may be a hint that when PEPP is over, conditional upon the economic outlook, they could compensate by buying more through other schemes, like the Asset Purchase Program (APP). So, we will scan the minutes to see whether this is the case. Clearer hints that the Bank stands ready to offset the end of the PEPP by buying more through other programs could encourage more euro selling.
Later in the day, the US initial jobless claims for last week are due to be released and expectations are for a small decline to 348k from 362k. Canada’s Ivey PMI for September is also coming out, but no forecast is available.
As for the speakers, we will get to hear from ECB Executive Board members Frank Elderson, Philip Lane, and Isabel Schnabel, as well as by BoC Governor Tiff Macklem.
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