Risk Appetite Stays Supported Despite Rise in Treasury Yields

Most global equity indices continued drifting north yesterday and today in Asia, perhaps as investors become more and more optimistic over Q3 earnings. The fact that US long-dated yields also climbed higher suggests that market participants still anticipate tighter monetary policy soon, but the earnings may have provided a relieve that the economic outlook is not as bad as previously thought. Today, the highlight on the agenda may be Canada’s CPIs, with accelerating inflation adding to the case for further tapering by the BoC next week.

Earnings Continue to Support Sentiment, Canada CPIs Enter the Limelight

The US dollar traded lower against most of the other major currencies on Tuesday and during the Asian session Wednesday. It underperformed versus NZD, AUD, GBP, and slightly against CAD, while it eked out some gains against JPY and CHF. The greenback was found virtually unchanged against EUR.

The strengthening of the risk-linked Kiwi, Aussie, and recently the pound, combined with the weakening of the safe-havens yen and franc, suggests that financial markets continued trading in a risk-on manner yesterday and today in Asia. Indeed, looking at the performance in the equity world, we see that major EU and US indices traded in the green, with the only exception being France’s CAC 40, which closed virtually unchanged. The positive appetite, although softer, rolled over into the Asian session today as well. Japan’s Nikkei 225 and Hong Kong’s Hang Seng were up, but China’s Shanghai Composite was virtually unchanged, and South Korea’s KOSPI slid.

With no clear fresh catalyst to drive the markets, we believe that the continuation of the risk-on activity may be due to investors becoming optimistic with regards to Q3 earnings. Remember that last week, big US banks reported better-than-expected results, while yesterday, it was the turn of Johnson & Johnson and Travelers to reveal upbeat numbers. With the US long-dated bond yields also climbing higher, it seems that market participants continued to add to their risk exposure, despite still anticipating the Fed to tighten its monetary policy faster than earlier thought. This may be due to rushing into taking advantage of ultra-low interest rates before they start rising, or it could be because the earnings results are revealing a more encouraging picture with regards to the global economic outlook than previously assumed.

With all that in mind, and with several major indices around the globe rallying after breaking key technical resistance zones last week, we believe that more positive results could encourage more stock buying. At the same time, risk-linked currencies are likely to benefit, while the safe havens may stay on the back foot. However, as we noted yesterday, we are reluctant to call for a long-lasting recovery. We prefer to take things step by step, and the reason is that the fundamental background that triggered the latest correction in equities has not changed much. Oil prices remain elevated, which could still lead to further acceleration in inflation, while China continues to face several problems, from default risks in the property sector to tight regulations for tech firms and fresh lockdown measures due to the spreading of the Delta coronavirus variant.

Today, the main event on the scheduled may be Canada’s CPIs for September. The headline CPI rate is expected to have inched up to +4.3% yoy from +4.1%, while no forecast is available for the core one. Following the BoC’s Business Outlook Survey, which revealed that business sentiment hit a new record, accelerating inflation could add to the case for further tapering by the BoC at next week’s gathering, and may prove supportive for the Canadian dollar, which has been performing very well recently, aided by the rally in oil prices. Let’s not forget that Canada is the world’s fifth largest oil producing nation, while it holds the fourth place in terms of exports.

DAX — Technical Outlook

The German DAX traded slightly higher yesterday, after it hit support at the prior downside resistance line drawn from the high of August 31st. Then it continued in a consolidative manner, fractionally above the 15477 level. In our view, as long as the index remains above that prior downside resistance line, the outlook remains positive.

Thus, we would expect the bulls to take charge again at some point soon and perhaps push the action up to the 15630 barrier, which is near Monday’s high, and is marked by the peak of September 28th. If they are not willing to stop there, then a break higher could allow advances towards the high of the day before, at 15720, or the peak of September 17th, at 15795.

We will abandon the bullish case, if we see a drop back below the 15295 barrier, marked by the inside swing high of October 3rd. Such a move could initially aim for the inside swing high of October 12th, the break of which could see scope for extensions towards the low of the same day, at around 15015.

USD/CAD — Technical Outlook

USD/CAD traded slightly higher on Tuesday, after it hit support at 1.2310. However, overall, the pair remains below the short-term downside resistance line taken from the high of September 29th, as well as above another line, taken from the peak of September 20th. In our view, this paints a negative near-term picture.

We believe that the bears could jump back into the action soon, and perhaps push the rate down for another test near 1.2310, where a break would confirm a forthcoming lower low and signal the continuation of the prevailing downtrend. The next stop may be at 1.2250, marked by the low of June 23rd, the break of which could extend the fall towards the 1.2175 territory, marked by the inside swing high of June 10th.

On the upside, a break above the psychological figure of 1.2500 could brighten the picture, as the rate would be above both the aforementioned downside lines. The bulls may then climb to the 1.2560 level or the 1.2600 area, marked by the highs of October 8th and 7th respectively. If they are not willing to stope there, then we could see them aiming for the peak of the day before, at around 1.2650.

As for the Rest of Today’s Events

During the early European morning, we already got the UK CPIs for September. Both the headline and core rates slid slightly more than anticipated, but the pound barely reacted. After all, both rates are still well above the BoE’s objective of 2%, and thus, they are unlikely to alter the Bank’s monetary policy plans. Still, British policymakers are expected to push the hike button before year end. Eurozone’s final CPIs for September are also due to be released, but as it is always the case, they are expected to confirm their preliminary estimates.

With regards to the energy market, we get the EIA report on crude oil inventories for last week, and the forecast points to a slowdown to 1.857mn barrels from 6.088mn the week before. However, bearing in mind that, yesterday, the API reported a 3.294mn barrels inventory build, we would consider the risks surrounding the EIA forecast as tilted to the upside.

As for the speakers, we will get to hear from Chicago Fed President Charles Evans and Fed Board Governor Randal Quarles.

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