US Open Preview – Dollar cautious ahead of US CPI; Europe joins in global stock sell-off

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XM Market Review
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Here are the latest developments in global markets:

  • FOREX: Dollar/yen was barely moving around 112.22 after dropping to 111.95 early on Thursday as US 10-year Treasury yields weakened to 3.15% from 3.24% on Wednesday. Trade worries were also weighing on investors appetite despite China’s Commerce Ministry saying Beijing is open for dialogue with Washington. US CPI figures later today could bring fresh waves of volatility to the greenback (see below). The dollar index was struggling too at 95.32 (-0.20%) on the back of a stronger euro. Euro/dollar climbed further to 1.1550 (+0.28%) ahead of ECB meeting minutes which are expected to explain in detail ECB chief Mario Draghi’s hawkish mood at his latest press conference. Euro/yen recovered to 129.68 (+0.28%) and euro/pound increased positive momentum towards 0.8752 (+0.25%). The Swedish krona was the best performer rallying by 1.69% against the dollar and 1.28% against the euro after Swedish CPI figures beat expectations. Meanwhile, Riksbank’s Deputy Governor admitted that if the economy evolves according to the central bank’s projections monetary stimulus could lessen. Pound/dollar flattened at 1.3197 although comments on Brexit so far in the day were not positive; The Irish foreign minister claimed that it is too soon for an agreement, while the former UK prime minister said that the Brexit question should be put back in people. Blair also backed a second referendum, highlighting the division among lawmakers in the British parliament. The antipodeans were overperforming, with aussie/dollar and kiwi/dollar jumping by 0.47% and 0.67%. In emerging markets the Turkish lira was up by almost 2.0% , paring all losses made the past two weeks.
  • STOCKS:European stocks followed their Asian and US counterparts deeply to the downside feeling the stress over elevated government bond yields. The pan-European STOXX 600 and the blue-chip STOXX 50 tumbled by 1.41% and 1.28% respectively to 20-month lows at 0840 GMT with energy and technology losing the most (-2.14%).  The  German DAX 30 declined by 0.85%, the French CAC 40 fell by 1.10%, while the Spanish IBEX 35 declined by 1.49%. The Italian FTSE MIB lost 1.42% and the British FTSE 100 moved down by 1.42%. In Asia, stocks printed considerable losses particularly Shanghai’s Composite SSE index which dived by more than 5%. In the US, futures tracking Dow Jones, S&P 500 and Nasdaq 100 were in the red, flagging a strong negative open.
  • COMMODITIESOil prices were trading heavily early in the European session as stock markets suffered and the API weekly oil report showed on Wednesday that US crude inventories increased the sharpest in more than a year. Hurricane Michael which turned to category 4 in Florida causing energy producers to cut 42% of their daily output in the Gulf of Mexico added further to the bearish sentiment. In the aftermath, WTI crude oil dived by 2.06% to $71.66/barrel and Brent slid by 2.20% to $81.26, both plunging to 2-week lows. In precious metals, gold was benefitting on risk-off sentiment, crawling up to 1,200/ounce (+0.47%).

Day Ahead: ECB minutes and US CPI attracting attention

Thursday’s calendar features numerous releases that could spur positioning in the markets.

The European Central Bank will release minutes of the latest monetary policy meeting at 1130 GMT. While no surprises are expected after the central bank maintained the guidance that the asset purchase program will end in December 2018 and interest rates will remain steady until summer 2019, investors will be interesting to clarify central bank’s economic views and particularly its wage growth prospects. Especially after the ECB Mario Draghi increased hopes that a tighter labor market could provide support to the underlying inflation at his latest press conference. Still, he mentioned that the balance of risks surrounding growth has not changed, with traders probably shifting some attention to any comments related to the Italian fiscal burden and US trade protectionism as well.

Out of the US, the Consumer Price Index will come under the spotlight at 1330 GMT, while earlier at 1230 GMT weekly jobless claims – initial and continued – will be also awaited. . The number of initial benefits claimants for the week ending October 6 is anticipated to be 206k, little changed from the preceding week’s 207k.

The headline CPI is expected to stand at 2.4% y/y, the lowest since March, compared to 2.7% seen in the previous month while, on monthly basis, is predicted to remain unchanged at 0.2%. Excluding food and energy, the core index is expected to tick higher to 2.3% y/y from 2.2% y/y previously. After the aggressive sell-off in Wall Street and thus the free-fall in the US dollar, any upside surprise in the data could prove dollar-positive.

On the Brexit front, EU Brexit negotiator Michel Barnier said yesterday the parties had agreed on much of the withdrawal agreement ahead of a summit of the bloc’s 28 national leaders next week, driving sterling higher. Today any fresh evidence that the EU and the UK are coming closer to a deal could provide tailwinds to the pound.

In oil markets, the EIA weekly report due at 1500 GMT is expected to indicate a smaller increase in US crude oil stocks for the week ending October 5 relative to the preceding week – the increase is estimated at 2.620 million barrels versus the previous week’s build-up of 7.975 million barrels.

In terms of public appearances, ECB President Mario Draghi and ECB Board Member Benoit Cœure will be attending the IMF and World Bank Annual meetings in Indonesia today and the next two days.

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