Price action for the majority of asset classes was relatively quiet throughout yesterday’s North American session, with the Remembrance and Veterans Day holidays sapping liquidity from markets as many traders observed the long-weekend. Equities ended the day virtually unchanged, while the currency markets also displayed little volatility with USDCAD remaining pinned in the high-1.04s.
Asian equity indices have started the week on solid ground, posting two straight days of gains before the conclusion of the four-day policy meeting in China where leaders have been discussing prospects for implementing broad reforms to shape the future economic landscape in the region. Central bank data on Monday showed that loan growth in China slowed from September to October, with Chinese banks’ lending 506.1bn yuan in the month of October, lower than the 600bn which analysts had forecast and less than the 787bn posted in September. The figures on the aggregate M2 money supply were in line with forecasts, increasing at a rate of 14.3% when compared to a year earlier, easing some concern that lending is once again getting out of hand in the region and that the mediocre growth statistics are only being fueled by credit expansion and not organic progress. The dampened loan expansion during the month of October supports rhetoric from leaders promising a more sustainable growth trajectory in the future, and should give policy-makers the confidence to charge ahead with plans for further reform at the third plenary session, although the official statement from the conclusion of the meeting offered only very broad strokes of the changes that have so far been agreed to. While the party didn’t issue any specifics surrounding any gallant reforms for the country’s state-owned enterprises, the Communist Party ensured that the free market would play a “decisive” role in allocating resources, whereas previously it had only had taken a “basic” role. The Shanghai Comp finished up by 0.82%, while the Nikkei climbed by 2.23% as the yen rose into the mid 99s against the big dollar.
The highly anticipated inflation figures for the UK economy during the month of October were released overnight; closely watched to see how the statistics for October would alter the market’s consensus of when we could potentially see the BoE look to increase interest rates. Analysts had been expecting a softening in fuel prices to drive the annualized reading for consumer prices down to 2.5% from the 2.7% registered in September; however, the official reading showed inflation slowed faster than originally anticipated printing at 2.2%. The drop in consumer prices now has inflation at the lowest rate since September of 2012, and should give the policy makers on Threadneedle Street a little more breathing room to leave rates at historically low levels, easing fears that the stubbornly high inflation will prompt one of the BoE’s knock-out clauses and force the bank to raise rates sooner than it anticipated. The pound came under pressure after the soft consumer price numbers, dropping south of the 1.59 handle against the USD as traders and investors re-priced the inflationary risks to the BoE’s interest rate outlook. Cable has since gained some of the lost ground back, trying to re-establish itself above the 1.59 level, while the FTSE displays a negative tone to its tape and is lower by 0.37% at the time of writing.
The positive sentiment exhibited during the overnight Asian session has failed to transpire in either European or North American markets, with S&P futures weaker as we get set for the opening bell. The Dollar Index (DXY) is firm and negatively affecting emerging markets and high-yielding currencies; USDCAD leaked higher during the overnight session, but couldn’t find enough momentum to vault itself north of the 1.0500 handle. The weak sentiment towards the Loonie is a factor of narrowing interest rate spreads between Canada and the US, soft energy prices as WTI once again slides below $95/barrel, and a widening spread between world benchmark oil price and what Canadian producers can realize on the open market; the WTI-WCS front month spread has increased past $40/barrel as of this morning. The economic docket is fairly light today, although the US POMO will be conducted later this morning and Fed speakers Kocherlakota and Lockhart hitting the podium later in the afternoon. The combination of the two events will likely influence equity prices and risk appetite throughout the day, and will be a guide for the DXY as traders parse the language of the Fed presidents to gauge whether any direction or hints on the Fed’s taper timeline can be gleaned from their speeches.
The economic calendar remains light for North America tomorrow, although further ammo for Pound traders will hit the wires overnight as the unemployment situation in the UK and the Bank of England’s inflation report are both released. The employment statistics for the British economy are expected to see continued improvement in the month of October, with analysts believing an additional 35k people will move away from claiming unemployment benefits. The BoE’s quarterly inflation report is also due out tomorrow morning, with any changes in longer-term inflation expectations more aligned with the broader market signaling the potential for the first rate increase from the central bank to come sooner than the originally anticipated time frame of the second half of 2016. A better reading on the employment front along with an inflation report from the Bank of England that is more in line with market expectations could give corporations that are naturally long GBP another chance at off-loading some exposure after today’s dip, while corporates short GBP may want to consider taking advantage of today’s move as the initial Sterling sell-off has been met with decent buying interest.