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MNI EUROPEAN MARKETS ANALYSIS: Little Relief For China Assets Even As Chengdu Moves Out Of Lockdown

  • It has been a quiet start to the week, with Japan out and UK markets closed in observance of the Queen's funeral. We also have a host of central bank meetings this week, headlined by the Fed, BoE and BoJ. This may have also kept trading activity lighter.
  • Still, familiar themes were prevalent. The USD was supported on dips against the majors. China moved Chengdu out of lockdown but onshore equities still struggled, while USD/CNH sub 7.00 couldn't be sustained. The authorities injected liquidity as well ahead of quarter end.
  • There was no UST cash trading on account of the Japan holiday, but the bias in futures was lower. Australian front end yields were lower, although sentiment seems to be more towards a 50bps move at the next RBA meeting after last week's parliamentary testimony from Governor Lowe.


US TSYS: Tight Range Maintained In Asia As Cash Tsys Remain Closed

TYZ2 is -0-03+ at 114-20 on volume of ~30K lots after establishing a tight 0-06+ trading range in Asia-Pac dealing, paring the bulk of Friday’s gains at writing.

  • The contract consolidates a little above worst levels after a move lower earlier in the session, although it has come nowhere near Friday’s base (at 114-10+).
  • A remark from U.S. Pres. Biden early in the session repeating that the U.S. would defend Taiwan from a Chinese attack on a 60 Minutes interview drew no notable reaction in Tsy futures nor the USD, likely as the White House immediately clarified that the U.S. policy of “strategic ambiguity” has not changed.
  • Looking ahead, speeches from the ECB’s de Guindos, De Cos, and Villeroy are due, while U.S. homebuilder sentiment will headline the NY data docket.
  • Focus for the week will remain centred on a spread of central bank policy decisions, with announcements from the Fed (Wed), BOE (Thu), and BOJ (Thu) due.
  • A note that cash Tsys are due to re-open in the NY session.

AUSSIE BONDS: Just Off Best Levels; RBA Minutes Eyed

ACGBs operate around best levels after unwinding a limited downtick mid-way through the Sydney session, building on their initial bid from the overnight richening in Aussie bond futures.

  • Cash ACGBs run 2.5-4.5bp richer across the curve, with the 7- to 10-Year zone leading the way higher.
  • YM is +4.0 while XM is +4.5, with both contracts operating shy of their respective overnight highs. EFPs are little changed, while Bills run 2 to 6 ticks richer through the reds.
  • The auction of A$700mn of ACGB Sep-26 went smoothly on both pricing and cover metrics, with little by way of a meaningful reaction observed in ACGBs after.
  • RBA Assistant Gov. Kearns spoke early in the Sydney session, highlighting “considerable uncertainty” in the impact that higher rates will have on property prices and borrowing.
  • The session also saw TD Securities join NAB and ANZ in calling for a 50bp hike for Oct (and a terminal rate of 3.6% from 3.35% prev.). STIR markets now price in ~41bp of tightening for the RBA’s Oct meeting, slightly off their recent extremes (~42bp), consolidating higher amidst the repricing observed after the U.S. CPI print.
  • Tuesday will see weekly consumer confidence data due, followed by Minutes of the RBA’s Sep policy meeting.

FOREX: USD Consolidates Gains

USD gains have consolidated through the afternoon session. The DXY remains above the 109.80 level. Overall moves have been modest though, with a large number of central banks meeting this, which may have dampened activity today (along with Japan's public holiday). Note also UK markets are out due to the Queen's funeral.

  • Cross asset signals were positive for the USD. US equity futures couldn't sustain a positive footing (-0.20% Eminis), while regional equities remained in the red. There has been no cash UST trading, but UST futures are generally lower.
  • EUR/USD is sub parity but not too far away from the level (last 0.9995). USD/JPY dipped to 142.65 in early trade, but rebounded back to 143.15/20.
  • AUD/USD is holding above 0.6700 for now. Slightly outperforming the rest of G10 FX. Higher iron ore and copper prices are helping, although we are away from best levels for both metals.
  • NZD/IUSD is around 0.5975 (-0.25% off closing levels last week). GBP/USD is 1.1400/05, -0.15% for the session.
  • Looking ahead, speeches from the ECB’s de Guindos, De Cos, and Villeroy are due, while U.S. homebuilder sentiment will headline the NY data docket.
  • Focus for the week will remain centred on a host of central bank policy decisions, with announcements from the Fed (Wed), BOE (Thu), and BOJ (Thu) due.

ASIA FX: USD/Asia Dips Supported In North East Asia

USD/Asia Dips have been supported today, particularly for NEA currencies. USD/CNH and USD/KRW are comfortably off earlier lows. It has been more mixed in SEA. USD/THB is back below 37.00, while USD/IDR is nudging towards 15000. Tomorrow, no change is expected in the China LPR rates, Taiwan export orders are out, along with Malaysian trade figures.

  • USD/CNH dipped towards 6.9900 early, but is now back around 7.0150. The fixing was a fresh record surprise, but did little to boost sentiment. China stocks have struggled to stay in positive territory, despite positive Covid news over the weekend (Chengdu moving out of lockdown).
  • 1 month USD/KRW is back close to 1392, up from earlier lows around 1383/84. The authorities will be checking more regularly on banks' onshore USD trading and positions. Still, onshore equities are down over 1%. This helped cap won gains.
  • USD/TWD is again at fresh cyclical highs, 31.365, albeit finding some resistance ahead of the 31.40 level. The TWSE is down 0.9% so far today.
  • USD/INR is back to 79.60/15, -0.15% on previous closing levels. Local equities are outperforming (+0.65% so far today) the broader regional trend.
  • USD/IDR is back to 14980, threatening a break above 15000, highs last seen in July. Higher UST real yields are weighing on the rupiah, but the currency is still outperforming NEA currencies.
  • USD/THB has moved away from the 37.00 level. We were last at 36.90. The BoT stated late last week that it would curb extreme volatility in the FX. The country also expects 2023 to see tourism inflows return to 80% of pre-Covid levels.

EQUITIES: Lower In Asia; Hang Seng Hits Fresh Six-Month Lows

Most Asia-Pac equity indices are in the red at typing on a negative lead from Wall St., with the move lower in the latter aided in part by FedEx’s well-documented warnings re: worsening economic conditions after the bell on Thursday.

  • The Hang Seng deals 0.8% worse off, operating around fresh six-month lows at writing. The Properties (-0.9%) sub-index leads losses, with underperformance in the Hang Seng Mainland Properties Index (-3.1%) reflecting worsening sentiment in China-based developers.
  • Stocks linked to travel and hospitality bucked the broader trend of losses, with the likes of Chow Tai Fook (+7.0%) and Cathay Pacific Airways (+2.0%) outperforming after source reports from local media stated that the city may soon relax some travel restrictions.
  • The CSI300 sits 0.1% better off at typing, eking out gains on strength in the high-beta consumer staples (+1.3%) sub-index even as the Shanghai Composite (-0.2%) and ChiNext (-0.5%) struggled.
  • The ASX200 trades 0.1% lower at writing, little changed as outperformance in materials (Mineral Resources Ltd: +4.3%) was offset by weakness in healthcare and tech equities.
  • E-minis deal 0.1-0.4% worse off at writing, operating around session lows heading into European hours.

GOLD: Paring Friday’s Gains

Gold deals $6/oz softer at writing to print $1,669/oz, edging lower after failing to break above Friday’s best levels earlier in the session.

  • To recap, gold rose from 29-month lows (at $1,654.2) on Friday to close $10 firmer, hitting session highs on the release of preliminary UoM data, with the rebound aided by a pullback in the USD (DXY) after a brief break above the 110.00 mark.
  • To elaborate on the former, gold likely drew some support from the slight miss in 5- to 10-Year inflation expectations (+2.8% vs BBG median +2.9%) and as-expected decline in 1-Year inflation expectations (+4.6%), even as the sentiment survey disappointed (59.5 vs. BBG median 60.0).
  • Looking ahead, the FOMC decision on Wed remains the key risk event, with the size of the rate hike in focus. Sep FOMC dated OIS now price in ~80bp of tightening, pointing to ~20% odds of a 100bp move at that meeting.
  • From a technical perspective, conditions remain bearish following the breach of its bear trigger at $1,681.0 last Thursday. Initial support is seen at $1,654.2 (Sep 16 low), with a breach of that level potentially exposing further support at $1,640.9 (Aug 8 ‘20 low).

OIL: Light Bid As Chengdu Exits Lockdown

WTI and Brent are $0.50 better off apiece, extending a move off of their respective session lows on Friday.

  • WTI and Brent caught an early, limited bid after the Chinese city of Chengdu (pop. ~21mn) announced an end to a two-week lockdown, to begin today.
  • Both benchmarks failed to breach their respective Friday’s highs despite the above development, suggesting a lack of conviction behind the implied improvement in energy demand, as China’s COVID-zero strategy remains in place.
  • Elsewhere, RTRS reports highlight that output at Kazakhstan’s Kashagan oil field will remain at ~100K bpd (usual ~400K bpd output) after an emergency gas release in Aug, with Energy Minister Akchulakov stating that output would recover “in October at best”.
  • The prompt spread for Brent has risen to $1.40 at writing, returning to around their highest levels observed for Sep, pointing to a rise in worry re: tightness in near-term global crude supplies.
  • Looking ahead, WTI and Brent continue to operate around the lower end of their YtD range amidst a rise in worry re: central bank-led economic slowdowns, with focus this week expected to centre around policy decisions from the Fed, BOE, and BOJ.

UP TODAY (Times GMT/Local)

DateGMT/LocalImpactFlagCountryEvent
19/09/20220900/1100**EU Construction Production
19/09/20220900/1100EUECB de Guindos at Consejos Consultivos Meeting
19/09/20221230/0830*CA Industrial Product and Raw Material Price Index
19/09/20221400/1000**US NAHB Home Builder Index
19/09/20221530/1130*US US Treasury Auction Result for 13 Week Bill
19/09/20221530/1130*US US Treasury Auction Result for 26 Week Bill

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