MNI US OPEN - UK Tumult Continues as Bank Rate Pricing Soars

NEWS

UK (MNI): MNI BOE Review: 75bp in November looking likely

There has been a huge repricing in terms of both market pricing and analyst expectations following both the September MPC meeting and the government's fiscal update ("Growth Plan"). Of the analysts that have explicitly updated or reaffirmed their views following the latter, 12/15 (80%) look for a 75bps hike in November while markets at Friday's close priced around 89bp.

Expectations for the terminal rate among those same analysts saw a median of 4.00%, with 80% of analysts expecting a terminal rate in the 3.50-4.25% range. This is considerably lower than the 5.50% terminal rate markets were pricing.

RUSSIA (MNI): Moscow to Extend "Full Protection" to Annexed Territories, West Threatens Punitive Measures

Russia's Foreign Minister Sergei Lavrov threatened that Moscow will extend "full protection" to any annexed territory as the West threatened punitive measures and Russia appeared to be tightening border controls amidst its partial mobilisation.

JAPAN (MNI): BOJ's Kuroda to Act If Sharp Downturn Materialises

Bank of Japan Governor Haruhiko Kuroda said on Monday that the BOJ will undertake additional easing if downside risks to the economy materialise without elaborating on possible policy responses.

“The risk of global economic deceleration is strengthening. If the global economy worsens sharply, Japan’s economy will be hit by it. We will take additional easy policy if such a risk materialises,” Kuroda told business leaders in a question and answer session.

ITALY (MNI): Center Right Fratelli d'Italia Set To Form Coalition Government
Yesterday's Italian general election delivered a decisive victory for the center-right coalition of Fratelli d'Italia, Forza Italia and Lega. FdI slightly outperformed expectation at the expense of other right right-wing parties Forza Italia and Lega, giving FdI leader Giorgia Meloni a strong mandate to build a government.

CHINA (MNI): PBOC Hikes Risk RRR On FX Forwards as Yuan Weakens

The People’s Bank of China hiked the risk reserve requirement ratio on foreign exchange forward sales on Monday to curb the sharp drop in the yuan, which has fallen to its lowest level against the U.S. dollar since May 2020.

The central bank will impose a 20% risk RRR on banks selling forex in the forwards market, effective on Sep 28, in a bid to “stabilize expectations in the forex market and enhance macro prudential management”, according to the PBOC’s website.

DATA

GERMAN DATA: IFO Sees Outlook Worsen (MNI)

• GERMANY SEP IFO BUSINESS CLIMATE 84.3 (FCST 87.0); AUG 88.6r
• GERMANY SEP IFO CURRENT ASSESSMENT 94.5 (FCST 96.0); AUG 97.5
• GERMANY SEP IFO EXPECTATIONS 75.2 (FCST 79.0); AUG 80.5r

The German Ifo business survey slumped to the lowest since May 2020 as outlooks across manufacturing, services, trade and construction all fell further into pessimistic territory. Ifo continues to expect a Q3 contraction. The headline index, current assessment and expectations indexes again fell further than expected.

Acute concerns regarding inflation and gas/energy supply shortages remain key issues headed into year-end. Although Friday's PMIs saw supply chain issues easing, this effect has clearly been overshadowed by gloomy economic growth outlooks.

On Wednesday the GfK consumer confidence index will be released, likely to slide to a fresh low and generate further concern for the ECB as they hike into a recession.

FOREX: GBP Downdraft Erased, Cable Little Changed

• Another session of monumental price action for GBP, with the currency spiralling in early Asia trade to put GBP/USD at record lows of 1.0350. The extension of weakness after last week's BoE Decision / Mini-budget had prompted unparalleled volumes spikes across Asia-Pac futures markets early Monday, with data suggesting a flurry of smaller orders were responsible, larger than one or two large trades.
• Price action has largely reversed ahead of the NY open Monday, with GBP/USD recouping losses to trade just below the $1.08 handle. Sentiment still clearly remains weak however, but a strong technically oversold condition could limit losses from here.
• Elsewhere, the USD Index continues to creep higher, with the gauge printing a fifth consecutive session of higher highs. EUR/USD holds below the $0.97 level, with $0.9554 printed overnight and marking the new low watermark for the pair.
• Focus turns to the central bank speakers slate, with EC's Lagarde, Centeno and de Cos on the docket as well as Fed's Collins, Bostic, Logan and Mester. BoE's Teneyro also makes an appearance - comments that will likely be carefully watched given the volatility in UK rates expectations so far Monday.

UK: What Happened in GBP Markets Overnight?

• GBP remains comfortably the poorest performer in G10, with GBP/USD spiralling lower to touch 1.0350 overnight, as markets continue the downdraft after last week’s BoE/Mini-budget. But what actually happened in currency markets?
• At 0159BST, GBP futures saw a considerable spike in volumes. 5,175 contracts traded inside 60 seconds, amounting to a cash equivalent of ~$345mln – some serious volumes for a normally sleepy overnight market. Bloomberg’s quote recap shows relatively few single, large trades crossing at that time, suggesting instead a flurry of smaller orders, rather than one single order driving this particular market at that time.
• As such, headed into the NY open, GBP futures volumes have traded over four times the average for this time of day, meaning today’s action already has topped a full day of average volumes.

BOE: What happens if an APF gilt sales operation isn't filled?

• Lots of market talk as to what happens if there is an uncovered BOE APF gilt sales auction - and whether the BOE would accept a big discount if there were not enough acceptable bids to clear the whole GBP580mln auction amount.
• The answer is: there a minimum prices the BOE will accept, any unallocated sales proceeds are rolled over to future auctions, and the BOE also retains the right to cancel and re-schedule any sales operation to either later in the day or a future day before the publication of results - note that the latter has been used previously in terms of technical difficulties when the BOE was buying rather than selling gilts.
• The following details are from BOE Market Notices:
  • "The Bank intends to set minimum levels for the bid prices / maximum yields it is willing to accept, as a backstop, in support of its objective not to disrupt the functioning of financial markets. This backstop will be set at a level such that it would not be expected to bind regularly, but would allow the Bank to respond to evidence of particularly weak demand within the auction by reducing the amount it supplies in those conditions."
  • "Any unallocated sales proceeds in an auction will be incorporated into the sales proceeds target for future auctions in order that the MPC’s target reduction in the stock of gilts will still be met."
  • "The Bank reserves the right to cancel an auction at any time before the results are published, at its sole discretion. If an auction is cancelled it may be re-scheduled to take place later the same day, or on a future date. "

BOND SUMMARY: UK markets driving core FI

• It's been all about the UK this morning with markets SONIA futures seeing another up to to 80 tick drop this morning on the back of further follow through from last week's BOE meeting, the UK government fiscal event and further comments from the Chancellor over the weekend that more tax cuts are to come.
• The gilt curve has been bear flattening this morning and the UK 2s10s curve (after almost a 20bp move) is now the most inverted it has been in over 15 years at -34.5bp. 10s30s has flattened, too, but has yet to break through the lows seen in June of this year.
• USTs and EGBs have been pulled low by gilts (although those curves have actually bear steepened slightly) but the moves are tiny in comparison to those seen in gilts today.
• We have also seen BTP-Bund spreads widen around 6bp following the weekend election results.
• TY1 futures are down -0-19+ today at 112-00+ with 10y UST yields up 7.5bp at 3.764% and 2y yields up 6.9bp at 4.275%.
• Bund futures are down -0.72 today at 138.76 with 10y Bund yields up 6.3bp at 2.083% and Schatz yields up 4.8bp at 1.948%.
• Gilt futures are down -2.93 today at 961.16 with 10y yields up 32.4bp at 4.148% and 2y yields up 51.8bp at 4.445%.

EQUITIES: S&P E-Minis' Downtrend Accelerates

EUROSTOXX 50 futures remain soft following the reversal on Sep 13, from 3678.00, the Jun 13 high and last week’s follow through. Key short-term support at 3423.00, the Sep 5 low has been cleared, the break strengthens bearish conditions. S&P E-Minis trend conditions remain bearish following last week’s extension lower - the trend has accelerated following the break of the July support.

• Japan's NIKKEI closed lower by 722.28 pts or -2.66% at 26431.55 and the TOPIX ended 51.84 pts lower or -2.71% at 1864.28.
• Elsewhere, in China the SHANGHAI closed lower by 37.143 pts or -1.2% at 3051.226 and the HANG SENG ended 78.13 pts lower or -0.44% at 17855.14.
• Across Europe, Germany's DAX trades higher by 46.38 pts or +0.38% at 12331.52, FTSE 100 lower by 11.07 pts or -0.16% at 7007.34, CAC 40 up 20.44 pts or +0.35% at 5804.96 and Euro Stoxx 50 up 17.61 pts or +0.53% at 3366.75.
• Dow Jones mini down 47 pts or -0.16% at 29633, S&P 500 mini down 5.25 pts or -0.14% at 3705.25, NASDAQ mini up 5.75 pts or +0.05% at 11388.

COMMODITIES: Gold Breaks Below Recent Range

Bearish conditions in WTI futures were reinforced last week - the contract cleared support at $80.89, the Sep 8 low. This marks a resumption of the downtrend and maintains the bearish price sequence of lower lows and lower highs. Gold traded lower Friday, breaking out of its recent range and in the process confirmed the bear flag formation evident on the daily chart. The break confirms a resumption of the downtrend.

• WTI Crude down $0.17 or -0.22% at $78.26
• Natural Gas down $0.13 or -1.87% at $6.7
• Gold spot up $2.96 or +0.18% at $1646.96
• Copper down $1.8 or -0.54% at $332.3
• Silver down $0.13 or -0.67% at $18.7451
• Platinum up $3.87 or +0.45% at $863.02