Market Overview

The most notable theme today is the sharp decline in global equity markets following the unexpected turnaround in US stocks yesterday. Major indices across the Asia-Pacific region dropped over 2%, while Europe’s Stoxx 600 fell more than 1%, marking its sixth sell-off day in seven sessions. Although US index futures initially fell more steeply, they have since partially recovered during European trading hours, with S&P futures down marginally and Nasdaq futures off approximately 0.25%.

Fixed Income and Safe Havens

Government bonds have attracted safe-haven inflows amid the risk-off sentiment. Japanese Government Bonds (JGBs) saw a rare rally at the long end for the first time in over two weeks. European bond yields declined by 2 to 5 basis points. Moody’s is scheduled to announce the outcome of its debt rating review of Italy today, with an upgrade being a potential outcome. Meanwhile, the 10-year US Treasury yield has fallen to about 4.06%, marking a new monthly low and down a couple of basis points.

Currency Markets

The US dollar has generally strengthened, though notably, the Japanese yen is the strongest G10 currency today. This is driven by explicit interventions threats from Tokyo that have prompted some short-covering, albeit limited. The New Zealand dollar also showed relative resilience, gaining around 0.2%, buoyed by widespread expectations that the Reserve Bank of New Zealand will cut interest rates next week. Most emerging market currencies retreated, led by declines in the Indian rupee (-0.80%) and South African rand (-0.60%).

Commodities

Gold failed to attract safe-haven demand amid the turmoil and slipped to a three-day low, trading slightly below $1,4023 and hovering near its 20-day moving average around $1,4039. January WTI crude oil prices declined to nearly $57.40, a four-and-a-half-week low.

US Dollar and Economic Data

The US Dollar Index matched its monthly high near 100.35 yesterday, its highest since late May. It has now settled above its 200-day moving average for two consecutive sessions, a first since early March. Momentum indicators are supported by the fact that this marks the fourth gain in five sessions. The index is consolidating mostly within the 100.00 to 100.25 range, with the next significant technical target near 101.55, the 38.2% retracement of this year’s decline.

In labor market data, nominal average hourly earnings increased by 0.2% in September, maintaining a stable year-on-year growth rate of 3.8%. The Bureau of Labor Statistics is scheduled to release real earnings data today, which, in conjunction with inflation figures, will allow better assessment of purchasing power trends. August data indicated a gap of roughly 3.0% between nominal and real earnings growth, close to the 2.9% CPI inflation for that month.

Preliminary November Purchasing Managers’ Indexes (PMIs) are expected to soften somewhat after the composite figure posted 54.6 in October — the year’s second highest and slightly above the third quarter average of 53.3. The final University of Michigan consumer sentiment reading and the KC Fed’s services activity report for November are not anticipated to significantly move markets.

Federal Reserve officials Williams, Barr, Jefferson, and Logan will speak today. Although Logan does not vote on policy this year, any remarks on balance sheet normalization will attract attention.

Eurozone Developments

The euro has encountered selling pressure for five consecutive days, trading near $1.15 yesterday but unable to breach that level significantly, likely due to large option expirations at that strike and others around $1.1535. Today it has been capped just above $1.1550 but slipped after release of soft preliminary PMI data, hovering near $1.1510. A break below $1.1500 could expose support in the $1.1470 to $1.1480 range.

In the eurozone, the November preliminary manufacturing PMI fell slightly from 50.0 to 49.7, indicating contraction as it dipped below the 50 threshold for the first time since May 2023. Services PMI edged up marginally to 53.1 from 53.0. The composite PMI barely eased to 52.4 from 52.5, marking the first deceleration since May. Separately, negotiated wage growth in the euro area slowed sharply to 1.87% year-over-year in Q3, well down from about 4.0% in Q2 — the smallest increase since Q3 2021.

Chinese Yuan (CNY) Dynamics

The US dollar has been restrained near CNH7.12 for a third straight session, roughly mid-range within the persistent CNH7.0850 to CNH7.1550 band seen since mid-September. The dollar remains supported above Wednesday’s low of about CNH7.1085. After three consecutive rises in the official reference rate, the People’s Bank of China (PBOC) slightly lowered it today to CNY7.0875 from CNY7.0905 yesterday. Nonetheless, this marks the first weekly advance in the dollar’s fix against the yuan in eight weeks.

Japanese Yen and Economic Indicators

The Bank of Japan’s verbal intervention aimed at stemming the yen’s depreciation has so far had limited effect. The yen has weakened every day this week until today, when a more explicit threat of significant currency market intervention strengthened the yen by around 0.5%, making it the top-performing G10 currency for the session.

The dollar hovered near JPY156.50 today, following a peak near JPY157.90 yesterday. The JPY156.25 level corresponds to the 38.2% retracement of the recent rally from JPY153.60 starting last Friday. Without a substantial reversal, the yen is poised to record its 10th weekly decline against the dollar in the last 13 weeks.

Japanese data releases today showed October inflation rose slightly, with headline CPI at 3.0% year-on-year (from 2.9% in September) and core CPI excluding fresh food steady at 3.0%. Another measure excluding both fresh food and energy inched up to 3.1%. October trade data revealed a nearly stable deficit of JPY232 billion versus JPY237 billion in September. Year-to-date trade deficits have contracted substantially to JPY3.06 trillion from JPY5.63 trillion. October exports increased by 3.6% year-over-year and imports rose 0.7%. The November preliminary composite PMI was 52.0, up marginally from 51.5 in October, led by improved manufacturing (48.8 from 48.2) and stable services (53.1).

Geopolitical tensions with China over recent Taiwan-related comments by Japan’s Prime Minister Takaichi remain elevated, raising concerns of further escalation. The Japanese cabinet also approved fresh fiscal stimulus measures totaling JPY17.7 trillion ($112 billion), part of a broader JPY21.3 trillion economic package. Meanwhile, Japan’s 30-year government bond yield declined for the first time in 12 sessions, and the 40-year yield fell after 14 sessions of gains.

British Pound (GBP)

Sterling rebounded modestly from a two-week low near $1.3040 to session highs close to $1.3125 during North American trading hours, managing to regain about half of last week’s losses from near $1.3215. However, it faces resistance near $1.3150 to $1.3160; clearing this zone could invite further short-covering ahead of next week’s UK budget. The pound struggled to hold modest gains, retreating toward $1.3050 this morning. Breaching support at $1.3035 may bring renewed testing of $1.3000, with $1.2945 representing the midpoint of this year’s advance.

UK data revealed weaker-than-expected October retail sales, declining by 1.1% following a revised 0.7% rise in September. Excluding gasoline, retail sales dropped 1.0% after a 0.7% gain the prior month. Notably, UK retail sales are measured by volume rather than price. The preliminary November PMI showed manufacturing activity firmed slightly to 50.2 from 49.7, while services activity slowed to 50.5 from 52.3, pulling the composite PMI down to 50.5 from 52.2 in October. The composite average for Q3 was 51.7.

Canadian Dollar (CAD)

The US dollar rallied above CAD1.41 yesterday amid sharp shifts in risk sentiment. This contrasts with Tuesday when the greenback had weakened to just below CAD1.40. It reached CAD1.4065 on Wednesday and extended gains yesterday, holding above CAD1.4080 today near the CAD1.4100 mark. The monthly high stands near CAD1.4140, a seven-month peak, although still shy of the midpoint of this year’s range near CAD1.4165.

Canadian retail sales are forecast to have contracted by 0.7% in September following a robust 1.0% increase in August. Excluding autos, retail sales may have fallen by 0.5%. Canada will report Q3 GDP data next week, with the economy expected to have grown modestly after a 1.6% annualized contraction in Q2, its first decline since Q3 2023. The median forecast anticipates 0.5% growth in Q3.

Australian Dollar (AUD)

The Australian dollar briefly tested its 200-day moving average on Wednesday but closed below this key technical level for the first time since late May yesterday, settling near $0.6435 and sliding further to just under $0.6425 today. Support lies near $0.6400, which also corresponds with the 38.2% retracement of this year’s rally.

Australia’s preliminary composite PMI for November rose to 52.6 from October’s 52.1, following a Q3 average of 53.9 that improved substantially from 51.0 in Q2 and 50.4 in Q3 2024. The manufacturing PMI advanced to 51.6 from 49.7 while the services PMI ticked slightly higher to 52.7 from 52.5. The market reaction was muted despite these positive developments.

Mexican Peso (MXN)

The Mexican peso, previously showing resilience, weakened sharply amid the reversal in risk appetite. The dollar was briefly sold to a marginal three-day low near MXN18.30 but rebounded to settle above Wednesday’s high around MXN18.3715, approaching a peak near MXN18.48 observed today. The midpoint retracement of this month’s losses is approximately MXN18.5120. A near-term price floor appears to have formed around the MXN18.25 to MXN18.30 range over the past two weeks.

Mexico will revisit its Q3 GDP report today, following earlier data showing a 0.3% quarter-over-quarter contraction and a 0.2% year-over-year decline. September’s industrial activity (IGAE) data may indicate continued weak momentum, expected to have fallen 0.1% after a 0.57% gain in August. Upcoming CPI data for the first half of November and the central bank’s inflation report will be critical in shaping expectations ahead of the next monetary policy decision.

Disclaimer

This analysis is provided for informational purposes only and does not constitute investment advice. Readers should conduct their own research or consult a financial advisor before making trading decisions.