Ten Factors affecting FX, Equities and Bonds – Oct 10th

1. Prior to the BoE rate decision earlier this morning Sterling extended its losses, however, since the expected rate announcement GBP seems to have registered it lows for the time being. The “Old Lady” has kept rates steady at +0.5% as Governor Carney has tied any changes in rates to a drop in the national unemployment rate to +7%. The BoE has retained the same level of ₤375b for its QE program.

2. The level of anxiety over a US default actually occurring appears to have peaked – probably on Tuesday. The “olive branch of sorts offered by President Obama” in the form of a short-term extension of the debt ceiling and spending authority, while ongoing ‘new’ negotiations can take place is helping ease some investors fears. Despite some of the speechmaking remaining heated, there is a sense by Capital markets that the worst of this round has passed, and there is movement toward a short-term fix.

3. The EUR is nudging a tad higher across the board as markets “de-stress on growing hopes of at least a short term increase in the US debt ceiling.” Euro periphery bonds yields are a touch easier in late European trading. The 17-member single currency has maintained its strong gains against the Scandies (SOK, NOK) after weak domestic data prints.

4. The ECB’s Draghi is to create currency swap lines with China’s PBoC. Europe will have access to CNY57b, while the PBoC will have $61b’s worth. This is certainly a sign of China’s growing trade and financial importance in European. The objective of the swap lines is to meet the financial obligations of financial institution and their need for foreign denominated funds. The three-year deal will be similar to swap agreements between the EURO and the US, Canada and UK. The deal is to serve as a backdrop liquidity facility.

5. Equity markets are trading better bid ahead of a White House meeting that will include key Republicans and President Obama – the first such meeting since the 10-day US government shutdown began. It seems that common sense is coming to the fore; finally Washington lawmakers are clueing into the fact at just how big the global fallout would be if the debt ceiling were breached.

6. Janet Yellen finally gets the nod from Obama – if and when confirmed, the current vice-fed chair has a tough task managing and defining when she and her cohorts will step back from the expansive monetary programs employed over the past six-years. Yesterday’s minutes indicated that it was a close call with last month’s surprise “no taper” decision.

7. IMF Officials critical of Japan’s PM Abe’s goals – Senior officials have indicted that it will be difficult for BoJ officials to meet the +2% inflation goal within its two-year time horizon. The country’s inflation expectations are not growing ‘significantly’.

8. US Labor market deterioration continues with this mornings US claims surging +66k last week. Analysts have already explained away the increase – 50% comes from California getting its computer act in gear (error in reporting) and +15k is from the federal shutdown. Both reflect job-losses, loss of income and confidence. Expect claims to keep rising in the coming weeks. US Treasurys has been able to recoup some of their losses amid the much bigger than forecast jump in last weeks claims.

9. Safe haven demand remains lukewarm today on hopes that the fiscal impasse is thawing – giving a leg up to riskier assets. US 10-year yields have backed up to +2.711% while the hard hit 1-month T-bills have stabilized. Short term Bill yields have tightened from Monday’s high of +0.34% to +0.27%. This afternoons $13b supply of 30-year bonds will cheapen up the long end a tad further.

10. Gold continues to struggle and recapture the pre-shutdown levels of $1,340/oz. Currently straddling the $1,300 level is disconcerting for most commodity bulls. Once the debt ceiling issue has been resolved long term support levels will be hastily tested.

Dean Popplewell, Director of Currency Analysis and Research @ OANDA MarketPulse.com

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