Congressional band-aids plaster over China’s return

The US Senate has slapped a fiscal band-aid over the US debt ceiling saga this morning, voting to raise the USD 0.50 trillion and temporarily extend its cut-off to early December. The can-kicking exercise by the Hill was enough to provide temporary relief for US equities and looks likely to overshadow the return on mainland China market from the Golden Week holiday.

Interestingly, US bonds refused to get caught up in the hype in what has been, despite the deafening noise volumes, a sideways week for many asset classes. US Initial Jobless Claims dropped unexpectedly to 328,000 overnight and bonds remained firmly on taper watch into this evening’s pivotal US Non-Farm Payrolls data. That is sensible in my opinion as come early December, the Democrats will be forced to use reconciliation to pass a more meaningful debt ceiling legislation, while at the same time likely using the same process to pass their multi-trillion spending packages through the US Senate. Ignore the short-term noise from the FOMO-gnomes of the equity market, this story still has a lot more to give.

Japan has formally pencilled in October 31^st for a snap lower house election. Newly installed Japan Prime Minister Kishida has also announced instructions to his cabinet to compile economic stimulus measures for an extra budget to be submitted after the election. Following a positive debt sticking plaster session from Wall Street equities, news that the hoped-for fiscal goodie bag has been confirmed has seen the Nikkei 225 soar by over 2.0% this morning. I do note though, that the Nikkei is now as subject to the fast-money whims as US markets these days, and a very high Non-Farm print tonight could evaporate today’s rally on Monday.

China markets have returned from a week-long holiday and inevitably Evergrande, and what to do with it, will resurface once again. Another medium-sized China property company defaulted on an offshore bond this week, and there is no sign of Evergrande or its subsidiaries US dollars for offshore holders of debt so far either. That said, the whole mess is likely to be overshadowed today by the Caixin Services PMI, which rebounded sharply in September to 53.4, as Covid restrictions were eased. The Composite PMI rising to 51.4 as a result. With markets this week having an investment horizon as far as their big toes, the short-term positives from the PMIs are lifting mainland equities higher to start the day.

The other main event to watch today will be the Reserve Bank of India policy decision. The RBI is likely to leave its policy rate and repo rate unchanged at 4.0% and 3.35% respectively. Inflation has been stagflation for a long time now in India and it will be interesting to see if the RBI decides now is the time to start unwinding monetary stimulus. As a giant energy importer, the rise in energy rises internationally will worsen that outlook and increase the pressure on the Indian rupee which has looked very wobbly of late. Easing their foot off the pedal should support the currency in the short term and the timing is probably riper now than previously, as the country emerges from the slump of the last pandemic wave. Expect plenty of volatility after the release at 1230 SGT today.

Germany’s Balance of Trade will attract greater attention this afternoon as well, after August Industrial Production slumped by -4.0% MoM (-0.40% exp), as supply chain bottleneck bit. That weighed heavily on the euro overnight, falling against the sterling and remaining unchanged versus the greenback, even as the US dollar fell against other G-10 currencies. A sub-EUR 15 billion print is likely to increase the downward pressure on the euro, which looks highly vulnerable to further US dollar strength anyway.

NFP report could shake up the US dollar

All roads lead to tonight’s US Non-Farm Payrolls data which will decide, in the market’s minds, whether the start of the Fed taper is a done deal for December. The volatile ranges seen this week across asset classes suggest that is so except for energy.  I do not believe that markets have priced in the Fed taper and its implications to any large degree yet. Even a weak number tonight probably only delays the inevitable for another month. Still, there is very much a binary outcome to tonight’s data. A number well below 500k equals buy everything sell US dollars. A number 500k and above equals sell everything, but US dollars.

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