Financial market research and analysis

Cable fell to 1.3135 as UK retail sales including auto fuel contracted by 0.8% on month to September, more than -0.1% expected by analysts.

The pound has been weakening since the beginning of this week, although there couldn't be a better scenario for the Bank of England (BoE) hawks than an inflation hitting the 3% level and slightly improved wages. Soft retail sales could be a catalyzer for a further sell-off toward the 100-day moving average (1.3097), which should provide a support given the high chances of a BoE rate intervention in the near future. The probability of a November rate hike stands above 80%.

UK and the European stock markets are down on escalating tensions between Spain and Catalonia.


IBEX down as Catalan insists on independence, EUR gives little reaction

IBEX plunged on the back of a deadlock regarding Catalonia’s independence claim. Catalan President Carles Puigdemont held his position and said he would formally declare independence if Spain doesn’t agree to talk. Meanwhile, unwilling to discuss, Spanish PM Rajoy responded he will hold an extraordinary meeting on Saturday to trigger the Article 155 and suspend the Catalan autonomy. Spain stated that ‘the government will continue with the procedures set out in Article 155 of the Constitution to restore the legality of self-rule in Catalonia’.

The Catalan impasse is barely reflected in euro prices. The EURUSD shortly fell to 1.1768 as a knee-jerk reaction but quickly rebounded as investors appear to be topping up hedges against a stronger euro before the European Central Bank (ECB) meeting due on October 26. Though, the Catalan crisis could curb the upside momentum. Offers are eyed at 1.1880 (Fibonacci 50% retrace on September – October decline). The 100-day moving average (1.1735) will likely provide support to panic sell-offs.

Gold made a U-turn before testing the 100-day moving average ($1’275). Catalan crisis could encourage further safe-haven allocations before the critical weekend in Spain.


US earnings boost equities

The Dow Jones (+0.70%) extended gains to 23’172 on Wednesday and closed the session above the 23000 level for the first time. The solid US earnings season is building a strong case for a hawkish Federal Reserve (Fed) policy and should help easing concerns on soft inflation. 60 out of 498 companies in S&P500 released results so far and earnings positively surprised by 4.68%, nearly one fourth of the Dow Jones and ten percent of the NASDAQ companies announced earnings as well and surprised investors by 6.37% and 5.62% respectively.

Bank of New York Mellon and Phillip Morris are among companies releasing results today.


AUD mixed on higher yields, soft jobs data and cheap commodities

The slump in iron ore futures (-3.81%) combined to poor Australian employment data capped the AUDUSD at 100-day moving average (0.7870), despite the spike in Aussie rates.

Although the unemployment improved from 5.6% to 5.5%, the Australian economy added 19'800 new jobs in September versus 53’000 a month earlier and nearly 70% of new jobs were part-time.

Still, risk-on investors could find the AU/US differential interesting despite the selling pressure on iron ore prices and jobs data. The next natural target for AUD-bulls is 0.7900/0.7910 against the US dollar, including the 50-day moving average. There is a double bottom formation at 0.7818 (major 38.2% retracement on May – September rise), which should distinguish between a further downside correction toward the 200-day moving average (0.7705) and a consolidation/advance targeting the 0.80 mark.

We note that the Reserve Bank of Australia (AUD) is concerned by a strong currency and would be tempted to keep its policy loose to counter the AUD-bulls. Therefore, sellers could take over the market approaching the 0.80 psychological level.


Focus on Chinese data, Communist Party congress

China’s Communist Party congress and President Xi’s speech occupy the headlines and bring the Chinese data forward this week. Freshly released today, China’s 3Q GDP growth came in at 6.8% as expected, retail sales expanded by 10.3% year-on-year in September, faster than 10.2% expected by analysts, as the industrial production surged to 6.6% from 6.0%, beating analyst estimates of 6.5%.

Good news barely boosted the appetite in Chinese stocks. Hang Seng dropped by 1.92%, as Shanghai’s Composite wrote-off0.34%.

Metal prices edged lower, copper futures (-1.20%) cheapened for the second day after Barclays warned that the trading could be above its fundamentals.


USDJPY hit 113.00

The USDJPY traded past 113.00 in Tokyo, as the divergence between the Federal Reserve (Fed) and the Bank of Japan (BoE) policy outlooks played in favour of a softer yen in the absence of risk-off inflows. But the European investors refused to follow up on the upside, as Catalan crisis increased demand in safer currencies.

Japanese trade balance surged from 113.6 billion to 670.2 billion yen in September versus 556.8 expected by analysts. Good data is good news for PM Shinzo Abe before the October 22 snap election. The market is pricing in a satisfactory outcome for Abe, who promises decent government spending on top of a loose monetary policy for longer. The yen will likely remain under pressure under Abe’s rule. Meanwhile, disappointment is the major risk into the election weekend. Some investors may be reluctant to stay short-JPY before Sunday’s election and this could cap the appetite past 113 level. Decent put options stand at the distant 110.00 for hedging an eventual slide in USDJPY.


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