Daily Market Outlook, October 17, 2023

Munnelly’s Market Commentary…

Asia - Asian stocks rebounded from yesterday's losses, following the US market's recovery. Japan's Nikkei-225 index rose by 1%, while other regional markets also gained. The Israel-Hamas conflict remains tense, but diplomatic efforts are underway to prevent further escalation. US President Biden will visit Israel tomorrow. China will release its GDP data for Q3 early tomorrow. The annual growth rate is expected to drop to 4.5% from 6.3%, due to base effects. The quarterly growth rate is expected to rise to 1.0% from 0.8%, indicating some stabilisation.

Europe - UK wage growth slowed more than expected in August, easing inflationary pressures. Other labour market data will be released next week. UK CPI inflation for September will be out early tomorrow. Look for a fall to 6.5% from 6.7%, despite higher petrol prices. Core CPI is expected to fall below 6% for the first time since January (to 5.9%). The October inflation figures will reflect lower utility prices and likely see headline CPI drop below 5%. BoE's Dhingra will speak at the London School of Economics on "The future of monetary policy in a post-pandemic world". She is expected to discuss the challenges and opportunities for monetary policy in the aftermath of the Covid-19 crisis, as well as the implications of the UK's departure from the EU. She is also likely to comment on the recent inflation developments and the BoE's policy stance. The speech will start at 11:50 GMT and will be followed by a Q&A session. ECB's Luis de Guindos will speak at a dinner event hosted by the Frankfurt Finance Summit on "The inflation outlook and monetary policy in the euro area". He is expected to explain the drivers and dynamics of inflation in the euro area, as well as the ECB's inflation target and its implications for monetary policy. He is also likely to discuss the challenges and opportunities for monetary policy in a low interest rate environment.

US - US retail sales and industrial production data for September will be out today. They are likely to show a slowdown in economic momentum in Q3, which could imply weaker growth in Q4. Fed's Barkin is scheduled to speak today on the economic outlook at the Greater Richmond Convention Center. He is expected to discuss the recent inflation developments and the Fed's policy stance. He will also reflect on the monetary policy and the economy in 2022 and share his thoughts on what’s ahead.

FX Positioning & Sentiment

FX option implied volatility measures the expected FX volatility/risk in the future. It spiked on Friday and Monday, reaching the recent highs for the 1-month expiry, as the Middle East conflict intensified. However, it has started to ease as the safe-haven currencies (USD, CHF and JPY) stopped rising and the FX market stabilised. The demand for call options on these currencies has also declined. Still, the implied volatility may remain high while the situation in the Middle East is unresolved. The US retail sales and the UK CPI data may also create some FX volatility in the short term. The 2-month expiry options are more focused on the central bank announcements in December, especially for USD/JPY, which has been very volatile lately.

CFTC Data As Of 4-10-23

The US Dollar Index ($IDX) declined by 1.2% in this period.
The Euro (EUR/$) appreciated by 1.36% during the same period, leading to a reduction of -3,411 contracts in speculative positions. The total net long positions now amount to +75,532.
The Japanese Yen (JPY/$) saw a minor decrease of -0.22%, resulting in an increase of +14,512 contracts in speculative positions. The total net short positions now stand at -99,476, and the pair is close to the key 150 level.
The British Pound (GBP/$) strengthened by 1.75%, but speculative positions reduced by -3,368 contracts, mainly due to a dovish Bank of England.
The Australian Dollar (AUD/$) gained 2% in the same period, with speculative positions increasing by +5,410 contracts, totaling -76,577. The AUD has been lower since Tuesday.
Bitcoin (BTC) saw a modest increase of 0.04%, and speculative positions grew by +95 contracts, reaching +1,151. The expectation of ETF approval supports BTC.
It's worth noting that the USD has rallied on a more hawkish Federal Reserve outlook since the period ended, and SOFR red contracts suggest an expectation of higher rates for a longer duration. (Source Reuters)

FX Options Expiries For 10am New York Cut

(1BLN+ represent larger expiries, more magnetic when trading within daily ATR)

EUR/USD: 1.0500 (1.3BLN), 1.0525 (807M), 1.0600 (8090M), 1.0665-80 (1.5BLN)
USD/CHF: 0.8965 (690M), 0.9055 (493M). AUD/USD: 0.6325 (222M)
GBP/USD: 1.2040 (932M), 1.2250-65 (550M), 1.2400 (1BLN), 1.2430-40 (935M)
NZD/USD: 0.5910 (282M), 0.6000 (409M). USD/CAD: 1.3505 (1.BLN)
USD/JPY: 148.00-10 (1.5BLN), 148.40 (320M), 148.65 (520M)
150.00 (1BLN), 150.25 (505M)

Overnight Newswire Updates of Note

The RBA expresses low tolerance for persistent inflation
President Biden's visit to Israel is on the horizon as efforts to open the Gaza crossing face obstacles
Israel readies for a potential ground offensive as Gaza faces shortages of food and water
Fed's Harker attributes rising home prices to higher interest rates
ECB's Lane commits to maintaining high-interest rates for as long as necessary
The ECB closely monitors oil prices for potential inflation risks, as conveyed by Lagarde to ministers
The UK's increasing interest payments leave minimal room for tax cuts, warns a think-tank
Long-end Treasury securities experience their most significant fluctuations since the onset of the 2020 pandemic
BlackRock adjusts its perspective on Treasuries after a substantial yield increase
Qatar explores opportunities to secure LNG buyers amid energy supply concerns in Europe
Rio Tinto reports a year-on-year increase in Q3 aluminium and copper output
Automakers criticise the US plan to raise fuel efficiency regulations
Volkswagen's cost-cutting plan falls behind schedule for the brand
The EU intends to tighten rules governing airline mergers