Headlines

*Chinese yuan drops, PBoC sets fix at weakest level in 14 years

*Dollar eases amid bets on less hawkish Fed as sterling steadies

*Us stocks close higher as traders prepare for Big Tech earnings

*China stocks rebound from rout as investors mull Xi’s policy

FX: USD traded under 112 as it trades below its 21-day SMA at 112.41. Price action is relatively contained this morning with yesterday’s low at 111.47. US Treasury yields corrected following UK gilts outperformance. This came on the back of Rishi Sunak becoming the next UK PM.

GBP/USD relief rally petered out having topped 1.1407. Cable is currently trading around 1.13, as it did during yesterday’s session EUR/GBP stayed above 0.8721 previous resistance. EUR/USD saw a decent gain above 0.9863 yesterday but is trading below here this morning. USD/JPY touched lows at 145.48 before closing at 148.94 on intervention chatter. The major is relatively stable this morning trading near 149.

NZD/USD and AUD/USD are firmer today after punching higher yesterday. But they both failed to close at new cycle highs. Gold traded either side of $1650 after getting above $1670 yesterday.

Stocks: US equities were bid across the board, building on Friday’s decent gains. The S&P 500 closed up 1.19%, the Nasdaq 100 finished 1.06% while the Dow gained 1.34%. It’s the busiest week of the Q3 earnings season. Mega-caps Apple, Amazon, Alphabet, Meta and Microsoft are among those set to report. Five of the western world’s biggest oil and gas majors, which have a combined market cap of more than $1 trillion, are also reporting.

Asian stocks eventually traded mostly higher following the Wall Street lead.The Hang Seng index was volatile and choppy after Monday’s huge selloff. A late intraday surge took place with unconfirmed reports of Chinese intervention in the stock market. The Nikkei remained above the 27,000 mark.  S&P 500 futures are trading around 3,800. European equities are generally in the green.

Event Takeaway – Stocks continue to bounce

Markets have again got excited by hopes for a dovish pivot by the Fed. Friday’s Wall Street Journal article by the Fed’s whisperer, Timiraos, has given a bid to stocks. He is widely considered to have solid access to Fed sources. The piece affirmed the view that the Fed may begin to downshift from the 75bp hike pace after the November meeting. Policymakers would then pause early next year to assess the impact of the rapid pace of rate rises.

We also saw softer US PMI data out yesterday. The rising cost of living and tightening financial conditions are affecting services activity. Manufacturing fell below 50 for the first time since June 2020. Weakening demand may help to moderate the overall rate of inflation, especially if interest rates continue to rise. This all helps the dovish pivot theme, though longer-term market based inflation expectations continue to creep higher.

Chart of the Day – Nasdaq breaks higher

This week sees blue-chip tech stocks report in what will a key gauge for the health of the consumer economy. Companies face three major headwinds – weakening demand, rising labour costs and unfavourable comparisons with last year’s earnings growth. Microsoft and Google report later today, followed by Meta on Wednesday and then Apple and Amazon on Thursday. Investors will likely monitor closely the cloud computing business outlook provided by Amazon’s AWS, Microsoft’s Azure, and Alphabet’s Google Cloud. 

The tech-laden Nasdaq printed a massive bullish engulfing candle after the US CPI data a few weeks ago. Prices have rebounded close to 10% from that low at 10,440. The mid-June resistance/support at 11,037 has held.  The index now looks to have broken out of the bearish channel. The October high is 11,660 will be a target for the bulls.