Overnight Headlines

*USD holds near one-month high as markets stabilise

*US stocks ended mixed after a choppy session

*The Vix eased back below the 25 level

*China markets only modestly lower, Hong Kong continues to rebound

USD is consolidating recent gains and holding just below the March high at 93.43. EUR/USD is little changed trading above 1.17. GBP is also consolidating at its recent lows above 1.3650. Next support is at the August low at 1.3602. CAD was little changed after the status quo election. USD/CAD is holding at mid-July highs around 1.28. AUD is the strongest major this morning, but still trading below 0.7290.

US equities were not able to turn around with the Dow giving up all its early gains and closing marginally lower. The S&P500 did similar and closed down -0.08% following its worst session since May on Monday. The Nasdaq closed +0.2% higher. Worst hit industrials and materials continued lower. Asian markets are very mixed and US futures point to a positive open.

Market Thoughts – Fed into Evergrande

Although the Evergrande situation remains uncertain, the company has said today that it intends to pay interest on bonds. Along with the cash injection into the system by the PBoC, this has soothed sentiment. Markets are trusting that this is a “Lehman moment” no more.

The Fed meeting later today has lost some of its importance after the recent sluggish jobs and CPI reports. Chair Powell wants to see improvement in the jobs picture even as he has stated it’s time to dial back stimulus this year. Consensus now sees a taper announcement in November with the start the following month. The hawkish risk lies in the Fed’s “dot plot”. Record job openings and resilient retail sales could make some Fed officials twitchy. Is it enough to bring forward their first rate hike call to 2022 from 2023? The market may also focus on the pace of the taper rather than the exact start date.

Chart of the Day – EUR/USD still pointing to the lows

The euro couldn’t sustain any gains yesterday and closed marginally lower on the day. This means its overall bearish trend remains intact after its failure above 1.19 at the start of the month.

The rebound off 1.17 gave some hope to buyers. But a move is needed above 1.18 before another test of the cycle lows at 1.1663 is excluded.

Near-term resistance sits at 1.1740/60 ahead of 1.1790/800. A relatively hawkish Fed and the global risk off mood could see a test of 1.16 in the next few sessions. A slower Fed policy shift and unchanged dot plot would scupper the bears chances and see dollar weakness and stocks higher.