Who needs perfect storms?

It’s not quite a ‘perfect storm’ but one could certainly be brewing.


It’s not quite a ‘perfect storm’ but one could certainly be brewing.

Oil and mining buyers show up

10-year Treasury yields continue to strain higher. Now on the 3.25% handle for yet more seven-year records. The route there remains sequential. Pain is being added gradually; alarming volatility cannot be ruled out but is currently lacking. Heavyweights Shell and BP, and big London miners even kept the FTSE 100 above the flat line for a spell before all shares retreated, though oil and basic resources cling to smaller gains, tracking the sector’s outperformance in Asia overnight, as the Iran-supply debate veers more towards the bullish side again, with help from Hurricane Michael. Corresponding STOXX sub-indices outperform too.

USD/CNY 7.00 in play

It helps that resources markets and corresponding equities anticipate further simulative attempts from Beijing. The People’s Bank of China, finally, conspicuously, stood aside from onshore yuan trade above the psychological 6.90 yuan per dollar mark, just ten fen away from 7.00, which is supposed to carry the biggest behavioural charge for markets. The Shanghai Composite managed to close slightly higher—on solid bounces by energy, mining and metals and consumer shares. The main Shanghai-Shenzhen gauge was also off lows. APAC index falls were muted, aside from Nikkei due to yen strength. The key sticking point to further stock index gains in China is the dollar. It’s run now looks more solid as majors, including sterling, Aussie, franc, Loonie, fall into line. This is circumstantial evidence that the greenback, like Japan’s currency is again seeing safety flows. The dollar is certainly now toppling weaker current account currencies that were spared earlier this week. These are incompatible conditions for a Chinese stock market revival.

U.S. sellers keep exit in sight

Despite overnight demand for U.S. ‘value’ names though, perceived to be safer—Walmart, Coke, JPM, others— lifting the Dow, the broader VIX gauge is slightly firmer than most of the day before. There is after all, no guarantee that volatile Wall Street upsets can be avoided. True, profit booking should still have some way to run, Nasdaq futures, for instance, are down for a fourth straight session, increasing the chance that a bounce like the one seen across markets earlier could sustain.

Time for the technocrats

Similar, though more conditional thoughts for Italy’s MIB, which also saw temporary relief. Deputy Prime Minister Salvini’s attempts to keep the confrontation with Brussels going are seeing diminishing returns in the press and markets. Relative quiet on Wednesday suggests an understanding that rhetorical cards can be overplayed. Technocrats got a word in edgeways in the interim. PM Conte called for “reasonable” dialogue. Overruled economy minister Tria sought “constructive” dialogue. On balance, compromise from Rome before the 15th October Budget deadline would still require fancy footwork.

BTP/Bund benchmark spread eyes 3.20%

Meanwhile, BTPs continues to back up all the way up the curve. Everything above a 5-year maturity now yields more than 300 basis points, widening the 10-year bund/BTP spread to the widest since 2013. Simple technical analysis suggests any transgression beyond 3.20% is now in speculative crosshairs. A break will clearly signal a return to more intense Italian market tumult. 

Source: Refinitiv/City Index

It is unlikely Italian shares can return to a sustainably firm footing under such conditions. Wednesday’s industrial data could provide a prop though, if output bounces to 0.8% from minus 1.8% in July. The yield complex also squashes the euro’s attempts to regain momentum after the early-week run stalled near $1.15. $1.145, where the single currency staged numerous bounces since 3rd October, beckons again.

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.