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Market Talk- October 24, 2018

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A lack of direction resulted in a mixed session for Asia today. Probably a sigh of relief for many market participants, as they are still attempting to explain the past few days events! Although, we are seeing volatile stock markets, it is worth keeping an eye on the currency movements. Again today we see the USD bid both for spot and forwards. The year end carry sees good demand from Asia and is probably accentuated as the domestic demand accelerates. It is a good sign that trading volumes are increasing in most areas and given the increased volatility displays cash flow is in full swing. International investors must be concerned with the disappointing returns seen for core Asian equities this year, so if they start to see the currency depreciate also this decline could accelerate capital flow towards the USD. The Japanese Yen appears to be losing its safe-haven bid, so that may actually provide a helping hand for the Nikkei. Obviously, anticipation of a decline in the Yuan is gathering attention as increased option volume shows. India has been fortunate this week as the energy prices have retreated, however, still worth keeping an eye of the INR weakening trend. SENSEX did manage a +0.5% rally today, but has been down for four days.

Both Deutsche Bank and Barclays reported Q3 results today, with Barclays probably standing better from its Cost of Capital. and Teir 1 ratio’s looking better. That said, Barclays shares are still off around 20% YTD even with a better outlook for its NPL book in relation to its European counterparts – DB closed down nearly 5%. . Confidence is still key and with core financials still suffering from events 10 years ago, it is probably not surprising the capital flows towards the US Dollar. ECB meeting tomorrow but where no-one really expects Mario Draghi to embark on political statements there is a chance he may be dragged into commenting on the Italian budget or the BREXIT debate during the Q+A session. There is also the concern that France maybe seeking a higher budget than expected! Lets watch [peripheral spreads and the Euro again tomorrow.

Any early gains were soon rejected as all core indices started to decline. The selling accelerated as we progressed with the NASDAQ leading the decline. Eventually closing down almost 4.5% also sees the DOW off over 600 points and erasing any gains for the year. This decline has taken over 7% off the DOW this month so far, however, we do need to see where we close next week for month end. In this decline the US Dollar has performed well and pushed both Euro and Sterling back to June 2017 lows, with the target now looking for the January lows (105 possible). Some say confidence was lost mid morning when the Housing numbers were released, but then the short-term momentum has been negative all month, so tend to ignore these comments. Worth remembering that during earnings season companies are restricted from buying back stock and so it will be interesting to see how November opens with the ECM date due. After hours we have just seen the Tesla results release better than expected resulting in a 10% bounce on closing prices.

Japan 0.12%, US 2’s closed 2.83% (-5bp), US 10’s closed 3.11% (-6bp), US 30’s 3.33% (-4bp), Bunds 0.39% (-2bp), France 0.77% (-1bp), Italy 3.60% (+1bp), Turkey 18.32% (-54bp), Portugal 1.97% (-3bp), Spain 1.62% (-4bp) and Gilts 1.45% (-2bp).