Market Talk- October 3. 2018

The Nikkei retreated from its recent highs in cash terms, but is late this evening retaking those losses. The concerns surround the auto and petrochemical industries, but the poor auto sales number certainly did not help key stocks today as Honda dropped 4.3% and Mitsubishi Motors down 3.4%, while Showa Denko fell 5.2%. However, many are still watching the decline in the Yen and late this evening has lost -0.6% on the day, now trading mid 114’s. We did see an attempt to trade positive just ahead of lunch, but selling pressure was just too strong by the cash close. The Hang Seng was in and out of the positive all day, but difficult to get too much traction with core China still closed. Fears are still present and building in India for the SENSEX. Closing this evening down 1.5%, has hit 3-month lows as the RBI began its three day meeting. The INR did trade well until the sunshine had past and then foreign liquidations looks to be increasing. In late US trading the Rupee is back at record lows, trading 73.65 (-0.5%).

A rather subdued day for Europe with Germany on national holiday, but the focus remains on the Italian budget proposal with BREXIT never far from anyone’s mind. Rumours were that the Italian government may lower the amount and so helped bring 10yr BTP’s back in. The spread tightened 9bp to German Bunds, but that was hindered by Bunds losing ground also. They actually rallied 14bp of recent losses to a yield now of 3.31%. However, a lot of talk that Italy should just buy all of its own debt – sounds bizarre, but that’s the talk! Maybe a response to the rumoured claims that the EU is scaring BTP investors. BREXIT again as the Conservative Party conference headlines hit the screens. Sterling held its own for much of the day, but started to drift as the Euro approached the 1.15 figure level. Gilts added 5bp on the day, pushing the 10yr yield back to 1.57%. As debt is the real issue for markets, it is quite alarming that two-thirds of global debt is in the US Dollar which has only just started to climb!

The surprise for US markets came today after the ADP employment report released this morning. We saw the best number in months and way better than the +168k seen last month (August). Services recorded their fastest ever pace and the bond market took its time to react. However, late in the day 10’s and Bonds broke crucial levels and we saw prices hit for the remainder of the day. The long bond is seeing yields its not seen in over four years, while 2’s hit 10 year highs. This is liked by bank shares and that was what started the equity rally. Most core indices have retreated from their highs as rates rallied, but now its the conundrum of – do they follow rates or currency, as this will certainly lift the US currency from here.

Japan 0.14%, US 2’s closed 2.85% (+4bp), US 10’s closed 3.15% (+10bp), US 30’s 3.30% (+10bp), Bunds 0.47% (+5bp Domestic market closed), France 0.81% (+3bp), Italy 3.31% (-14bp), Turkey 18.52% (+81bp), Greece 4.35% (+10bp), Portugal 1.88% (-1bp), Spain 1.53% (u/c) and Gilts 1.57% (+4bp).
Much of the US rates decline (price/yields higher) came after the European close. We will see the result of this only on Thursday.