Equities dragged by disappointing Chinese data; U.S. dollar bulls on a short break

October 13, 2016

A 10% fall in Chinese exports in September does not only provide a warning signal that the world’s second largest economy is losing momentum, but also suggests a fragile global demand, specifically from developed economies which comes in line with the World Trade Organization’s outlook that global trade growth is slowing. Imports also dropped by 1.9% versus expectation of a 1% rise, indicating that demand for key commodities that played a role in the housing boom is also slowing.

The released data reflected negatively on Asian equities, and supported the safe haven Yen after it declined to its lowest levels in two and half months against the dollar. USDJPY fell by more than 100 pips from its highs to trade at 103.56.

Oil prices came under pressure, falling for a third straight day after API data showed crude inventories rose by 2.7 million barrels last week. This is the first fall in U.S. stockpiles in 6 weeks and official data due later today from EIA might show a similar pattern after more than 25 million barrels were withdrawn in the past 5 weeks.

The 15% rally in Brent from June 28 to Oct 10 was mainly driven by headlines from OPEC and non-OPEC producers showing their willingness to end the supply glut, and we need to see this continue for Brent to hold the $50 benchmark especially when OPEC’s official meeting in Vienna is more than 6 weeks away from now.

The dollar index declined slightly from a 7-month high as bulls seem to be on a short break. Yesterday’s Fed Minutes provided very little information beyond what we already know, and markets continued to price in a 70% chance that the Fed will hike in December. The resilience in financial markets shows just how effective U.S. policy makers were in communicating their thoughts. I believe that spreads between U.S. treasury yields and those of other major sovereign bonds will be a key indication on how the dollar will perform, if spreads continue to widen the dollar index could be heading towards 100 by year end.

The pound was the best performing currency yesterday after UK’s Prime Minister Theresa May, has agreed to consult with the Parliament over Brexit negotiations. Her comments that their negotiations will include maximum possible access to the European market is making the hard Brexit case look softer, but we still see many bumps ahead and prefer selling the rallies than buying the dips.

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