CSI 300 drops 7%, Oil steadies, and the US Dollar remains firm

Overview: We suspect the market overreacted to the US jobs data, which was tainted by the lowest "establishment" response in over two decades and seasonal adjustments were likely thrown off by Hurricane Helene and the 33k strike at Boeing. We think Fed officials, and more speak today, have confirmed that it was not the game changer than many market participants think, which was likely influenced by positioning. It did help facilitate the dollar's upside correction we had been looking for. The greenback is firm today. Sterling made a marginal new low, while the euro retested $1.0950. The Reserve Bank of New Zealand's 50 bp cut took the New Zealand dollar down nearly 1%, though it was well anticipated. Only the Swiss franc is holding its own today among the G10 currencies. Emerging market currencies are mixed. Central European currencies are the heaviest, while a few Asia Pacific currencies and the Mexican peso are posting small gains. 

Mainland Chinese shares fell hard today, with the CSI 300 dropping a little more than 7%. Finance Minister Lan Fo'an will hold a briefing on Saturday to ostensibly introduce moves to strengthen fiscal policy. Mainland shares that trade in HK fell by about 1.6%. Most of the large markets in the region, except for China and South Korea, traded higher. There are some reports that North Korea may send troops to help Russia in Ukraine. Europe's Stoxx 600 is firm, while US index futures are trading with a heavier bias. European 10-year yields are mostly 1-2 bp softer. The 10-year US Treasury yield is firm, near 4.02%. Gold is consolidating yesterday's losses, spending most of the session so far below yesterday's settlement near $2622. November WTI is trading quietly today (~$73.55-$74.45) after yesterday's large swing (~$78.45-$72.70, settling near $73.55). 

Asia Pacific

The market is not focused on the high-frequency Japanese economic data. The fall in the preliminary estimate of September machine tool orders may take the shine off  Q3 capex. Instead, the market is focused the dimensions of the fiscal support the government is expected to unveil shortly after the October 27 general election. The market drew cautious after the dollar rose above JPY149 in early Asia Pacific activity Monday, and some linked the pullback to comments by the Vice Minister of International Affairs as the Ministry of Finance, who indicated the exchange rate was being watched closely, and noted the speculative element. Non-commercials (speculators) tripled their gross long yen position in Q3 but cut the position nearly 9% in the week ending last Tuesday, the biggest liquidation since early June. We suspect the unspoken problem Japanese policymakers are wrestling with is the yen's move to a greater volatility equilibrium. Three-month implied yen vol is holding a new and higher range (~11%-12.5%). To put it in some context, consider that the 200-day moving average is around 9.6%. 

Without inspiration from the US 10-year yield, which hovered around little changed levels yesterday, the dollar was confined to a relatively narrow JPY147.75-JPY148.35 trading range in North America. A small bullish hammer candlestick may have been formed yesterday as the market reacted the push lower (to JPY147.35) before recovering and settling near Monday's close not far from session highs. The greenback continued to advance today to reach JPY148.75 in Europe. Stretched momentum indicators warn against chasing it in early North America activity. Risk is JPY148.00-25. The Australian dollar also consolidated in North America yesterday, hardly moving outside of the quarter-cent range above $0.6720. It is holding today as well. The momentum indicators are still falling but 2.5% drop this month may need some consolidation. As widely expected, the Reserve Bank of New Zealand became the first G10 central bank after the Federal Reserve to deliver a half-point cut, bringing the overnight target rate to 4.75%. The market expects another 50 bp cut at next month's meeting. Inflation is falling (Q3 CPI is reported on October 16) and the economy has contracted in four of the past seven quarters. The New Zealand dollar was up about 0.4% for the year coming into October, where it has depreciated by a little more than 4.1%, including today's 0.9% drop. The dollar has largely remained in the range set at the end of last week against the offshore yuan (~CNH7.0470-CNH7.1040). The yen continues to provide directional cues, and the weaker yen today as seen the dollar rise from near CNH7.0540 to almost CNH7.0780. The PBOC set the dollar's reference rate at CNY7.0568 (CNY7.0709 yesterday). 

Europe

France reported its August trade deficit yesterday (~6.35 bln euros). Germany reported its August trade surplus today (~22.5 bln euros). Through the first eight months of the year, the French shortfall of almost 51.7 bln euro (~70.6 bln euros in Jan-Aug 2023 period) was easily offset by the German surplus of about 179 bln euros (~145 bln in the Jan-Aug 2023 period). At the risk of oversimplifying, the eurozone excluding Germany has a roughly balanced external account. The aggregate August estimate will be released on October 17. Tomorrow, the UK reports August GDP. After stagnating in June and July, the British economy is expected to have grown by about 0.2%. Industrial production and construction likely expanded after shrinking in July. Service activity may have grown slightly between the July's 0.1% increase. The UK's August trade deficit is expected to have narrowed after it jumped to GBP7.5 bln in July from GBP5.3 bln in June. 

The euro continues to consolidate after falling from $1.12 to $1.0950 last week. Previous support at $1.10 now acts as resistance. The euro stalled into front of it in early European turnover yesterday and recorded the session low as European dealers adjusted positions as their session wound down. It revisited $1.0950 in early European turnover today. Initial resistance now in the $1.0970-80 area. Sterling's downside momentum stalled too, after falling a little more than 3.5 cents. That said, it made a marginal new low today near $1.3055, its lowest level since September 12. It recorded a lower high yesterday for the eighth consecutive session, adding to the bearish tone to the recent price action, and that pattern is extending today. Yesterday's high was a little shy of $1.3115, and today, sterling has barely been above $1.3105. A convincing break of $1.3050 could spur a move toward $1.3000, which sterling has not traded below since August 20. 

America

A final look at August wholesale inventories is unlikely to move anyone's needle, while the FOMC minutes due late in the session will provide color to what we already know: The median dot now sees another 50 bp of cuts in Q4 and 100 bp in 2025. We suspect the market is more impressed with the jobs data than most Fed officials, and in part, this is because the market had strayed from the Fed's guidance. Four Fed officials speak during today's session (Bostic, Logan, Goolsbee, and Jefferson), and after the markets close two other officials speak (Collins and Daly). The highlight of the week is tomorrow's September CPI. The headline rate is seen slowing to 2.3% from 2.5%, while the core looks sticky at 3.2%. Mexico reports September CPI today. The headline rate is seen falling to almost 4.6% from practically 5.0% in August. The core rate can edge down to around 3.95% from 4.0% in August. Still, before Banxico meets again (November 14), the October CPI will be reported. The swaps market has 35 bp of cuts discounted for the next three months, and about 175 bp over the next 12 months. Separately, the Wall Street Journal ran a headline "Mexico Wants to Curb Chinese Imports With Help From U.S. Companies." But the story is really about Deputy Trade Minister Gutierrez called for import substitution strategy and not directed simply at China, but included the US, Malaysia, Vietnam, and Taiwan. He was quoted saying that about 70% of Mexico's imports from Asia are brought into the country by about 50 foreign companies and half of them are US firms (automotive, semiconductor, and aerospace industries). Lastly, Brazil reports IPCA inflation. It is expected to have risen for the fourth month of the past five. The swaps market is discounting 95 bp of hikes over the next three months,  

The run on the Canadian dollar continued yesterday. It fell for the fifth consecutive session and the seventh session in the past nine session. With yesterday's gains to around CAD1.3675, the US dollar practically met the (50%) retracement if the August and September slide. It remains near there today. The next retracement (61.8%) is near CAD1.3745. Support now is seen in the CAD1.36240 area. The US dollar trended higher against the Mexican peso since early April. It entered a range, which for about the past month-and-a-half has been mostly between MXN19.00-MXN20.15. The five- and 50-day moving averages have converged to less than 0.25%. It is consolidating quietly today (~MXN19.3350-MXN19.3980). There may be potential toward MXN19.27-MXN19.30 today. The dollar held above BRL5.40 on Monday, and gapped higher on Tuesday, reaching BRL5.5360. The greenback has not traded above BRL5.60 in nearly a month.