New quarter, same struggles for stocks, bonds and yen

World markets struggled to put a testing third quarter behind them on Monday, with stocks and the euro ticking lower, bonds still on edge, and a last-minute deal to avert a U.S. government shutdown barely lifting Wall Street futures.

An opening move higher from the pan-European STOXX 600 (.STOXX) quickly gave way in the face of some weak PMI data, denting traders’ hopes for its first three-session run of back-to-back gains since the middle of August.

MSCI’s 47-country world index was also lower, having lost 7% since July amid a sharp rise in oil prices and global borrowing costs. The updated euro zone September PMI data – seen as a key indicator of economic health – showed manufacturing activity remains in a broad-based downturn.

It was enough to nudge the euro back into the red for the day. Like many of the major global currencies, it had fallen over 3% in the third quarter, unable to fend off irresistible U.S. dollar strength built on ongoing Federal Reserve interest rate rises. /FRX

Markets in China, Hong Kong, and India were closed for holidays but Tokyo’s open-for-business Nikkei (.N225) jumped as much as 1.7% as the yen dribbled back towards 150 per dollar, a weakness viewed as a boon for Japan’s exporters.

“We have had two big risk-off months and you have a risk-on event with the (U.S. government) shutdown being postponed but the 10-year Treasury is at 4.62% and the yen is near 150 so nothing has really changed,” said Societe Generale analyst Kit Juckes.

Marginally higher oil prices and debt pressures meant benchmark European government bond yields were also edging higher again, with Germany’s 10-year Bund level within striking distance of a 12-year high of 2.86% hit late last week.

The eleventh-hour deal to avoid a U.S. government shutdown, struck over the weekend, lifted U.S. stock futures in Asia overnight but they skulked back to almost flat in Europe.

The stopgap funding bill allows the government to keep operating through Nov. 17 and means key data releases including Friday’s monthly payrolls report can go ahead on time.

“The shutdown risks are only delayed, not eliminated,” TD Securities strategists wrote.

“A sense of reduced uncertainty is likely to drive a small relief in markets,” but “market volatility is likely to remain elevated as investors wait for the next catalyst, which is likely to be top-tier data.”

Japanese stocks were also boosted by the Bank of Japan’s quarterly Tankan survey overnight, which showed an improvement in business sentiment, although the World Bank became the latest to trim its forecast for China’s economy next year.

Chinese data released over the weekend also delivered mixed messages. 

Beijing’s official PMI figures on Saturday reported the first pick-up in activity in the key manufacturing sector in six months. Sunday’s Caixin/S&P Global PMI survey, however, showed the pace of growth slowing again.

DOLLAR RESILIENCE

Bond and foreign exchange trade remains driven by anticipation of U.S. interest rates staying high and selling of the yen and Japanese bonds on Monday drew a response.

“We are closely watching market moves with a strong sense of urgency,” Japanese Finance Minister Shunichi Suzuki told Reuters, referring to the currency nearing the 150 per dollar threshold.

The finance minister has jurisdiction over currency intervention, but he declined to comment on whether it was a possibility at this point.

Ten-year Japanese government bond yields rose by a basis point to their highest for a decade at 0.775%. The Bank of Japan also said it would buy bonds with 5-10 years to maturity on Wednesday, with the size of purchases to be announced then. Futures bounced on the news.

In the U.S. Treasury market, 10-year yields rose to 4.62% and the two-year yield rose to $5.10%.

The dollar (.DXY) was still standing strong in currency markets, though was stopped short of last week’s milestone highs save for against the yen, where it hit its highest since last October at 149.74 yen.

“Relative U.S. growth resilience and (a) hawkish Fed are factors that continue to underpin support for the dollar until U.S. data starts to show more material signs of softening,” said OCBC currency strategist Christopher Wong.

Mixed Chinese factory surveys and an expectation of no changes to rate settings at central bank meetings in the coming days kept pressure on the Australian and New Zealand dollars.

The Aussie fell as much 0.5% to $0.6400 and the Kiwi slipped 0.2% to $0.5986. The euro was a touch weaker at $1.0535, as was sterling at $1.2161.

Crude oil steadied after late-week falls

Brent December crude futures rose 27 cents, or 0.3%, to $92.50 a barrel. U.S. West Texas Intermediate crude futures gained 20 cents, or 0.1%, to $90.99 a barrel. Gold was 0.3% lower at $1,841 an ounce.

Source: https://www.reuters.com/markets/global-markets-wrapup-1-2023-10-02/