Daily Market Outlook, October 25, 2021

Overnight Headlines

ECB meets, U.S. earnings season kicks into gear The European Central Bank will meet on Thursday, but the market is expecting it to be a non-event. The U.S. corporate earnings season kicks into high gear, with a large proportion of S&P 500 companies due to report results this week. The ECB is likely to say as little as possible, as policymakers look ahead to the December meeting when there will be an update of forecasts. The ECB will likely remain on record as saying inflation is transitory – even though market pricing suggests otherwise. In the U.S., a number of tech giants are due to report earnings this week and the focus will be on Apple, Amazon, Microsoft and Alphabet, among the market leaders in this year's rally. The tone of their reports and outlooks will likely determine if the 2021 rally continues or starts to peter out into year-end. The Bank of Japan is also due to deliver its policy decision on Thursday, but no change is expected at this week's meeting.

Inflation and growth data lead to a quiet calendar Preliminary Q3 GDP and inflation data out of the U.S. and Europe will stand out in an otherwise quiet week for global economic data. The U.S. will release a raft of housing data, but the main events will be advance third-quarter GDP and the Federal Reserve's favoured inflation gauge, the core PCE price index. Other data of note includes consumer confidence, durable goods, weekly jobless claims and final University of Michigan October consumer sentiment. Euro zone highlights are flash Q3 GDP and October HICP; EZ sentiment indices, consumer confidence and the German Ifo are also due. There is no top-tier UK data this week, but finance minister Rishi Sunak will deliver his budget on Wednesday. Japan data includes Tokyo CPI, unemployment, industrial production and retail sales. China's industrial profits are due during the week, but the focus will be on Sunday's NBS October PMIs. It will be a fairly busy week in Australia with Q3 CPI and PPI out, along with September retail sales. New Zealand data includes trade numbers and the NBNZ business outlook. Canada has a central bank decision and August GDP due.

Investors again trimmed the aggregate USD long position slightly by USD574mn to USD22.3bn or less than USD1bn below its recent high in early October, in line with the near 1% decline in the dollar (Bloomberg dollar index basis) over the week to Tuesday. The overall ‘minor’ adjustment in dollar sentiment hides a broad move against the classic haven currencies, the JPY and CHF, likely due to their high-sensitivity response to climbing long-term US yields while accounts favoured the CAD, EUR, GBP, and AUD.

The bearish JPY position rose by USD2.8bn to USD11.2bn as investors increased their short contract holdings while longs held relatively steady; shorts now exceed longs by over 100k contracts which represents the most JPY-bearish position since late-2018. Over the period covered in this report, the JPY was the only currency that lost ground against the dollar with a 0.7% depreciation. The CHF short also increased by USD639mn to USD2.4bn although the CHF managed to hold a respectable ~0.9% gain against the dollar in line with the EUR and CAD.

Negative sentiment in the CAD eased as investors trimmed the currency’s net short by USD1.35bn—the biggest change in positioning after the JPY to USD884mn. While short contracts held practically unchanged, accounts increased longs by 18k contracts, representing the largest bullish push into the CAD since July 2019, and taking the dollar terms position to below USD1bn for the first week in five. • The GBP short was erased with a USD1.16bn shift in sterling’s favour as investors likely prepare for earlier-than-anticipated hikes from the Bank of England that may come as soon as early-November. Speculators mainly continued to slash their short bets against the GBP from its two-year high two weeks ago while long contracts only rose slightly. For similar reasons, with markets wagering that the RBA may increase rates as soon as late2022, bearish AUD positioning was reduced by USD755mn to a still very large net short of USD5.7bn. •

Elsewhere, the NZD long fell by USD146mn to USD461mn (still larger than the only other ’long’, the GBP’s) while MXN positioning was left practically intact at slightly under USD1bn. In other markets, bullish WTI positioning rose to a twelve-week high amid continued demand/supply imbalances in energy markets.