Supply Chain Issues, Inflation Negative

STOCK INDEX FUTURES

Global markets had a mildly positive start to the week, but have taken a negative shift coming into this morning’s action. Third quarter Chinese GDP and September Chinese industrial production came in lower than forecasts while September Chinese retail sales came in above trade forecasts. Asian shares generally finished in negative territory and were led by modest losses in the Shanghai Composite and Japanese Nikkei indices. European shares were posting moderate early losses and were led to the downside by the German DAX and Italian MIB indices. The North American session will start out with September US industrial production which is expected to have a modest downtick from August’s 0.4% reading while capacity utilization is forecast to have a minimal uptick from August’s 76.4% reading. The October NAHB housing market index is expected to have a minimal downtick from September’s 76 reading. The Bank of Canada will release their latest Business Outlook survey during mid-morning hours. The August US Treasury International Capital (TIC) report will be released during afternoon hours and will be scrutinized for net changes in Chinese and Japanese Treasury holdings.

S&P 500: It is hard to look past the third quarter Chinese GDP and September Chinese industrial production number which came in well below expectations. With energy issues and news that new construction starts in September slumped for a sixth straight month, it is difficult be optimistic on the China economy in the months just ahead. Expensive energy should eat into corporate earnings worldwide and this leaves a major headwind to expect new all-time highs soon for the stock market. In the long run, inflationary pressures are also a negative to earnings. E-Mini S&P positioning in the Commitments of Traders for the week ending October 12th showed Non-Commercial & Non-Reportable traders net bought 41,014 contracts for the week and are now net long 134,515 contracts. Close-in resistance for December

CURRENCY FUTURES

DOLLAR: The Dollar has been able to break out of a near-term consolidation zone with moderate gains early in today’s action, but it remains well below last Tuesday’s multi-year high. Lukewarm Chinese GDP and industrial production readings have led to fresh safe-haven inflows to the Dollar early this week. The growing consensus of Fed tapering by the end of this year has also boosted the Dollar, but the market will need to avoid disappointing US industrial production results later today for the Dollar to extend its recovery move. Near-term support is at 93.85 as the Dollar should benefit from the negative shift in global risk sentiment early this week.

EURO: After a positive finish to last week’s trading, the Euro has fallen back on the defensive early this week. While Euro zone inflation has increased, it has not reached levels that would encourage the European Central Bank to consider tapering. The ECB’s Visco said that their policy will remain accommodative and will look through price pressures, which is in sharp contrast to recent comments from Fed and Bank of England officials. Near-term resistance is at 1.1630 as the Euro will need to see a significant positive turnaround in global risk sentiment to regain upside momentum.

YEN: While the Yen is only finding mild pressure early in today’s action, it is closing in on a new 4-year low. Japanese officials are starting to voice concern over the Yen’s September/October downdraft while new Japanese Prime Minister Kishida said that he has no plan to change the Japanese sales tax, both of which may help the Yen to find its footing. Near-term resistance is at 87.75 as the Yen may need to see significant safe-haven inflows in order to avoid reaching multi-year lows this week.

SWISS: The Swiss franc has seen coiling price action over the past week and continues to have trouble sustaining upside momentum. The Euro/Swiss cross remains in close proximity to an 11-month low, and that increases the chances for SNB intervention to weaken the Swiss franc. Recent Swiss data results have been generally positive, but that has not been enough to underpin the Swiss franc. Near-term resistance is at 1.0840 as the Swiss franc may remain on the defensive during today’s action.

CANADIAN DOLLAR: The Canadian dollar was unable to hold onto early support and is now following through on last Friday’s negative daily reversal with modest early losses coming into this morning’s action. Surging crude oil prices should help to underpin the Canadian dollar early this week, but the Bank of Canada’s Business Outlook survey could become a source of headwinds if their economic guidance has an overly negative tone. Near-term support is at 80.40 as the Canadian dollar should remain fairly well supported early this week.

INTEREST RATES

Treasury prices found early pressure again this morning and as with Friday’s session, they have not been able to shake that off as they are posting moderate losses coming into this morning’s action. The longer-end of the yield curve has been outperforming shorter durations as 10-year notes slumped to a 5 1/2 month low while 5-year notes have reached an 18-month low. While global risk sentiment has taken a negative shift following lukewarm Chinese GDP and industrial production results, the prospect for rising global rates has kept Treasuries on the defensive early today. In addition to the growing consensus that Fed tapering will begin this year, comments from a Bank of England official have increased the chances of a UK rate hike next month which is also weighing on Bonds and Notes.

There may also be additional long liquidation in front of the latest TIC report, but keep in mind today’s release will cover August holdings which was before Treasury prices started their longer-term move to the downside. The North American session will start out with September Canadian housing starts which are forecast to have a minimal downtick from August’s 260,200 annualized rate. September US industrial production is expected to have a modest downtick from August’s 0.4% reading while capacity utilization is forecast to have a minimal uptick from August’s 76.4% reading. The October NAHB housing market index is expected to have a minimal downtick from September’s 76 reading. The Bank of Canada will release their latest Business Outlook survey during mid-morning hours.

The August US Treasury International Capital (TIC) report will be released during afternoon hours and will be scrutinized for net changes in Chinese and Japanese Treasury holdings. Minneapolis Fed President Kashkari will speak during afternoon US trading hours. The Commitments of Traders report for the week ending October 12th showed Bonds Non-Commercial & Non-Reportable traders net bought 20,443 contracts and are now net short 103,927 contracts. T-Notes positioning showed Non-Commercial & Non-Reportable traders reduced their net short position by 31,452 contracts to a net short 141,751 contracts.