Daily Market Outlook, October 3, 2022

Overnight Headlines

Outside of Japan, equities across Asia are mostly trading lower overnight as rising interest rates amid deteriorating global growth, continue to weigh on risk sentiment. In part, this also reflects reports that OPEC is considering slashing oil production, which has pushed up oil prices at the start of the week.

UK Chancellor Kwasi Kwarteng has announced that plans to scrap the 45p rate of income tax would be abandoned. The measure, which was part of the fiscal statement that was made on 23 September and led to rout in sterling assets, had been subject to criticism from some Conservative Party MPs over the weekend.

The focus will remain on domestic politics as the Conservative Party conference continues in Birmingham. Ahead of PM Truss’s closing speech on Wednesday, as she faces pressure to help shore up investor confidence and with latest polls pointing to a widening lead for Labour, the Chancellor is expected to speak later today at 16:00BST. While the government’s fiscal plan aimed at boosting long-term growth was lauded by business organisations, most analysts believe markets were concerned about the lack of an independent economic assessment from the Office for Budget Responsibility (OBR). The OBR has said it will provide a first ‘iteration’ of its forecasts to the Chancellor on Friday and will also set out a full timetable for the period to the full release on 23 November. However, this morning’s announcement markets will be listening closely for further evidence that the Chancellor is committed to fiscal discipline.

This evening, Bank of England (BoE) rate-setter Catherine Mann is scheduled to speak on inflation at the C.D. Howe Institute on ‘The Path Back to 2 Percent’. Whether Ms Mann will focus on the UK’s current situation is unclear, however, any comments she makes about the domestic interest rate outlook, post the recent fiscal event, will be closely followed. Speaking last week, the BoE Chief Economist Huw Pill indicated that the government’s fiscal plan would lead to a “significant monetary policy response”, although he played down the likelihood of an interest rate hike before the next scheduled update on 3 November. Markets have reined in their expectations but, are still pricing in at least a 100bp increase (to 3.25%) by early November.

Manufacturing PMI reports for September across the UK, Eurozone and US are final estimates and are expected to show that manufacturing activity largely remains in contractionary territory across most of Europe, while for the US, the PMI report will be overshadowed by today’s more-closely watched US ISM release. The headline manufacturing ISM report is expected to remain above 50, signalling expansion, albeit supply chain issues are expected to see a moderation in the index. US Federal Reserve policymakers members Bostic and Williams are scheduled to speak today.

Overnight, the Reserve Bank of Australia is expected to be the latest central bank to increase interest rates, with a 50bp increase to 2.85% predicted by financial markets.

EUR/USD: 0.9600 (250M), 0.9645-50 (510M) 0.9675-80 (400M), 0.9740 (200M), 0.9760 (254M)
USD/JPY: 142.50 (579M), 145.00 (405M)
USD/CHF: 0.9880 (230M), 0.9900-05 (630M)
EUR/CHF: 0.9650 (570M)
AUD/USD: 0.6570 (306M), 0.6640 (358M)

EURUSD Bias: Bearish below 1.00

GBPUSD Bias: Bearish below 1.1250

USDJPY Bias: Bullish above 140

AUDUSD Bias: Bearish below .6750

BTCUSD Bias: Bearish below 25.3K