MARKET WRAPS
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GDP and CPI data for EU, France, Italy; ECB Vice-President Luis de Guindos participates in a colloquium with students organized by ICADE University; France consumer spending, PPI; Germany retail trade, Deutsche Bundesbank President Joachim Nagel delivers the Ludwig Erhard Lecture; trading updates from BP, Stellantis, Finnair, Anheuser-Busch InBev, BASF, Prada, Thales Group, Impala Platinum Holdings, Banco Bilbao Vizcaya Argentaria, EDP Renovaveis, DSM Firmenich, Bouygues
Opening Call:
Stock futures were broadly lower as investors parsed weak China data and the Bank of Japan's monetary policy decision. In Asia, stock benchmarks traded mixed; the dollar strengthened; Treasury yields were mostly lower; oil futures gained; while gold declined.
Equities:
European stock futures were broadly lower early Tuesday with sentiment likely weighed by weak China's manufacturing activity.
An official gauge of China's manufacturing activity unexpectedly fell into contraction after rising to expansion territory for one month in September, signaling renewed weakness in the sector.
Meanwhile, the Bank of Japan said Tuesday that it would consider its cap on government bond yields as a reference point rather than a hard boundary, backing away from a seven-year-old policy amid persistent inflation.
The 1% level would now be considered merely a reference, and it would make government bond purchases "taking account of market rates."
The Fed and the Bank of England rate decisions are due later this week along with the U.S. jobs data and a highly anticipated borrowing announcement from the Treasury Department.
While investors have paid a fair amount of attention recently to the conflict between Israel and Hamas, for stocks, "the bigger issue is the surge in interest rates," said George Mateyo, chief investment officer at Key Private Bank.
The Treasury on Monday said it expects to borrow $776 billion in the fourth quarter, which is $76 billion lower than the prior estimate made in July.
Many analysts have expected the Treasury to increase auctions of notes and bonds by a similar amount as it did a few months ago when auctions of 10-year notes were boosted by $3 billion.
Forex:
The U.S. dollar gained slightly early Tuesday.
With the Fed meeting, the September JOLTS report, October's jobs numbers, and the Treasury's refinancing announcement, an "incredibly busy week beckons" for investors according to Corpay's Karl Schamotta.
The chief market strategist expects a "solidly-hawkish bias" in the Fed's statement and post-meeting press conference on Wednesday, with markets listening carefully for a shift in language around the idea that recent increases in long-term yields are lifting rates into "sufficiently restrictive" territory.
But, Schamotta cautions that with the labor market staying tight, consumer balance sheets retaining considerable spending capacity, elevated oil prices and growth routinely topping forecasts, the case for further tightening remains "surprisingly undiminished."
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The yen weakened slightly after the BOJ's move, which fell short of some market predictions about a decisive move to lift interest rates. The yen was trading at around 149.90 to the dollar Tuesday afternoon in Tokyo.
Bonds:
Treasury yields were broadly lower in Asia as investors digest the BOJ's outcome and the U.S. government's lower-than-expected $776 billion in borrowing needs for the fourth quarter.
The Bank of Japan said on Tuesday that it would consider its cap on government bond yields as a reference point rather than a hard boundary, backing away from a seven-year-old policy amid persistent inflation.
The 1% level would now be considered merely a reference, and it would make government bond purchases "taking account of market rates." It didn't set any firm upper boundary. It maintained its short-term interest-rate target at minus 0.1%.
"The Bank of Japan today de facto abolished yield curve control and we think policy makers will call time on negative interest rates as soon as January," said Marcel Thieliant, an economist at Capital Economics.
Focus now shifts to the Treasury's auction schedule due Wednesday along with the Federal Reserve's policy announcement.
The refunding process had created some angst in the bond market because of nervousness around the U.S. government's growing deficit. During the third quarter, Treasury borrowed an eye-popping $1.01 trillion.
Energy:
Oil futures gained in Asia.
The global oil market is still extremely tight, and we don't have any room for any disruptions of supply, so the pullback may be short-lived as the market awaits more headlines on the progress of the Israeli invasion of Gaza, Phil Flynn, senior market analyst at The Price Futures Group, said.
Analysts said traders will remain sensitive to developments, in particular any sign the conflict could result in direct confrontations with Iran.
"If Iran's involvement were to lead to a fall in the country's oil exports, this could pressure an already constrained market - with a 500,000 barrel a day reduction potentially taking Brent crude prices to between $100 and $110, from around $89 at present," UBS strategists said.
Metals:
Gold prices were lower early Tuesday.
Israel's limited ground offensive in Gaza was softening demand for the precious metal, ANZ analysts said.
Gold had pushed above $2,000/oz last week, but that hasn't been sustained this week.
That said, ANZ says gold appears to be consolidating and building a base for further gains.
Gold may also get support from expectations for sustained inflationary pressures stemming from oil price increases given Middle East geopolitical tensions, Huatai Futures analysts said.
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Aluminum prices could benefit from production curbs in China's Yunnan province, Morgan Stanley analysts said.
"Based on latest industry feedback, the percentage of aluminum production suspension in Yunnan province has been finalized and ranges from 9% to 40% among aluminum smelters, specifically 9% for Hongqiao, 20% for Yunnan Aluminium, and 40% for Shenhuo," the analysts said.
That equates to about 1.16 million metric tons of aluminum capacity or roughly 20% of the province's total operating capacity, they said.
The suspension is expected to start Nov. 1 and is likely to continue into 1Q 2024.
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Copper declined, dragged by worse-than-expected China manufacturing PMI data released earlier.
On the downside, the $7,885/ton level may be a crucial support to hold, IG said.
If this support breaks, this could pave the way for copper to drop toward the $7,515/ton level next, it added.
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Iron ore prices were flat amid mixed cues.
Solid demand supported by high operation rates at Chinese mills has pushed up iron ore futures prices, ANZ analysts said.
China's total crude steel production from January to September reached 795 million tons, up 1.7% on year, according to the China Iron and Steel Association.
However, China's official October PMI unexpectedly fell into contraction after rising to positive territory for one month in September.
TODAY'S TOP HEADLINES
Bank of Japan Backs Away From Rate Cap Amid Persistent Inflation
TOKYO-The Bank of Japan said on Tuesday that it would consider its cap on government bond yields as a reference point rather than a hard boundary, backing away from a seven-year-old policy amid persistent inflation.
Since 2016, the Bank of Japan has prevented the yield on 10-year Japanese government bonds from rising above a certain level, part of a policy known as yield-curve control. In July, it raised the hard cap to 1% from 0.5%.
China Manufacturing PMI Fell Into Contraction for October
An official gauge of China's manufacturing activity unexpectedly fell into contraction after rising to expansion territory for one month in September, signaling renewed weakness in the sector.
China's official manufacturing purchasing managers index fell to 49.5 in October from 50.2 in September, the National Bureau of Statistics said Tuesday. A reading above 50 indicates an expansion in activity while a reading below it indicates contraction.
Treasury cuts its fourth-quarter borrowing estimate
Corrects total borrowing to $776 billion
The Treasury Department said Monday it expects to borrow $776 billion in the fourth quarter, which is $76 billion lower than the prior estimate made in July.
Israeli Forces Make Major Advance Toward Gaza City
TEL AVIV-Israeli tanks and infantry temporarily seized control of a strategic road linking the Gaza Strip's north and south, a major advance that appeared aimed at encircling the enclave's biggest population center, Gaza City.
The thrust through the center of Gaza marked the deepest push into Palestinian territory since Israeli ground troops entered the strip late last week, starting a new phase in its war to eradicate Islamist militant group Hamas following the surprise Oct. 7 attacks. The Israeli military and Hamas said there were clashes between troops and militants Monday, and Israel said its forces had freed a soldier taken prisoner on Oct. 7 in what appeared to be the first such rescue of a hostage in Gaza.
Hospitals in Gaza Get Closer to Front Line in Israel's Battle to Root Out Hamas
Gaza's hospitals have found themselves on the front lines of Israel's war against the Palestinian Islamist militant group Hamas.
Airstrikes near hospitals-overflowing with the sick and wounded and sheltering large numbers of displaced civilians-have damaged buildings, blown in windows and disrupted operations, doctors and administrators say.
Meta Pauses Ads for Users Under 18 in Europe as It Rolls Out Subscriptions
Meta Platforms will stop showing ads to European teens as part of a plan announced Monday to launch subscription-based versions of its social-media products to comply with the continent's regulations.
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10-31-23 0115ET
