The Morning Update

The USD is steady, oil prices edge higher, equity markets fall, and US yields rise as risk sentiment softens. The USD holds near recent highs and yields rise as investor risk-off sentiment returns with the prospect of higher interest rates for longer, while commodities soften as continuing China property problems impact demand for natural resources. The yield on Germany's 10-year benchmark rose to its highest levels since 2011, while the benchmark US 10-year yields are on course to test levels last seen in 2007. In China, the Evergrande Group's latest trouble in firming up a long-pending debt restructuring plan triggered a sell-off in its and its peers' shares as worries resurface about the crisis-hit property sector. A Bloomberg Intelligence index of China's property developers sank as much as 6.6%, heading for its worst session in 9 months. Today sees a light set of US data releases, so the focus will be on ECB President Lagarde's speech to help provide some intraday direction to currency markets.

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in other news. Evergrande's debt revamp roadblocks his China property investors' sentiment. Hollywood writers reach tentative deal with studios. France to withdraw troops from Niger by the end of the year. Russia dodges G7 price cap sanctions on most of its oil exporters. Russia pounds the port of Odesa in its latest air strikes against Ukraine. Germany scraps plans for more stringent building standards to prop up industry. Thailand expected to pause interest rate hikes on Wednesday after seven straight hikes. China-EU relationships are at a crossroads, an EU official says in Beijing.

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In currency news. Japanese Yen drops to near yearly lows vs. the US as Japanese intervention is in focus. China's yuan slips on rising pre-holiday demand. Swedish Krona to strengthen in the long run, Riksbank chief says. Asian currencies were subdued after the Fed's hawkish rhetoric and USD strength. Trading currencies start the week on the back foot with CHF & MXN dropping 0.35% AUD & NOK down 0.20% JPY & NZD slipping 0.1%, while ZAR is flat and outlier SEK rallies 0.8% vs. USD.

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In commodity markets. Oil prices firm 0.2% - Natural Gas falls 0.7% - Gold slips 0.2% -Silver weakens 0.3% - Copper tumbles 0.9% - Lumber is unchanged - Wheat prices eased 0.2%.

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CAD outperforms its peers in early trading, retesting 1.3450 on firm oil prices and an increasing prospect that the BoC may hike again within 2023. "Stronger-than-expected Canadian inflation data helped lift the CAD this week," said Shaun Osborne, Chief currency strategist at Scotiabank. "The inflation data boosts the risk of forcing the Bank of Canada to tighten its policy rate again." With a light economic calendar today we expect the CAD to be maintained within a tight trading range today.

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EURCAD continues to weaken, testing fresh 4-month lows, down over 2% in September as stronger oil prices and the increasing prospect of BoC hiking interest rates continue support for the loonie.

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EUR remains under pressure ahead of ECB President Lagarde's testimony. Euro holds steady within a tight trading range ahead of President Lagarde's testimony before the Economic and Monetary Affairs committee today at 9 a.m. EST. Domestically German Business Climate, Current Assessment, and Expectations all beat projections, but the positive data failed to boost the Euro as risk-aversion impacted investor sentiment. The Chief Economist at HCOB said, "We expect the Eurozone to enter a contraction in the third quarter". Our bias remains bearish on Euro and anticipate a break of 1.0600 opens up the potential of a reset of 1.0480 next.

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GBPEUR bounces off four-month lows as investors are cautious of long euro positions ahead of ECB President Lagarde's testimony today.

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GBP retests six-month lows amid increasing risk aversion. The pound extends losses, down 3.5% vs. USD in September, hitting a fresh six-month low amid the combination of increasing risk aversion amid China concerns, the increasing prospect of a UK recession, and after the BoE paused interest rate hiking policy last week. Friday saw UK Retail Sales rise 0.4% in August vs. -1.1 in July, and additionally, the Composite PMI declined highlighting an ongoing contraction in the UK's private sector's activity. CIPS Chief Economist, "Manufacturing experienced a rapid fall in pipelines of work as their backlogs shrunk at the fastest pace since Feb 2009." The worsening UK economic outlook will likely force the BoE to keep rates on hold and increase the prospect that the GBP weakens towards 1.2000 vs. USD in Q4.