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Trade wars are back 

Chinese tech stocks led the declines in Asian trade after the Biden administration imposed a set of sweeping export controls on Friday. US export controls include measure to cut China off from semiconductor chips made using US tools. Chinese chipmakers plunged by around 20% on the news, which marks an escalation in US-China trade wars. Meanwhile a sharp decline in the Caixin services PMI also hit sentiment. The Hang Seng fell around 3% and mainland shares were off around 2%. Tokyo fell 0.7%.

NFP underscores the narrative

Stocks plunged at the end of the week following the US nonfarm payrolls report, which was strong enough to give the Federal Reserve plenty more cover to keep on raising rates. The Dow Jones rose 2% last week and the S&P 500 added 1.5%, but the jobs report erased much bigger gains.

European stock markets opened lower on Monday with the soft handover from Asia and Wall Street. The FTSE 100 was down around half of one percent around the 6,950 area. Wall Street had closed the week out marginally higher, but the S&P 500 fell 2.8% on Friday to wipe out most of the gains made a week ago when it notched its best two-day advance since 2020. 

Friday’s US jobs report underscored the macro narrative – no pivot, higher US interest rates, stronger dollar. Whilst the pace of expansion in the labour market was the slowest in many months, it remains exceptionally tight. Several Fed speakers on the wires last week also hammered home the point that a pivot is not imminent. 

Pivot paranoia

It will be the same kind of pivot will-they won’t-they this week with a slew of central bank speakers, FOMC minutes and US inflation. We hear from the Bank of England governor Bailey and chief economist Pill, as well as MPC members Mann and Haskell. The ECB’s Lane and Lagarde and BoJ’s Kuroda are also due to speak this week at the IMF. But Thursday’s CPI is perhaps the biggest event risk this week. The most recent PCE reported showed inflation accelerated more than expected in August, jumping 0.6% month-on-month amid signs of a broadening of pressures in the services sector.

Bank of England steps up support

With rates moving back up following the sharp decline at the start of last week, the Bank of England says it will step up the scale of bond purchases this week. Its temporary gilt market operation comes to an end on Friday and it will increase the daily maximum it can deploy from £5bn to £10bn. So far it has carried out 8 daily auctions, offering to buy up to £40bn, and has made around £5bn of bond purchases. The Bank might be concerned about what happens when it stops – the market should be aware that the central bank is prepared to step in, but yields are creeping up. The 10yr gilt moved from 3.75% to 4.25% last week, whilst the 30yr has risen from around 3.8% at last week’s lows to 4.4%.  The Bank made it clear it will be the market maker of last resort, but we are not home and dry just yet.

Today economic data

The IMF kicks off its latest round of meetings with the World Bank. On the data front, we are looking at the EU Sentix investor confidence survey. And it’s Columbus Day, which sees a bank holiday in the US, though the stock market will be open. Canada observes its Thanksgiving holiday. 

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