One of the largest hurricanes to hit the US continues to storm through the Southern States today. Markets had their own deluge yesterday that continues today.  China Shanghai Composite fell 5.22% - the biggest drop since February 2016 – blamed on US trade war intensifying and the FOMC rate hikes continuing.  If money is leaving equities, where is it going? What is the safe-haven from the storm?Bonds are not reacting to this scare in the same way as before, nor is technology as markets search for something else.  Central to these questions is the role of financial conditions (or market stability) in monetary policy decisions. The view over the last 24-hours is that money is still easy enough and the pain in stocks normal enough not to change either the FOMC or ECB path to further tightening of policy. Throw in the role of politics as a factor as well – with US President Trump ratcheting up his view that the Fed raised rates too fast.  The FOMC will want to show its independence from such pressure. Perhaps the most obvious shift for the market is intended. Volatility in markets going up as it’s the natural outcome of shifting off from financial repression – just ask Bernanke.  What is the safe-haven is shifting with EM currencies bouncing, commodity currencies bouncing despite the drop in oil and copper. In G10 FX, SEK after a higher CPI is up 1.4% and breaking the 55-day support. GBP has broken higher with 1.3492 the 200-day in play following up on yesterday’s flag while EUR holds bid as hedges unwind.  Markets are selling the US and buying what is perceived to be cheap (and maybe has value if the Fed blinks).  In such times, the right bellwether for risk usually is AUD/JPY, which is the G10 carry trade, and reflects both rate, growth and regional issues. This was the early warning system for trouble in 2008 as its dump in August 2007 marked a key turning point. We aren’t yet at that kind of point and perhaps the deluge in the US is merely a pull down from everywhere else. 

Question for the Day: Is this selling the catch-up trade for the US? The key question for investors is whether this washout in global risk that started with Emerging Markets this summer continues into the US market. The view that held until October was that US growth and US policy was not at risk to the future economy while the rest of the world suffered. The escalation of the US trade war with China – now including spying charges and Navy challenges – makes things different. Technology shares have suffered notably and they were the leaders. While many will say this move in the US is long-overdue and an opporunity, the issue is one of where to claim enough pain has been had to find value. Breaking 200-day moving averages in big bourses everywhere matters.

The chart that caught my eye this morning as we all try to find perspective and search for a safe-haven comes from Topdown Charts with a comparison of US vs. EM cyclicals vs. defensives. Perhaps the US is merely catching up to EM or perhaps its about the FOMC like Trump suggests or perhaps we have a lot further to go before its safe to buy this dip.  

What Happened?

• Japan September Domestic PPI rose 0.3% m/m, 3% y/y after 0% m/m, 3.0% y/y – as expected. The ex-electricity rate was up 0.2% m/m. Import prices rose 0.1% m/m, export prices rose 0.6^ m/m while the JPY weakened 0.7% on the month. The biggest increase was in energy with oil and products adding 0.16pp to headline while agriculture/fish subtracted 0.02pp. 
• BOJ Sakurai: Still need easy policy but eying side effects. Sakurai, an advocate of the idea that the BOJ must keep a close eye on the side-effects of easy policy, warned, "Maintaining the easy policy to achieve the price stability target will cause a risk the financial and economic imbalances accumulate." The BOJ must examine financial imbalances and manage monetary policy in an appropriate manner, he said, without elaborating how the BOJ addresses the risks its facing now. Sakurai also voiced concern over increasing uncertainties regarding the outlook for the global economy and over downside risks from trade disputes and fund outflows from emerging economies.
• Australia October consumer inflation expectations unchanged at 4% - as expected. The mean-weighted inflation rose to 2.5% from 2.4%, however it’s been consistent within the 2.3-2.5% range for 6 months. The data confirm inflation expectations are well anchored and consistent with the RBA target. 
• RBA Ellis: Labor market good indicator for growth pulse.Ellis was speaking in Melbourne at the Melbourne Institute 2018 Economic and Social Outlook Conference on the topic, "Supporting Growth in the Short Run and the Long Run."The main message was that monetary policy needs to be expansionary to support above-trend growth when there is spare capacity in the economy. And the best guide to spare capacity is the labor market. Ellis said that "If employment is growing faster than the working-age population, and the unemployment rate is coming down, those are pretty good signs that the economy is running faster than 'trend'."

• French September final HICP -0.2% m/m, 2.5% y/y after +0.5% m/m, 2.6% y/y – unrevised as expected.  The National CPI also -0.2% m/m, 2.2% y/y after 2.3% y/y. 
• Spanish September final HICP +0.6% m/m, 2.3% y/y after +0.1% m/m, 2.2% y/y – unrevised as expected. The national CPI was up 0.2% m/m, 2.3% y/y after 2.2% y/y. The core CPI was 0% m/m, 0.8% y/y unchanged from August y/y. 

• Sweden September CPIF rose 0.5% m/m, 2.5% y/y after -0.2% m/m, 2.2% y/y – more than +0.4% m/m, 2.4% y/y expected. The CPI rose 2.3% y/y after 2.0% y/y. Core CPIF rose 1.6% - in line with the Riksbank. Food and accommodation prices led to the rise in the headline. 

• Bank of England 3Q Credit Conditions Survey: Mortgage supply shrinks, spreads narrow. The credit availability 3M forward drops -6.4% after +0.5% in 2Q. Corporate credit available past 3M -1.7% after +0.5%, household secured credit available -10.8% after +4% and outlook 3M forward -14.8% after -4.1%. Unsecured household credit -8.8% after -4.3% with 3M forward -10.7% from -7.7%. 

Market Recap:

Equities: The S&P500 futures are off 0.8% after losing 3.29% yesterday with focus on 200-day at 2,774.  The Stoxx Europe 600 is off 1.7% - worst in 20 months – while the MSCI Asia Pacific fell 3.5% - worst in 17 months and largest drop in 2 years. The MSCI EM is off 3.3% to 19 month lows. 

• Japan Nikkei off 3.89% to 22,590.86
• Korea Kospi off 4.44% to 2,129.67
• Hong Kong Hang Seng ooff 3.54% to 25,266.37
• China Shanghai Composite off 5.22% to 2,583.46
• Australia ASX off 2.78% to 5,993.50
• India NSE50 off 2.16% to 10,234.65
• UK FTSE so far off 1.9% to 7,011
• German DAX so far off 1.5% to 11,538
• French CAC40 so far off 1.7% to 5,120
• Italian FTSE so far off 1.4% to 19,449

Fixed Income: Weaker equities leave front-end bid in bonds, but there is no joy in overall market. Supply in US and EU continues along with views that financial conditions are not yet a problem for further FOMC, ECB tightening actions. Biggest move in Gilts with UK 10Y yields off 4.5bps to 1.68% while German Bunds off 4bps to 0.515% and French OATs off 2.5bps to 0.87%. Periphery still watching Italian budget with Italy up 10bps to 3.6%, Spain up 1.5bps to 1.625%, Portugal up 2.5bps to 1.975% and Greece up 4.5bps to 4.455%. 

• Italy sold E6.5bn of bonds with mixed demand and sharply higher rates– E3.5bn of 3Y 2.3% Oct 2021 BTP at 2.51% with 1.26 cover – previously 0.13% and 1.77 cover – E1.5bn of 7Y 2.5% Nov 2025 BTP at 3.28% with 1.9 cover – previously 2.55% with 1.28 cover – E942mn of 15Y 2.45% Sep 2033 BTP at 3.66% with 1.41 cover – previously 3.04% with 1.46 cover – and E558mn of 20Y 4% Feb 2037 BTP at 3.79% with 1.90 cover – previously 2.93% with 2.15 cover. 
• US Bonds are lower with focus on CPI, 30Y supply– 2Y up 0.4bps to 2.846%, 5Y up 0.3bps to 3.006%, 10Y up 0.2bps to 3.165% and 30Y up 0.4bps to 3.352%
• Japan JGBs rally with equities lower, curve flatter despite mixed 30Y sale –2Y flat at -0.127%, 5Y off 2bps to -0.077%, 10Y off 0.6bps to +0.136% and 30Y off 1.5bps to 0.914% – MOF sold Y567.4bn of 30Y JGBs at 0.898% with 3.92 cover – previously 0.838% with 4.231 cover. 
• Australian bonds are bid with risk off trade– 3Y off 2.7bps to 2.035% and 10Y off 2.5bps to 2.725% – AOFM sold A$500mn of 6M notes Feb 2019 T22029 at 1.8343% with 5.59 cover. 
• China PBOC skips open market operations, leaves liquidity unchanged. Money market rates mixed with 7-day steady at 2.595% and O/N off 3.5bps to 2.345%. The 10Y bond yields fell 3.5bps to 3.58%. 

Foreign Exchange: The US dollar index is off 0.35% to 95.16 with range 95.14-95.43.  In Emerging Markets, USD is mostly lower in Europe, bid in Asia – EMEA: ZAR up 0.8% to 14.642, TRY up 1.5% to 5.985, RUB up 0.4% to 66.54; ASIA: TWD off 0.35% to 31.102, KRW off 0.95% to 1144, INR up 0.15% to 74.09.

• EUR: 1.1570 up 0.45%.Range 1.1520-1.1575 with USD weakness more than EUR strength driving 1.1580 pivot for 1.1650 restest. 
• JPY: 112.15 off 0.1%.Range 111.97-112.38 with EUR/JPY 129.80 up 0.35% - suggesting 112 key with 110.50 and lower risk on equities.
• GBP: 1.3210 up 0.1%.Range 1.3182-1.3244 with EUR/GBP .8760 up 0.3% - less Brexit, more equity fears with 1.3250-1.3300 key resistance.
• AUD: .7095 up 0.6%.Range .7046-.7101 with crosses key and USD weakness theme. NZD up 0.65% to .6490. 
• CAD: 1.3045 off 0.15%.Range 1.3033-1.3068 with oil lower not a problem as commodity currency games driver and 1.2990 base back in play. 
• CHF: .9875 off 0.25%.Range .9857-.9902 with EUR/CHF 1.1430 up 0.2% - All about EUR strength rather than CHF safe-haven.
• CNY: 6.9098 fixed 0.04% weakerfrom 6.9072, trade 6.9290 into London off from 6.9194 yesterday close. Now flat at 6.9210 after 6.9196-6.9364 range. 

Commodities: Oil lower, Gold higher, Copper off 1.5% to $2.78

• Oil: $71.76 off 1.95%.Range $71.63-$72.76. WTI lower on API and equity hit to demand views – 55-day back in play at $69.24 as base with $70 pivot before that against $73 and $75.08 Oct 10 highs. Brent $81.26 off 2.7% - also lower but with 55-day at $77.52 further away and $80 base holding with $81.50 pivot against $83 and $86.74 Oct 4 highs. 
• Gold: $1205 up 0.9%.Range $1194.50-$1206. Gold going up fast with $1180.90 then $1160.40 far away and as 55-day break at $1200 opens $1211.1 Sep 21 high retest. Silver $14.44 up 0.95% - still watching $14.18 Sep 27 lows as key support but $14.50 pivot back in play for $14.70 retest. Platinum up 0.3% to $825.30 and Palladium up 1.25% to $1082. 

Conclusions: No longer a diverse market?  The usual way portfolios protect from crisis is through the power of diversity. Correlations being negative between sectors and different asset classes drive such logic and bring stability in scary times.  Usually, the S&P500 itself is diverse and needs little more than its wide net of sectors and different companies to keep stock investors happy. This chart of the S&P500 implied correlations says it all about why yesterday and perhaps today matters.  This is no longer a market of stocks but one stock market. The push to deleverage any and all positions will be the central theme if we continue to see momentum unabated. The break in the S&P500 200-day support opens a test of 2600. 

Economic Calendar:

• 0730 am ECB monetary policy meeting accounts
• 0830 am US weekly jobless claims 207k p 205k e
• 0830 am US Sep CPI (m/m) 0.2%p 0.2%e (y/y) 2.7%p 2.5%e /ex food+energy 0.1%p 0.2%e 2.2%p 2.3%e
• 0830 am Canada Aug new housing prices (m/m) 0.1%p 0.1%e
• 1100 am US weekly EIA crude oil stocks +7.975mb p +5.082mb e
• 1200 pm US WASDE report
• 0100 am US sells $15bn 30Y bonds
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