Major US stock indexes rose slightly, as investors refrained from active purchases in anticipation of the announcement of the results of the two-day Fed meeting. Meanwhile, falling oil prices put pressure on energy stocks.

West Texas Intermediate (WTI) oil futures fell 6% after Reuters reported that oil production in Saudi Arabia could recover faster than originally anticipated. According to a senior Saudi source, production can be fully restored within two to three weeks, and the kingdom is close to recovering 70% of the 5.7 million barrels per day lost after the attacks.

The results of the September meeting of the Fed will be announced tomorrow at 18:00 GMT, after which Central Bank Chairman Jerome Powell will hold a press conference. Market participants expect interest rates to fall by 0.25 percentage points at the end of the current meeting, but they will carefully analyze the regulator’s statements, hoping to understand how recent events in Saudi Arabia and trade negotiations with China could affect future policies.

Meanwhile, the published data showed that US industrial production recovered sharply in August, which somewhat eased concerns about a slowdown in economic growth caused by weak production. According to the Fed, industrial production grew by 0.6%. This was the largest increase since August 2018, followed by a 0.1% drop in July. Industrial production rose 0.4% year on year in August.

Favorable data also came from the real estate market. The National Association of Home Builders (NAHB) released a report that reflected an unexpected improvement in the confidence of American homeowners in September. The report said the NAHB / Wells Fargo Housing Market Index rose in September to 68 points in September from a revised August value of 67 points. Economists had expected the index to remain unchanged from the initial August estimate of 66. As a result, the index reached its highest level since October 2018.

DOW components completed trading mixed (15 in the red, 15 in the red). Outsiders were shares of Dow Inc. (DOW; -2.24%). The biggest gainers were The Boeing Company (BA; + 1.34%).

Almost all S&P sectors recorded an increase. The conglomerate sector grew the most (+ 0.8%). Only the raw materials sector showed a decrease (-0.8%).

At the time of closing:

Dow 27,108.46 +31.64 + 0.12%

S&P 500 3,005.37  +7.41 + 0.25%

Nasdaq 100 8,186.02 +32.47 + 0.40%

• Doesn't think checks needed near border
• Ireland won't sign up for permanent border checks
• UK has to come up with solutions
• EU open to deal, yet to receive written proposals

Analysts at TD Securities are expecting the U.S. Federal Reserve to cut rates by 25 bps and leave the door open to further easing at its September meeting.

• “The dot plot should reflect a number of FOMC voters projecting 75bp of total cuts this year, but not enough to move the median lower to that level. Presidents George and Rosengren should dissent again at the meeting.
• Rates: The market is fully priced for the 25bp cut. Given that the market is pricing in additional 60bp of cuts by end-2020, forward guidance will be key. Our base case is one of disappointment, resulting in a bear flattener.
• FX: Focus on dot plot. But, unless the Fed provides a firm dovish surprise, the USD should trade with a firm bid tone. EURUSD likely re-challenges 1.0925 key support. USDJPY to remain in broad 107/109 range but upside risk.”

The National Association of Homebuilders (NAHB) announced on Tuesday its housing market index (HMI) rose one point to 68 in September from an upwardly revised August reading of 67 (originally 66). That was the highest level since October 2018.

Economists had forecast the HMI to stay at 66.

A reading over 50 indicates more builders view conditions as good than poor.

The three HMI components were mixed this month. The indicator gauging current sales conditions increased two points to 75 and the component measuring the traffic of prospective buyers remained unchanged at 50. Meanwhile, the measure charting sales expectations in the next six months dropped one point to 70.

NAHB Chairman Greg Ugalde said: “Low interest rates and solid demand continue to fuel builders’ sentiments even as they continue to grapple with ongoing supply-side challenges that hinder housing affordability, including a shortage of lots and labor.”

Meanwhile, NAHB Chief Economist Robert Dietz noted: “Solid household formations and attractive mortgage rates are contributing to a positive builder outlook. However, builders are expressing growing concerns regarding uncertainty stemming from the trade dispute with China. NAHB’s Home Building Geography Index indicates that the slowdown in the manufacturing sector is holding back home construction in some parts of the nation, although there is growth in rural and exurban areas.”

Nathan Janzen, the senior economist at Royal Bank of Canada, notes that Canada’s manufacturing sales fell 1.3% in July while excluding price-effects, sales fell 1.6% as the transitory factory shutdowns explain some but not all weakness.

• “Part of the headline decline in manufacturing sales in July – which built on a similar-sized 1.4% drop in June – reportedly was due to transitory disruptions to output in the steel and auto production industries, both of which saw sharp monthly declines. But excluding those components, sales still fell 0.4% and declines were posted in 11 industries in total.
• New order volumes fell by 1.6% month-over-month and the inventory-to-sales ratio rose to a new cycle high – hardly positive for near-term growth in the sector.
• The question, in terms of the broader economic growth backdrop, is how much the other 90% of the economy that is not the manufacturing sector can fill the hole. The trade war has also pushed interest rates sharply lower which, combined with still-strong labour markets and rising wages, has left a better household income backdrop than was expected even several months ago. Retail spending numbers this Friday will be our next clue as to the extent that offset is developing. For now, we continue to expect a 1.8% increase in Q3 Canadian GDP.”

The Federal Reserve reported on Tuesday that the U.S. industrial production rose 0.6 m-o-m in August, following a revised 0.1 percent m-o-m drop in July (originally a 0.2 percent m-o-m decrease).

Economists had forecast industrial production would increase 0.2 percent m-o-m in August.

According to the report, the manufacturing production rose 0.5 percent m-o-m, more than reversing a 0.4 percent m-o-m decline in July. Meanwhile, the indexes for utilities and mining went up 0.6 percent m-o-m and 1.4 percent m-o-m, respectively.

Capacity utilization for the industrial sector increased 0.4 percentage point m-o-m in August to 77.9 percent. That was 0.3 percentage point above economists’ forecast but 1.9 percentage points below its long-run (1972-2018) average.

In y-o-y terms, the industrial output rose 0.4 percent in August, following an unrevised 0.5 percent advance in the prior month.

U.S. stock-index futures fell on Tuesday as investors braced for the kick-off of a two-day U.S. Federal Reserve meeting today.

Global Stocks:

FX Strategists at UOB Group note the Kiwi Dollar is seen extending the consolidation at current levels in the near term.

• "24-hour view: While we expected NZD to weaken yesterday and “test 0.6365”, we were of the view “a sustained weakness is unlikely”. However, NZD cracked 0.6365 and dropped to 0.6342 before settling on a weak note (NY close of 0.6347, -0.47%). From here, further decline would not be surprising but oversold conditions could ‘limit’ any weakness to 0.6300 (there is a relatively strong support level at 0.6330). On the upside, 0.6380 is expected to be strong enough to cap any intraday rebound (minor resistance at 0.6365).
• Next 1-3 weeks: We detected the waning momentum early last Friday (13 Sep, spot at 0.6405) and warned that the “odds for further NZD strength have diminished”. After the weak daily closing in NY on Friday, we indicated yesterday (16 Sep, spot at 0.6380) that “a short-term top is in place” and expected NZD to “trade sideways between 0.6330 and 0.6430 for now”. Our view was not wrong even though the relatively large and rapid decline of -0.47% (0.6347) yesterday was not exactly expected. For now, we continue to expect NZD to trade sideways, albeit likely at a lower range of 0.6300/0.6400. Looking forward, if NZD were to register a NY close below 0.6300, it would suggest the early September low of 0.6270 would come under pressure. At this stage, the prospect for a move to 0.6270 is not high."

(company / ticker / price / change ($/%) / volume)

Home Depot (HD) downgraded to Neutral from Buy at Guggenheim

Snap (SNAP) upgraded to Neutral from Negative at Susquehanna; target raised to $18

Statistics Canada released its Monthly Survey of Manufacturing on Tuesday, which showed that the Canadian manufacturing sales fell 1.3 percent m-o-m in July to CAD57.15 billion, following a revised 1.4 percent m-o-m decrease in June (originally, a 1.2 percent m-o-m drop).

Economists had anticipated a decline of 0.2 percent m-o-m for July.

According to the survey, sales dropped in 11 of 21 industries, representing 66.8 percent of total manufacturing sales. The July decrease was mainly due to lower sales in the primary metal (-7.3 percent m-o-m) and motor vehicle industries (-4.7 percent m-o-m). Meanwhile, the food industry recorded the largest gain (+1.3 percent m-o-m).

Overall, sales of non-durable goods rose 0.6 percent m-o-m in July, while sales of durable goods fell 2.9 percent m-o-m.

FX Strategists at UOB Group suggested that USD/JPY could be losing some upside traction in the near term.

• "24-hour view: We held the view yesterday “USD could dip below 107.50 but the next support at 107.20 is not expected to come into the picture”. Aside from yesterday’s early morning low of 107.47, USD did not quite “dip below 107.50” as it rebounded quickly and ended the day little changed at 108.12 (+0.05%). The recovery appears to be running ahead of itself but a test of last Friday’s 108.26 top is not ruled out. The next resistance at 108.50 is unlikely to be challenged. Support is at 107.75 followed by 107.50.
• Next 1-3 weeks: USD eked out a fresh 1-1/2 month high of 108.26 last Friday (13 Sep) before ending the day little changed at 108.07 (-0.01%). However, USD gapped lower upon opening this morning on the back of news of drone attack on Saudi oil facilities. While our 107.20 strong support is still intact, the price action has dented the upward momentum and the prospect for the rebound that started on 06 Sep (spot at 107.00) to extend to 108.50 has diminished. In order to revive the flagging momentum, USD has to move and stay above 108.25 within these few days or a break of 107.20 would not be surprising”.

• Says Saudi cabinet asserts that the Kingdom will defend its lands and vital installations and is capable of responding to the attacks regardless of their origin
• Attacks on Aramco aim to disrupt global oil supplies

Analysts at TD Securities are expecting Canada’s manufacturing sales for July to edge down 0.2% vs. market forecast of -0.1%, in line with the soft export data for July.

• “Real manufacturing sales should outperform the nominal decline owing to lower factory prices which will translate into a more modest drag on industry-level GDP.”

• No-deal planning must continue "at pace"
• PM Johnson spoke to German Chancellor Merkel this morning
• Says both parties agreed on the need to accelerate Brexit talks
• Looking to discuss further at the UNGA next week
• Says UK has been putting forward detail of backstop proposals

Analysts at TD Securities are expecting the U.S. industrial production growth to rebound to 0.1% in August, up from a 0.2% contraction in the previous month (mkt +0.2%).

“We expect a 0.3% gain in manufacturing activities to be the main driver behind IP growth, following the -0.4% tumble in July.”

FX Strategists at UOB Group believe that Cable has moved into a consolidation phase although it could still test the 1.2580 area."

• "24-hour view: Yesterday, we expected GBP to “trade sideways to slightly higher within a 1.2450/1.2530 range”. However, the price action was against our view as GBP dropped rapidly to an overnight low of 1.2399. The recent strong upward pressure has dissipated and the current movement is still viewed as part of a broader consolidation phase. For today, GBP is expected to trade sideways, likely between 1.2380 and 1.2470.
• Next 1-3 weeks: While we indicated last Friday (13 Sep, spot at 1.2330) that “we are not ruling out further GBP strength” and “GBP could be ready to move out the ‘range trading phase’ over the past few days”, the manner by which GBP blew past several strong resistance levels with ease and rocketed to a high of 1.2506 came as a surprise (GBP gained +1.37% last Friday, the largest 1-day advance since March this year). The recovery that started more than a week ago (05 Sep, spot at 1.2245) has moved into a new phase and we see room for GBP to test 1.2580 from here even though it is unlikely able to maintain the pace of its current advance. On the downside, only a break of 1.2350 (strong support level was at 1.2235 last Friday) would indicate that GBP strength has run its course”.

• EU's collective response to Brexit may possibly be a further integration of Europe
  
• If current oil shock lasts, could increase inflation and hamper growth

FX Strategists at UOB Group still remain neutral on EUR/USD, expecting it to trade sidelined in the near term.

24-hour view: “The sudden and sharp decline in EUR was unexpected and came as a surprise. The drop appears to be running ahead of itself but with no sign of stabilizing just yet, EUR could weaken further to 1.0970. For today, last week’s low near 1.0925 is unlikely to come into the picture (there is another support at 1.0950). On the upside, only a move above 1.1050 would indicate that the current weakness has stabilized (minor resistance is at 1.1035)”.

Next 1-3 weeks: “The rapid retreat in EUR yesterday after testing the minor resistance at 1.1110 last Friday (high of 1.1109) was not exactly expected. However, it is too soon to expect the start of a sustained decline. For now, we are holding on to our view from Friday (13 Sep, spot at 1.1055) wherein EUR “is likely to trade sideways within a broad 1.0925/1.1130 range”. Looking forward, EUR has to register a NY close out of the expected range before a more sustained directional price action can be expected. Meanwhile, it could continue to trade between the two levels for a while more”.

Pooja Kumra, senior European rates strategist at TD Securities, points out that the ECB delivered on all policy fronts; however, the "adequacy" of the package, as well as the introduction of a tiered deposit system, left the markets puzzled.

“As seen from the experience of the SNB and the BOJ, the implementation of tiering does come with its initial teething period. However, we prefer looking at the bigger picture for EUR rates which will be marked by a "QE infinity" programme and a more persistent negative policy rate. From a rates perspective, this should be supportive for tighter EGB/credit spreads. However, a further push lower in Bund yields will be driven by markets repricing rate cuts from the ECB. This seems less likely in the near-term as the ECB implements its new QE programme only in November.”

According to the report from Centre for European Economic Research (ZEW), Indicator of Economic Sentiment for Germany experienced a sharp rise in September 2019, making up for the significant decline witnessed in August. Currently standing at -22.5 points, the indicator climbed 21.6 points compared to the previous month. The indicator thus exhibits about the same level as in June, which was -21.1 points. It remains, however, well below the long-term average of 21.5 points. In the current September survey, the assessment of the economic situation in Germany worsened by 6.4 points, with the corresponding indicator falling to a current reading of -19.9 points. This has been the lowest reading since May 2010.

Financial market experts’ sentiment concerning the economic development of the eurozone has also improved greatly, with the corresponding indicator climbing 21.2 points to a current level of -22.4 points compared to the previous month. The indicator for the current economic situation in the eurozone deteriorated slightly by 1.1 points to a level of -15.6 points. 

For years, China has been one of the world’s fastest growing sources of outward foreign direct investment (FDI). In 2016, China invested $46 billion into the United States and $41 billion into the European Union. Total outward FDI exceeded $200 billion or nearly 2 percent of the country’s GDP.

But by 2018, investment into the United States dropped to less than $5 billion, while the European Union received short of $21 billion. Total outward FDI dropped by more than half.

The drop-off is mostly due to tougher restrictions in China on capital outflows placed in 2017 but also because of tougher US and European screening measures for foreign investments and heightened political tensions, especially between China and the United States. 

J.P. Morgan’s chief quant says oil prices won’t hurt stock prices until they hit the $80 to $85 per barrel range.

Marko Kolanovic, global head of macro quantitative and derivatives strategy, said when oil prices are stable, oil correlates positively with the S&P 500, but when there are large price increases, the correlation weakens and becomes negative.

In a note, Kolanovic said higher oil prices can hurt consumer spending activity, but there are also positives including higher energy sector profits, reduced worries about high-yield energy debt, and improved employment in the industry.

Kolanovic, who sees a positive stock market this year, said rising geopolitical risk could also be a factor that pushes China and the U.S. to a trade agreement. He also sees both oil and natural gas prices moving higher, and that should drive energy stocks higher, accelerating a trend into value stocks.

In view of Axel Rudolph, analyst at Commerzbank, GBP/USD’s advance has taken the cross to the May and June lows at 1.2506/59 and between these levels and the mid-July high at 1.2580 the cross is to short-term consolidate some more.

“Further up lies strong resistance between the seven month resistance line, 200 day ma and the June high at 1.2694/1.2784. Now that a weekly Friday chart close above the 1.2310 August high has been seen, we changed our weekly forecast to a bullish one. Minor support below the 55 day moving average and the September 12 low at 1.2300/1.2283 is seen between the early and mid-August lows at 1.2080/15 and major support at the 1.1958 current September low. A slip through the 1.1958 recent low would put the 1.1491 October 2016 low (according to CQG) on the cards.”

Barclays Research discusses its expectations for this week's FOMC policy meeting on Wednesday.

"We expect the FOMC to deliver a 25bp cut to its policy rate in September, reducing the target range for the policy rate to 1.75-2.00%. We look for only minor changes relative to the July statement, with the committee reiterating that the baseline outlook still calls for sustained expansion and inflation near the symmetric 2% objective, but noting its decision to make another adjustment to its policy rate “in light of … global developments … and muted inflation pressures. We also expect similar forward guidance, retaining the committee’s pledge to “act as appropriate” as it contemplates future changes to the path of the funds rate. With measures of activity and inflation having played out broadly in line with expectations since June, and with fundamentals only slightly less supportive, on balance, we look for only minor changes to the median projections for inflation, unemployment and GDP in 2019 and 2020," Barclays projects.

Danske Bank analysts note that following the strike on Saudi oil facilities, the oil price has hovered around USD66-68 per barrel.

“After Trump Sunday tweeted the US was 'locked and loaded', he yesterday struck a more moderate tone saying the US was in 'no rush' to act. 'We have a lot of options but I'm not looking at options right now. We want to find definitively who did this,' he said, adding that 'this was an attack on Saudi Arabia' and not the US. Among other considerations, going into the election year Trump seems to put a very high priority on sustaining a robust US economy. A US-Iran military conflict would be a clear threat to this.”

Japanese Prime Minister Shinzo Abe said on Tuesday he would meet with Iranian President Hassan Rouhani at the end of the month, as regional tensions rise in the Middle East after the weekend attacks on Saudi oil facilities, public broadcaster NHK said.

It was during a meeting with members of the ruling Liberal Democratic Party that Abe repeated his intention of speaking with Rouhani on the sidelines of the U.N. General Assembly (UNGA) in New York, according to NHK.

Abe added that he would travel to Belgium after the UNGA session and meet with European Commission President Jean-Claude Juncker, NHK said.

TD Research discusses EUR/USD outlook and adopts a neutral bias on a medium-term basis.

"The central banks have a narrow mandate to protect inflation and any whiff of lost confidence in their toolbox would undermine their credibility. As a result, they will push ahead whether necessary or reasonable. The Fed comes on the heels of a multi-pronged easing package by the ECB. Draghi's swan song increases the scope for fiscal support, given the ECB will continue to cap increases in sovereign yields. Our LFFV models anchor EURUSD in the low 1.20s and we still like it above forwards on a rolling 6m and 12m basis. However, a German led fiscal boost requires more pain to play, suggesting the EUR remains sidelined over the coming months," TD adds.

China’s new home prices grew at their weakest pace in nearly a year in August as a cooling economy and existing curbs on speculative buying put a dent on overall demand.

Average new home prices in China’s 70 major cities rose 8.8% in August from a year earlier, compared with a 9.7% gain in July and the weakest pace since October 2018, according to the report from National Bureau of Statistics (NBS).

On a monthly basis, average new home prices rose 0.5% in August, less than July’s growth of 0.6% and the smallest increase since February. However, it still marked the 52nd straight month of gains.

Most of the 70 cities surveyed by the NBS still reported monthly price increases for new homes, though the number was down to 55 from 60 in July.

The property sector has held up as one of the few bright spots in the world’s second-largest economy.

Bill Evans, analyst at Westpac, notes that the RBA minutes of the September Board meeting indicate that the Board is nearing the time when another rate cut will occur.

“The minutes make a fairly clear case for another rate cut in 2019. With two meetings now having passed since the last move and , from my perspective, most importantly, the key rate cut theme that “ the Australian economy could sustain lower rates of unemployment and underemployment” returning to the narrative, our central view that there is no reason to wait until November for the next move still seems reasonable. November is typically favoured by the RBA since it is a time when it can refresh its forecasts although we are not expecting any significant changes along the lines of August when the forecast unemployment rate was lifted; the forecast pace of wages growth was lowered; and the timing of the return of inflation to the 2–3% band was pushed out by a year. The growth forecast in 2019 is likely to be lowered but the 2020 forecast should remain intact. However, as the minutes warn, “developments in the international and domestic economies, including the labour market” will be assessed to see whether a further easing of policy is “needed. Westpac continues to predict cuts in the cash rate of 25 basis points in both October and February next year.”

EUR/USD

Resistance levels (open interest**, contracts)

$1.1178 (1868)

$1.1146 (1887)

$1.1106 (1439)

Price at time of writing this review: $1.1012

Support levels (open interest**, contracts):

$1.0975 (4209)

$1.0935 (3185)

$1.0891 (2213)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date October, 4 is 92068 contracts (according to data from September, 16) with the maximum number of contracts with strike price $1,1050 (13296);

GBP/USD

Resistance levels (open interest**, contracts)

$1.2580 (1786)

$1.2555 (752)

$1.2518 (575)

Price at time of writing this review: $1.2417

Support levels (open interest**, contracts):

$1.2333 (581)

$1.2300 (735)

$1.2222 (1038)

Comments:

- Overall open interest on the CALL options with the expiration date October, 4 is 15272 contracts, with the maximum number of contracts with strike price $1,2500 (1786);

- Overall open interest on the PUT options with the expiration date October, 4 is 15293 contracts, with the maximum number of contracts with strike price $1,1900 (1464);

- The ratio of PUT/CALL was 1.00 versus 0.96 from the previous trading day according to data from September, 16

* - The Chicago Mercantile Exchange bulletin (CME) is used for the calculation.

** - Open interest takes into account the total number of option contracts that are open at the moment.