US EARLY MORNING: Index futures are rallying as yields fall; hopes of an easing in the pace of monetary tightening, and unverified reports that China is to look at ways to end Covid Zero are supporting sentiment

NOTE: Daylight saving time in the UK has now ended, and the time differential between London and New York will be four hours this week. Daylight saving will end in the US on Sunday 6th November, upon which the usual five-hour time differential will be restored.

SNAPSHOT: US equity futures are gaining by 0.6-1.0%, with the Nasdaq-100 leading gains as Treasury yields narrow by 6-9bps, with much of the rally in the 5yr space. Hopes that the Fed will signal a less aggressive pace of rate hikes ahead have gained further traction after Australia’s RBA, which has often led G10 central bank policymaking in the pandemic era, refrained from a jumbo-sized hike. Additionally, there are some unverified reports that China was forming a committee to assess how to exit Covid Zero policies, though officials have not been able to confirm the rumours. In Europe, Gilts are outperforming as the Bank of England prepares to start Gilt selling later today (also some reports that higher taxes would be needed ahead). The Dollar Index is lower by around 0.6%, falling beneath the 111.00 handle. Crude futures are rallying amid a weaker dollar, a constructive risk tone; analysts are expecting a small 300k build to crude stocks this week, though the products are seen drawing by almost 2mln.

EQUITIES INTO THE FED: Nomura’s quants say CTA short covering is a factor behind the rally over the last couple of weeks, and it expects CTAs to continue to cover shorts in US equities for some time. Regarding the Fed, Nomura says risks to share prices from the Wednesday meeting appear to be to the downside. “The one-week implied volatility skew for the S&P 500 is low, in the 20th percentile for the week prior to FOMC meetings since January 2012,” the bank writes, “a low skew often means that volatility itself is being suppressed.” But Nomura says that we are currently seeing high volatility, and while this would normally imply high demand for downside protection, the skew is low. “The US options market at least appears increasingly optimistic about the November FOMC meeting,” it says, “when optimism ramps up ahead of a meeting, this tends to leave the market somewhat defenceless, and this tends to lead to weakening share prices in the wake of the meeting,” it warns. Nomura adds that stock prices are prone to decline in response to a hawkish surprise, and are unlikely to react much to a dovish surprise, as this is already factored in to some extent. Meanwhile, JPMorgan reckons that stocks could rally 10% on Wednesday if the Fed raises by 50bps vs the 75bps expected, though they still expect 75bps.

DAY AHEAD: Final manufacturing PMI data from the UK, although Gilt traders may be more attuned to the Bank of England commencing Gilt sales today. Stateside, the manufacturing ISM data is the highlight (headline expected at 50.0 from 50.9), along with JOLTs data. After hours, the API will publish its gauge of weekly energy inventories. The central bank speakers slate is quiet, but we do get remarks from the ECB's Schnabel; we are now also entering a particularly busy window, with the Fed on Wednesday, and the BoE on Thursday (preview links below). Full Day Ahead here. In terms of US corporate earnings, it promises to be another busy day, with highlights including LLY, PFE, UBER, ABNB, AMD; full expectations can be accessed here

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01 Nov 2022 - 08:22- EquitiesData- Source: Newsquawk

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