Chinese stocks return to losses, Trump promises tax cuts

Summary:

• Stocks in China get back to falls after a two-day rally

• Donald Trump promises that a new tax cut will be unveiled shortly before the midterms

• Yen higher as sentiment sours, US 10Y yield moves 2 bps lower

After a two-day rally spurred by revelations regarding numerous tax deductions as well as other encouraging steps undertaken by regulators, investors in China decided to book some of gains benefiting from the remarkable upward move. As a result, stocks in Shanghai are falling 1.4% as of 6:13 am BST on Tuesday while losses in Hong Kong have already exceeded 1.7%. Note that yet more sour moods are present in Japan where the NIKKEI (JAP225) is declining 2.3% at the same time. The Australian benchmark closed a bit more than 1% lower. Taking into account the two last trading days one should not be surprised about a corrective move to the downside albeit from a technical standpoint today’s session could mean a more profound pullback to come. Looking at the chart below we may notice that the Hang Seng (CHNComp) broke through 10440 points (the meaningful resistance) yesterday. However, it has been unable to retain these gains today and as a consequence we have bounced off this level. On that account one may suppose that the China’s index could visit the area nearby 10000 points in the days to come. Finally the 100DMA should be seen as the major hurdle for bulls and even as they are able to move above the 10440 points once again, the breaking of the blue line in the chart below could demand something more than a temporary boost provided by the local authorities. It is worth noting that the US stock market closed the Monday’s session with falls (except the NASDAQ gaining 0.3%) ranging from 0.4% to 0.5% and the SP500 futures are pointing to a red opening today being traded 0.9% lower at the time of writing.

The Hang Seng (CHNComp) has fallen as traders are cashing in on their recent long positions. Source: xStation5

The US midterm elections will take place as soon as November 6 and the biggest question mark is whether Republicans will be able to retain a majority in the House and Senate. One may realize that if Democrats are able to take control of either the House or Senate then the US could slip into political gridlock. Meanwhile Donald Trump is trying to convince the US people that voting for Republicans is the best they can do. On Monday the US President said in Houston that “we’re giving the middle-income tax reduction of about 10%” adding that “we’ll do the vote after the election”. These words turned out to be a big surprise for lawmakers claiming that no such legislation is in the works. The aim for Donald Trump is to show that tax cuts that Republicans are implementing into the economy benefit not only the most affluent people and the business world but they are equally beneficial for ordinary inhabitants of the United States.A White House spokeswoman said on Monday that “the President and Republicans in Congress support additional tax cuts for hard-working Americans”. Notice that according to Donald Trump more details regarding the 10% tax cut will be unveiled yet before the midterm elections while the voting should take place afterwards. It needs to be said that Democrats did not support tax cuts implemented at the end of the last year and they have been also critical of another round of tax reductions as they add to the budget deficit. They said that new tax cuts could backed up by them only if corresponding spending reductions are prepared.

The USDJPY is dropping this morning mainly due to falls across Asian equity markets. Bulls could take a stab at moving toward the blue trend line which seems to be the paramount support for them for the time being. Source: xStation5

Summing up the FX market we may briefly conclude that the Japanese yen is gaining roughly 0.3% this morning on the back of sour sentiment in Asian stock markets while riskier currencies such as AUD and NZD are on the back foot at the same time. Most of EM currencies are also understandably lower. In turn, the US 10Y yield has shed 3 basis points reflecting a slight flow to ‘safe haven’.

In the other news:

• German PPI rose to 3.2% YoY from 3.1% YoY in September beating the consensus of a 3% increase

• Donald Trump sees many possible penalties for Saudi Arabia in the wake of Khashoggi's death