Only three days ago, US markets managed to post their best one-day gains since March, on the back of optimism that a decent start to earnings season would outweigh all of those concerns that prompted stock markets to fall sharply at the end of last week.

It appears to have taken all of 48 hours for that optimism to become a distant memory, as US markets followed on from declines in Asia and Europe yesterday, as concerns about rising yields, a deteriorating economic outlook, and rising geopolitical tensions, saw markets fall back sharply again, and look set to see markets in Europe open lower again this morning.

There appears to be a rising concern that the Federal Reserve may well be on the verge of making a serious policy error, in terms of its keenness to normalise monetary policy in order to be better prepared for the next crisis, when it comes. The only problem with this is that their eagerness to do this is causing problems in other parts of the global economy, and in so doing is starting to cause a chain reaction, which looks set to rebound back at them.

The economic outlook in China is also causing concern, amidst a deteriorating relationship with the US over trade, the latest economic data out of the Middle Kingdom showed that the economy slowed more than expected in Q3, with annualised GDP coming in at 6.5%, its weakest quarter since 2009, and below expectations of 6.6%.

Industrial production for September also slowed to 5.8%, its lowest level this year, as well as being the weakest quarter for several years, though retail sales did pick up a little at 9.2%, up from 9%.

Italian equity markets led the declines in Europe yesterday, falling to new multi month lows after the EU Commission reportedly asked the Italian government to review or clarify their recently submitted budget, as their spending plans are “unprecedented in the History of the Stability and Growth pact” and in serious breach of EU rules, or risk it being rejected.

The Commission has asked Rome to respond to its concerns by Monday next week, however initial reactions from the Italian government suggest that they appear to be in no mood to do so, sending Italian 10-year yields sharply above the 3.6% level once more.

Markets are also starting to get a little nervous about the final destination of Brexit talks with the problem of the Irish border starting to become as problematic as the paradox of Schrödinger’s Cat.

What should be fairly straightforward is turning into a saga of epic proportions, as both the EU and UK look to come to a solution that would maintain the status quo arrangements, once the UK leaves the EU.

The problem is there doesn’t appear to be any one solution that Prime Minister May would be able to take back to Westminster and get the necessary votes to get it through Parliament, and EU leaders are slowly waking up to this. It has been suggested that the talks could well break down, with the odds of a “no deal” higher than they have ever been, while suggestions of an extension to any transition arrangement causing consternation and confusion in equal measure.

Today’s Canada inflation numbers could well be the final piece of the puzzle when it comes to another hike in interest rates from the Bank of Canada when they meet to deliberate on monetary policy next week. The jobs market, is giving off some mixed signals despite an unemployment rate of 5.9%, with full time jobs declining in September. Inflation on the other hand is fairly strong at 2.8%, well above the Bank of Canada’s target rate. Core prices are also at 8-year peaks of 2%, while the recent agreement of the new USMCA deal is likely to act as a positive for the Canadian economy.

If today’s inflation numbers come in as expected then it would be a huge surprise if the Bank of Canada were not to raise interest rates next week for the third time this year, a probability that is currently being priced at a 94% probability.

EURUSD – has continued to drift back lower after the failure to get back above 1.1620 this week. The next support remains at the previous lows at the 1.1430 area, with a break retargeting the 1.1300 August lows.

GBPUSD – continues to come under pressure with next key support at the 50-day MA and trend line support from the 1.2660 lows at 1.2980. We need to see a move back above 1.3150 to stabilise and argue for a retest of this week’s peaks at 1.3240.

EURGBP – finding it difficult to retest the lows at 0.8720, and as such needs to move back above the highs this week at 0.8825 to retarget the 0.8870 level.

USDJPY – having found support at the 111.60 trend line support from the March lows the US dollar is struggling to move beyond the 112.80 level. We need to hold above 111.60 to keep the uptrend intact and move back towards the previous highs at 114.60. A break below 111.50 suggests the prospect of further losses towards 111.20, and even the 200-day MA at 110.35.

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