The recent trends in the global capital markets are reversing today.  Although the price action yesterday warned of the risk, there have been five fundamental developments that are contributing to the price action today.

First was China’s September trade figures.  The balance was little changed at $60.34 bln 9$60.24 bln in August).  The consensus had forecast a fall toward $48.2 bln.  The larger than expected surplus was driven by less weak exports and considerable weaker imports.

Exports fell 3.7% after a 5.5% decline in August.  The consensus was for a 6% drop.  It is the third negative year-over-year print in a row and is the sixth decline in the first nine months of the year.   Imports plummeted 20.4% after a 13.8% decline in August.  The consensus called for a 16% decline.   It is the 11th consecutive month that imports fell on a year-over-year basis.

Although some observers see the mini-devaluation in August as having played a role with today’s report, we are more skeptical.  The goods shipped in August were ordered months ago, and the devaluation was too small in the context of the value-added costs incurred in yuan to have much impact.  We would highlight the important role that prices are playing.

We note that crude oil imports rebounded in September from three-month lows.  China is building its strategic reserves with cheap oil.  Also, Chinese refiners are a large source of demand.  Iron ore imports increased to the highest level of the year.   Nevertheless, the Antipodean currencies that have had a strong run are seeing their advancing streaks snapped.    The Australian dollar is the weakest of the majors, off about 0.85% near midday in London.

The Canadian dollar reversed lower yesterday and is extended those losses today.   It is off about 0.5%.  After testing CAD1.29 on before the weekend and again yesterday in holiday-thinned trading, the US dollar rebounded to near CAD1.3070.   The first retracement target is found near CAD1.3110.

Second, the UK’s CPI was lower than expected.  This has seen sterling sell-off.  Down almost 0.7% on the day, sterling is the second weakest of the major currencies.  The euro is at its best level against sterling since May, reaching almost GBP0.7475.    The headline rate fell to -0.1% from zero.  The core rate was unchanged at 1.0%.  The consensus had anticipated a small increase.  The combination of firm wages and soft consumer prices would appear to bode well for household finances.  However, this assessment is mitigated by the fact that service prices increased to 2.5% from 2.3%.  Consumers buy more services than goods.

Third, German investor sentiment deteriorated more than expected.  The ZEW measure of current situation fell to 55.2 from 67.5.  The Bloomberg consensus called for a 64.0 reading.  This was the poorest assessment of the current situation since March.   The expectations component fell to 1.9 from 12.1.  The consensus was for 6.5.  This is the lowest since last October when it briefly slipped in to negative territory.

The euro rose steadily through the Asian session and poked through $1.1400 for the first time since mid-September.  It was sold off in the European morning, falling to about $1.1365 before finding a good bid.  We note that although ECB officials have emphasized the flexibility of its asset purchase program, many officials, including most recently Coeure and Mersch, have played down the urgency.  The wait and watch mode prevails.

Fourth. the Swedish krona is the strongest of the majors, rising almost 0.7% against the dollar and 0.5% against the euro.  The euro is at three-month lows against the krona. The euro found support near SEK9.2350.   The main catalyst was firmer than expected September inflation.  Consumer prices rose 0.4% on the the month, lifting the year-over-year rate to 0.1% from -0.2% in August.   This snapped the three-month deflation spell.   The underlying inflation rate, which adjusted for fixed rate mortgage interest rates rose to 0.4% from -0.1%.  The take-away is that the Riksbank will likely stand pat when it meets on October 28.

Fifth, the EC has rejected Spain’s 2016 draft budget proposal, forcing it to implement more spending cuts and increase revenue.  The government, which faces the voters in a couple of months, forecast a 4.2% deficit this year and a 2.8% deficit next year.  However, the EC projects a 4.5% deficit this year and 3.5% shortfall next year.   One of the key issues is enforcing local government spending caps.   Spain’s bonds are narrowly under-performing Italy and Portugal’s bonds today.   Spanish equities are also posting marginally larger losses than most European bourses today.