Key Highlights

• Risk sentiment rattled by fresh Sino-U.S. tensions over the shipping industry, including South Korean shipbuilder sanctions.
• Japan’s ruling LDP party has set a special Diet session for October 21 to select a new prime minister.
• Two non-confidence motions in the new French government have been scheduled for Thursday.

Chart of the Day

CNY and JPY both struggling as hedges pick up

^{Source: BNY}

Risk aversion has returned amid escalating U.S.-China trade tensions; judging by the flurry of economic activity taking place, there is every sign that the G7 is aligning on matters such as rare earths and shipping. Although the dollar struggled during the April round of disputes, its performance at present is more nuanced and we can see a clear preference emerging for the greenback against major APAC low-yielders: CNY and JPY have been comprehensively sold since the end of September. Assuming that, even with greater uncertainty, there won’t be much scope for the Fed to move toward a more dovish stance, then policy differentials alone would be in the U.S.’s favor. Meanwhile, idiosyncratic factors relating to equity markets could be a factor. The surprising performances by both markets, despite uncertainty over domestic economic policy and performance, have left asset exposures relatively high: CNY reached its highest net exposure level this year (i.e. low hedge ratios), and JPY was one of the most overheld currencies in G10. With risk aversion finally coming through, such exposures render it difficult to achieve additional currency performance, and with rate differentials relatively favorable, the bar for additional hedging to come through is low. This depends on the dollar holding on to safety status for the time being, and we believe valuations are generally supportive of such a market stance.

What's Changed?

Global equity selling has returned, as the tit-for-tat trade escalation between U.S. and China worries investors ahead of Q3 earnings. Today looks like another “turnaround Tuesday” for investor sentiment. U.S. Treasury Secretary Scott Bessent has warned that China wants to “pull everybody else down.” The winner overnight was silver, which reached fresh record highs of $53/oz; meanwhile, gold held over $4,100, and ILS and AUD fell nearly 1% against USD. Only CHF and JPY made gains, highlighting the markets’ traditional safe-haven bias. Currency debasement concerns continue around the world, with keen interest in how bonds will perform in the EU and U.S. today, as rates try to offset equity losses. The new French government faces two no-confidence motions this Thursday, while in Japan the CDP leader is being asked to outline a framework for a new government involving a three-party coalition ahead of the parliamentary vote on October 21. Overnight, the MAS kept its policy unchanged, while the PBoC has vowed to maintain CNY flexibility. The combination of political uncertainty, trade uncertainty and upcoming earnings reports has left growth and inflation outlooks lower. The IEA has lowered its oil demand projection to 104.5 million barrels/day in its latest monthly report, highlighting the global economic concerns, with oil down 2%. The IMF meetings begin in earnest today, as the World Economic Outlook for October is released along with the financial stability report. This week feels different to the last, as the U.S. government shutdown persists and concerns about it rise. The latest Polymarket odds are 70% for a 30-day-plus federal shutdown. Risks around this event that matter to markets, along with trade policy returning as a factor, are pushing up volatility across all markets. We are watching to see whether bank earnings, which start being reported today, will bring back confidence in growth and the consumer, which will be paramount to keeping the buy-the-dip trading plan from yesterday intact.

What You Need to Know

China’s Ministry of Commerce has announced a joint investigation with the Ministry of Industry and Information Technology into the impact of the U.S. Section 301 investigation on China’s shipping, shipbuilding and related supply chain industries. The probe will examine whether any domestic enterprises, organizations or individuals have implemented, assisted with or supported U.S. discriminatory restrictions in these sectors and will assess the resulting risks to national security and industrial interests. The investigation, conducted under the National Security Law, Anti-Foreign Sanctions Law and International Maritime Regulations, aims to safeguard China’s shipping and shipbuilding industries and will be followed by appropriate measures based on the findings. The Ministry of Commerce has also announced bans on dealings by Chinese companies with five U.S. subsidiaries of the South Korean shipbuilder Hanwha Ocean. CSI 300 -1.195% to 4539.06, USDCNY +0.152% to 7.1417, 10y CGB -1.7bp to 1.831%.

Global oil supply is projected to exceed demand by an even wider margin, according to the International Energy Agency’s October report. The agency has raised its global supply growth forecast to 3.0 million barrels per day (bpd) for this year and 2.4 million bpd for next, compared with demand increases of just 710,000 bpd and 699,000 bpd, respectively. The IEA said stock buildups, so far concentrated in China and the U.S., are set to accelerate as large crude shipments reach major hubs. Rising Middle Eastern and American output has led to the biggest increase in oil on water since the pandemic. However, Brent prices have held steady at $65-75 per barrel amid ample natural gas liquid supply. Brent -1.217% to 62.55, WTI -1.211% to 58.77.

Japan’s opposition parties – the Constitutional Democratic Party, Japan Innovation Party and Democratic Party for the People – are coordinating to field a unified candidate before the October 21 Diet session. Japan’s Komeito leader Tetsuo Saito signaled a shift in stance, saying the party may back an opposition candidate if the Diet vote for prime minister goes to a runoff. Speaking on October 13, Saito described such support as “one of the possibilities,” softening his earlier position that voting for an opposition leader was “out of the question.” Komeito withdrew from its 26-year coalition with the Liberal Democratic Party (LDP) on Oct. 10 following disputes over political reform, though Saito said future coalition talks with the LDP would not be ruled out. Nikkei -2.582% to 46847.32, USDJPY -0.224% to 151.94, 10y JGB -3.2bp to 1.656%.

The MAS has decided to maintain the prevailing rate of appreciation, width and center of the S$NEER policy band at its October review, after having eased monetary policy twice this year. Singapore’s economic growth has turned out stronger than expected, with the output gap projected to remain positive in 2025 and come in around 0% next year. Core inflation, which eased to 0.4% y/y in Jul-Aug from 0.6% in Q2, is expected to trough in the near term and rise gradually in 2026 as temporary factors fade. Core inflation should average around 0.5% in 2025 and 0.5-1.5% in 2026, while CPI-All Items inflation is projected to average 0.5-1.0% this year and 0.5-1.5% next year. STI -0.87% to 4351.63, USDSGD +0.178% to 1.3009, 10y SGB -3.5bp to 1.791%.

What We're Watching

U.S. September NFIB Small Business Optimism Index expected at 100.6 from 100.8.

Fedspeakers: Fed Chair Jerome Powell speaks on the economic outlook at the NABE, with Q&A; the Fed’s Christopher Waller speaks on payments panel at the IIF, Vice Chair Michelle Bowman is participating in a fireside chat with the IIF, and the Boston Fed’s Susan Collins is giving remarks with Q&A at a Chamber of Commerce event.

U.S. Treasury is selling $86bn in 13-week and $77bn in 26-week bills. 

What iFlow is Showing Us

Mood: Back in risk-off territory, as equity markets respond more forcefully to the pick-up in U.S.-China trade tensions. Nervousness looks set to extend through the rest of the month.

FX: iFlow Carry has moved back into the neutral zone after a spike into positive statistical significance. Some low-yielders such as CHF are seeing recovery flow, while high-yielding EMEA currencies such as HUF and ZAR face additional hedging risk.

FI: Divergence is emerging in Latin American fixed income: Peru is leading the way despite weak currency performance, and Argentine fixed income has continued to perform well. In contrast, Colombia was the worst-performing bond market in iFlow.

Equities: With the exception of Sweden, European markets such as Poland, Switzerland and the Eurozone aggregate are facing outflows as positioning adjusts from the highs. Japan is seeing flow acceleration even though markets are moving away from JPY and JGB exposures.

Quotes of the Day

“Turnarounds seldom turn.” – Warren Buffett

“Turnaround or growth, it’s getting your people focused on the goal that is still the job of leadership.” – Anne Mulcahy

Economic Details

Germany’s September inflation rate was confirmed at 2.4% y/y, up from 2.2% in August and unchanged versus preliminary estimates. The increase was driven mainly by a 3.4% rise in service prices, while goods prices rose 1.4%. Energy prices fell 0.7%, marking a fifth consecutive month of slowing declines, as household energy costs dropped 1.9%, offset by slight rises in fuel (+1.1%) and natural gas (+0.7%). Food prices rose 2.1%, with notable increases in sweets (+6.5%) and fruit (+5.1%), partly offset by cheaper oils (-3.2%) and vegetables (-2.1%). Core inflation, excluding food and energy, rose to 2.8%. On a monthly basis, consumer prices increased 0.2%, reflecting stable food and service costs and higher clothing prices. DAX -0.859% to 24178.35, EURUSD -0.121% to 1.1556, 10y Bund -4.9bp to 2.587%.

German investor sentiment strengthened in September, as the ZEW expectations index rose to 39.3 from 37.3 in August, signaling improved confidence in the medium-term outlook. However, the increase fell short of analysts’ expectations of 41.1, while the current conditions index unexpectedly deteriorated. The ZEW Institute noted that despite persistent global uncertainties and delays in implementing fiscal stimulus measures, experts remain cautiously optimistic about an eventual economic upturn. ZEW President Achim Wambach stated that sentiment may see a further modest increase in October, reflecting hopes that forthcoming government investment programs could stabilize growth even as near-term conditions remain weak. Separately, the Eurozone ZEW index came in at 22.7 vs. an expected 26.1.

U.K. average weekly earnings rose 5.0% y/y including bonuses and 4.7% excluding bonuses in June-August 2025, with real pay up 0.8% and 0.6%, respectively, after adjusting for CPIH inflation. Using CPI, real pay growth was slightly stronger, at 1.2% for total pay and 0.9% for regular pay. Average weekly earnings reached £733 for total pay and £682 for regular pay. Public sector regular pay growth was 6.0%, lifted by early pay settlements, while private sector growth eased to 4.4%. The wholesaling, retailing, hotels and restaurants sector recorded the strongest regular pay growth after the public sector, at 5.9%, while finance and business services showed the weakest at 2.9%. FTSE 100 -0.202% to 9423.82, GBPUSD -0.548% to 1.326, 10y gilt -5.6bp to 4.602%.

The British Retail Consortium has reported that U.K. retail sales rose 2.3% y/y in September, above the 12-month average of 2.1%, with food sales up 4.3% and non-food sales up 0.7%. In-store non-food sales gained 0.5%, while online non-food sales rose 1.0%, lifting online penetration to 37.6%. Growth was mainly driven by household goods and new cellphone launches, though overall non-food demand remained subdued. Retailers cited weak consumer confidence, unseasonably mild weather and inflationary pressure as headwinds, while food sales growth was largely price-led. The BRC and KPMG warned that uncertainty around the upcoming budget, business rates and household costs could weigh on spending in the key pre-Christmas trading period.

Switzerland’s producer and import price index fell 0.2% m/m in September to 105.3 (December 2020 = 100) and was down 1.8% y/y. The producer price index was flat m/m but 1.4% lower y/y, while import prices fell 0.5% m/m and 2.7% y/y. The decline mainly reflected lower prices for petroleum, natural gas and petroleum products, along with cheaper motor vehicles, workwear and pharmaceuticals. In contrast, raw milk prices increased and green coffee rose sharply. Domestically manufactured products edged down 0.1% m/m, while export prices were unchanged. Broadly, energy and chemical products continued to exert downward pressure on prices, while selected agricultural and consumer goods saw moderate increases. SMI -0.431% to 12431.04, EURCHF -0.118% to 0.92931, 10y Swiss GB -2.6bp to 0.158%.

Czechia’s August current account showed a CZK 0.7bn deficit, as a CZK 20.5bn surplus in goods and services was offset by CZK 20.4bn in dividend outflows and a CZK 3.5bn deficit in EU-related transfers. The financial account recorded net borrowing of CZK 22.4bn, driven by higher non-resident liabilities. Direct investment saw a CZK 21.3bn net outflow, mainly through debt instruments, while portfolio investment posted a CZK 5.3bn outflow as both resident and non-resident equity positions rose. Other investment recorded net inflows of CZK 83.2bn, supported by higher non-resident deposits with Czech banks. International reserves increased by CZK 32.5bn over the month. Prague SE -0.044% to 2374.92, EURCZK +0.177% to 24.347, 10y CZGB -3.6bp to 4.367%.

 Japan’s September money stock growth accelerated, with M2 rising 1.6% y/y from 1.3% in August, while M3 increased 1.0% after 0.8%. On a seasonally adjusted basis, M2 expanded at an annualized rate of 4.3% and M3 at 3.0%, reflecting stronger deposit and liquidity conditions. Currency in circulation declined 0.8% y/y, and quasi-money fell 1.6%, though certificates of deposit rose 5.2%. Broadly defined liquidity (L) grew 2.1% y/y, up from 2.0% in August, supported by an 8.4% increase in investment trusts and a 3.9% rise in pecuniary trusts, offsetting declines in bank debentures and commercial paper. Total average outstanding M2 reached ¥1.271.1qn, and L stood at ¥2.228.9qn. Nikkei -2.582% to 46847.32, USDJPY -0.224% to 151.94, 10y JGB -3.2bp to 1.656%.

The minutes from the latest RBA meeting, at which rates were left unchanged, show the board took the view that monetary policy remained slightly restrictive but appropriate. Members noted that inflation could come in higher than expected, with July-August CPI data indicating persistent price pressures in services and housing, while labor market conditions remained broadly stable. Private demand had recovered faster than anticipated, and earlier monetary easing was supporting housing and credit growth. Globally, uncertainty persisted, though U.S. growth was steady and Chinese authorities were expected to respond to weakness with fiscal support. The board viewed risks to the outlook as balanced and reaffirmed a cautious, data-dependent approach focused on price stability and full employment. ASX -0.215% to 5095.86, AUDUSD -0.906% to 0.6456, 10y ACGB -5.8bp to 4.234%.

Australia’s September business conditions held steady, with the National Australia Bank index unchanged at +8 as stronger sales and profits offset weaker employment. Business confidence rose three points to +7, remaining above its long-run average. The survey showed business sales up three points to +16 and profitability up one point to +6, marking an 11-point rise since May, while forward orders fell three points into negative territory. Input costs edged higher but stayed below early-year levels, with quarterly retail prices up to 0.7% and labor cost growth easing to 1.5%. The NAB said both confidence and conditions were consolidating just above average levels after mid-2025 improvements.

India’s September wholesale inflation slowed to 0.13% y/y from 0.52% in August. The Wholesale Price Index (WPI) fell 0.19% m/m, reflecting weaker food and primary article prices. Primary articles fell 1.1% m/m, with food articles down 1.4%, led by sharp declines for vegetables (-9.7%) and onions (-7.8%), though the latter was linked in part to a 26.1% surge in onion prices in the year-earlier period. Manufactured products rose 0.2% m/m and 2.3% y/y, driven by food products and non-metallic minerals. Fuel and power prices slipped 0.1% m/m and 2.6% y/y, respectively. The WPI food index dropped to 192.0 from 193.5 in August, marking an annual decline of 2.0%. SENSEX -0.547% to 81876.94, USDINR +0.126% to 88.7875, 10y INGB -0.7bp to 6.513%.

Singapore’s GDP grew by 2.9% y/y in Q3, moderating from 4.5% in the previous quarter, while output rose 1.3% q/q seasonally adjusted, slightly below Q2’s 1.5%. The manufacturing sector was flat y/y after a 5.0% gain previously but expanded 6.1% q/q as most clusters improved despite weakness in biomedical and general manufacturing. Construction grew 3.1% y/y, supported by both public and private projects, though it fell 1.2% q/q. Services expanded by 3.5% y/y, driven by information, communications, finance and professional services at 4.4% and accommodation, real estate and other services at 4.1%, while wholesale, retail and transport rose 2.5%. Full Q3 data will be published in November’s Economic Survey. STI -0.87% to 4351.63, USDSGD +0.178% to 1.3009, 10y SGB -3.5bp to 1.791%.