Stocks Rout Continues, USD Fears Ebola

The S&P 500 finished at the lows again on Monday capping the worst three-day performance since Nov 2011. The yen was the best performer and the Australian dollar lagged in a classic risk-off trade. Up next,  Japan re-opens after a holiday and PPI data is due.  After our GBPJPY Premium  short opened on Oct 9th hit its final target for a total of 180 pips moments ago, we issued a new GPS trade with 3 new charts ahead of Tuesday's UK CPI & Wednesday's jobs figures.   

The rout in the S&P 500 extended another 1.65% on Monday, almost all of it in the last hour of trading. The FX market was relatively indifferent until the loss exceeded 1%, that sparked a rush into JPY and EUR late in the day.

USD/JPY broke below 107 to the lowest since Sept 10 and the euro climbed above 1.2750. Expectations of Fed rate hikes are quickly fading. The main driver is concern about global growth, especially Europe. Lower commodity prices and the stronger dollar also put downward pressure on inflation.

We warned yesterday about falling expectations for rate hikes and now Fed funds futures have cut the chance of the Fed hitting 0.75% by August to 4% from 28.7% on Sept 17. Ultimately, the US is still on pace to be the growth leader for the coming quarters but the Aug/Sept rally was simply too much, too fast until the Fed sends a stronger signal.

The US dollar moves still have plenty of room to retrace without breaking the uptrend. For now, we'll be closely watching the bond and stock markets. The violence of the stock market moves, in particular, point to a period of elevated volatility.

In the near term, Asian markets will now get a chance to digest the moves. The calendar features a speech from the RBA's Debelle at 2230 GMT and Japanese PPI at 2350 GMT.