The Overnight Report: The Dragon Digs In

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US markets see-sawed as trade negotiations between China and the US continued across the social and media sphere in full view of all.

After ending slightly positive yesterday, ASX200 futures are pointing to a strong start on Wednesday morning.

Good Morning,

A mixed and volatile session transpired on Tuesday with the ASX200 finishing up 17pts or 0.2% to 8,899.

Miners and energy were the top performers, with consumer discretionary and banks lagging.

What happened overnight, NAB Markets Today Research

In Australia yesterday the September NAB Survey showed confidence up 3pts, retracing the fall in August and back above its long-run average. Conditions were unchanged at plus-8, also a little above their long run average and consolidating the improvement since May on the back of stronger profitability and trading conditions.

The RBA Minutes said decisions would be “cautious and data dependent,” and highlighted that indications of stronger services and housing inflation, if sustained, could mean less supply capacity than thought, but noted they are awaiting the full picture in Q3 CPI on 29 October. Policy is “probably still a little restrictive.” NAB sees the RBA on an extended pause, pencilling in a cut in May 2026. 

The S&P500 was down as much as -1.4% soon after the US open, but recovered through the day to be around 0.3% higher for most of the US afternoon, before a reversal back into negative territory on Trump’s latest post on China trade.

In US earnings, JPMorgan, Wells Fargo, Goldman, and Citi all topped estimates. IT sharply underperformed with the S&P closing down -0.16%, and the Nasdaq was -0.76% lower.

During the Asian trading session China Mofcom issued a statement defending its rare earth export control measures, saying [they] do not prohibit exports, and urging the US to correct its wrongdoings.

It vowed to “fight to the end” in a tariff war and trade war but said the door for negotiation is open. China also sanctioned the US units of South Korean shipping giant Hanwha Ocean, escalating the tit-for-tat measures related to maritime shipping.

Treasury Secretary Bessent gave an interview for the FT and said the export controls reflected problems in China’s economy and that “they want to pull everybody else down with them.”

Overnight, US Trade Representative Greer told CNBC that President Trump could still meet with Xi later this month, there is a scheduled time, and he thinks they’ll be able to “work through it” with China.

The US and China trade headlines weighed on risk sentiment, and the AUD before a reversal in risk assets through the US session, helped by Greers comments. Powell’s remarks that left the FOMC on track to ease further and solid earnings from major banks were also supportive. 

In the last hour of trade, Trump posted on Truth Social that “I believe that China purposefully not buying our Soybeans, and causing difficulty for our Soybean Farmers, is an Economically Hostile Act” and threatened retribution, paring the erstwhile recovery in the AUD and US equities

The AUD slid to an intraday low of 0.6441. It recovered through the US session alongside a sharp reversal in US equities but remains -0.3% lower over the day around 0.6493. 

Fed Chair Powell’s focus on downside risks in a cooler job market left the Fed on track to ease further. He repeated ‘there is not risk-free path’ and said that inflation “appears to be continuing to increase quite gradually…but now the labor market has demonstrated pretty significant downside risks.”

He noted the stronger activity data offered some tension with the labour market data. There was little reaction in rates markets, with an October and December cut near fully priced.

On the absence of government data, Powell said everyone was looking at the same non-government data, and that “available evidence suggests that both layoffs and hiring remain low, and that both households’ perceptions of job availability and firms’ perceptions of hiring difficulty continue their downward trajectories.”

He said there were few substitutes for inflation data, and that “we’ll start to miss that data, and particularly the October data, if this goes on for a while.”

The BLS will publish the CPI report, originally scheduled for tonight, on 24 October, but does not intend to reschedule other released during the shutdown.

On balance sheet runoff, Powell said “our long-stated plan is to stop balance sheet runoff when reserves are somewhat above the level we judge consistent with ample reserve conditions,” and “We may approach that point in coming months.” 

The Fed has been passively reducing its US$6.6 trillion asset portfolio since mid-2022.

In Europe, French PM Lecornu won support from the Socialist opposition after he proposed suspending a pension law that raises the retirement age. That increases the chances his government will survive no-confidence motions. French bond spreads narrowed, withy 10yr OATs down 6bp, against a 2bp drop in German bund yields.

In the UK, labour market data was softer than expected. The 3m unemployment rate ticked higher to 4.8%, expectations were for it to hold steady at 4.7%, and private earnings ex bonuses slowed to 4.4% from 4.7% (4.5% expected). Pricing for a BoE cut by February extended to -23bp, from -18bp a day prior.

The BoE’s Bailey, speaking in Washington after the data said, “We’re seeing some softening of labor market,” but that needed to be balanced against above target inflation.

He views the UK economy as growing a little bit under potential and that most of the reason for above target inflation is “not generated by the balance of supply and demand in the economy, but it is inflation nonetheless.”

The Dragon digs in: Markets brace for the next trade war act, Stephen Innes, SPI Asset Management

The trade war is once again grinding its gears, and Beijing is showing no signs of slamming the brakes. This isn’t an April rerun, it’s more like a sequel written by a director who’s had enough of being lectured by Hollywood.

China has moved from veiled warnings to active retaliation, limiting U.S. entities tied to South Korea’s Hanwha Ocean. The move wasn’t about economics alone, it was about theatre, sovereignty, and showing that Beijing will not be typecast as a supporting actor in Washington’s trade drama.

The Ministry of Commerce’s vow to “fight to the end” might sound like rhetorical boilerplate, but in forex space, those words reverberate like the clanging of a temple bell.

Traders know when Beijing speaks in absolutes, it’;s usually signaling strategic patience cloaked as defiance. That tone, combined with another twist in U.S. rhetoric accusing China of “pulling everyone else down,” sent traders sprinting for the nearest safe-haven.

The yen, franc, and euro became the market’s bomb shelters while the Aussie and Kiwi, perennial proxies for Chinese sentiment, were shoved into the storm cellar.

This is what happens when geopolitics collides with seasonality and positioning. The dollar, which had been trying to enjoy a quiet recovery after the weekend’s tariff lull, suddenly finds itself torn between its two personalities: the swaggering bully of the global system and the scared kid hiding behind the Fed’s balance sheet. 

For now, it’s leaning on its safe-haven status, but that comfort blanket can only hold as long as yields stay sticky, and Treasury buyers keep believing that U.S. dysfunction is somehow “safer” than everyone else’s chaos.

What’s more, China’s latest trade figure have emboldened this stance. Strong diversification means Beijing no longer needs to blink first. It can afford to flex on exports while still absorbing the blows of higher tariffs.

In other words, Washington’s tariff gun may still be loaded but Beijing’s wearing armour forged in alternative supply chains. Every ton of copper rerouted to Brazil, every container reflagged through Malaysia, every semiconductor line shifted from Shenzhen to Penang adds another layer to China’s resilience playbook.

Meanwhile, traders are dissecting every pixel of Powell’s speech today, though there’s unlikely to be any fresh choreography. With the data blackout from the government shutdown muting macro rhythm, even a whisper from the NFIB’s hiring sub-index could swing the tempo. If Powell sticks to his cautious beat, we’ll likely see a dollar that wobbles but doesn’t yet wilt.

Elsewhere, Europe’s theatre remains messy. The French political saga threatens to keep EUR/USD stuck in a holding pattern, like a pilot circling a stormy Paris runway. If Prime Minister Lecornu’s budget gamble collapses into another confidence crisis, the euro’s safe-haven status will look more like a cardboard set than steel shelter.

Across the Channel, the U.K. quietly drifts toward its own reality check. Cooling wage data and a rising jobless rate give the Bank of England some breathing room but not enough to whistle past December. A February cut remains the likely release valve, assuming fiscal policy stops throwing kerosene on the inflation embers.

But the real stage drama remains in Tokyo. Japan’s political script has morphed from triumphant to tangled. Sanae Takaichi’s victory should’ve been the start of a new policy arc. Looser fiscal strings, a friendlier BoJ but losing coalition support has turned the LDP’s majority into quicksand. 

Now, with Komeito walking out and opposition parties scenting blood, even the question of who will be Prime Minister by month’s end feels up for grabs. Traders, ever allergic to uncertainty, have started repatriating. USD/JPY has slid from the 153 handle as the yen reclaims its ancestral safe-haven mantle. The Nikkei, once drunk on political optimism, is now sobering up fast.

What we’re seeing isn’t panic, it’s fatigue. A market that’s learned to react, retreat, and reload faster than policy can pivot. Tariffs, shutdowns, coalition collapses, each episode feeds volatility, but traders have adapted to the noise. The more Washington and Beijing lock horns, the more the market internalizes that this is the new equilibrium: a world where “truce” is just another trade setup and “retaliation” a fresh entry signal.

In that sense, China’s message is simple and brutally clear: it isn’t playing for applause anymore. It’s playing for endurance. And the longer this dance drags on, the more likely it is that fatigue, not fire, will decide who steps off the floor first.

Corporate buybacks —the great liquidity aesthetic— are currently blacked out until late October. Forty percent of the corporate bid will re-enter the market after the 24th, but until then, equities must walk without their crutch. Traders know this; it’s why liquidity readings just cratered to near-decade lows. Without buybacks, every tick feels heavier, every dip lasts longer, every rebound less believable.

So, what is everyone chasing? Not fundamentals. Not even the Fed’s ghost whisperings. They’re chasing each other’s shadows in the alleyways of positioning, gamma, and trend. The market is no longer a debate about value; it’s a race to guess who’s about to flinch. 

We are, all of us, running through a darkened casino, listening for the sound of chips being moved. Somewhere, someone still believes they can beat the dealer.

But the dealer’s hedges are thinner, the tables are slicker, and the crowd’s nerves are shot.

The chase continues, not for truth, nor for yield, but for the fleeting illusion that you’re still one step ahead of everyone else.

Corporate news in Australia

-South32 ((S32)) progresses the sale of Cannington for $1bn by appointing Barrenjoey and JPMorgan to sell the silver operations.

-Capstone Copper ((CSC)) is selling -25% of Santo Domingo mine to Orion for up to $522m with a buy-back option post-production.

-Bickford’s owner Angelo Kotses raises its stake in Maggie Beer ((MBH)) to 19.99%.

-Sydney-based used car refurbisher and dealer Carma is looking to raise $95m, $70m in primary raising and $20-$25m in an investor selldown for a $270-$300m IPO listing.

On the calendar today:

-AU Westpac Leading Index

-JP Aug Industrial production

-CH Sept CPI, PPI

-EZ Aug Industrial Prod’n

-US Fed Beige Book

-AUCKLAND INTERNATIONAL AIRPORT LIMITED ((AIA)) Sept Traffic Update

-AUSTRALIAN UNITED INVESTMENT CO. LIMITED ((AUI)) AGM

-BANK OF QUEENSLAND LIMITED ((BOQ)) FY25 Result

-BRAVURA SOLUTIONS LIMITED ((BVS)) AGM

-COMMONWEALTH BANK OF AUSTRALIA ((CBA)) AGM

-CADENCE CAPITAL LIMITED ((CDM)) ex-div 3c (100%)

-CADENCE OPPORTUNITIES FUND LIMITED ((CDO)) ex-div 7c (100%)

-EVOLUTION MINING LIMITED ((EVN)) 1Q26 Update

-HILLGROVE RESOURCES LIMITED ((HGO)) Investor Presentation

-HORIZON OIL LIMITED ((HZN)) ex-div 1.50c

-ORORA LIMITED ((ORA)) AGM

-ORIGIN ENERGY LIMITED ((ORG)) AGM

-PERENTI LIMITED ((PRN)) ex-div 4.25c

-LOTTERY CORPORATION LIMITED ((TLC)) AGM

-UNITED OVERSEAS AUSTRALIA LIMITED ((UOS)) ex-div 0.50c

-WAM RESEARCH LIMITED ((WAX)) ex-div 5c (60%)

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

The Australian share market over the past thirty days…