Summary: Equity markets rebounded yesterday after major US indices tested important support and as we await today’s US August jobs report. Given the focus on a fresh rise in treasury yields, strong payrolls and earnings data may prove negative for risk sentiment if US treasury yields threaten higher. In FX, the USD is poised for more gains if yields run higher, having already broken to new multi-decade highs against the Japanese yen ahead of today’s report.
S&P 500 futures climbed back from the abyss yesterday after a much lower low ending the session higher, but already this morning negative sentiment is extending again. S&P 500 futures are trading around the 3,964 level this morning with the US jobs reports being the key data point with the market closely watching hourly earnings for clues to how strong the dynamics are in nominal wages.
Hong Kong and mainland China stocks declined, Hang Seng Index -0.9%, CSI300 -0.4%. Chinese developers and auto names were among the top losers, China Overseas Land & Investment (00688:xhkg) -2.1%, China Resources Land (01109:xhkg) -3.2%. Leading China auto stocks fell 1.5% to 4.5%. A bunch of bad news from yesterday continued to depress sentiment. Taiwan shot down a civilian drone, believed to have come from mainland China, near its frontline island, Kinmen. Further, the announcement of lockdown over Chengdu, a city of 17 million residents and the largest city being locked down since Shanghai, stirred up concerns about the economic costs of China’s strict pandemic control policies. Shenzhen also extended the city’s pandemic control restrictions to three additional regions that might cause disruption to Foxconn factories and Apple’s supply chain.
The US dollar has edged to the strong side of the range ahead of today’s August jobs report, with a drumbeat of data this week suggesting a resilient US economy. A strong report today (Earnings could be as much a focus as the nonfarm payrolls change) could send the USD higher still, with some USD pairs still stuck in the range even as USDJPY has melted up again (see below) and GBPUSD has plunged and may challenge its lows since the mid-1980's. The EURUSD situation remains unresolved as we enter the tenth day today in a tight range between 0.9900 and 1.0100.
USDJPY has soared above 140.00 for the first time in over 20 years as US yields have taken a run higher again overnight. Markets are absorbing the higher-for-longer inflation and interest rates concerns. The initial surge in China’s yuan on reports of Russia purchasing as much as USD 70bln in "friendly" currencies was also reversed in the overnight session, further supporting dollar strength. The USDJPY move came despite some modest verbal intervention yesterday. Japanese Chief Cabinet Secretary Hirokazu Matsuno had said the government is watching fluctuations in foreign exchange with a high sense of urgency and reiterated that rapid moves are undesirable. The break of the key barrier suggest that Japanese officialdom will have to mount stronger intervention signals if it wants to tame the move, particularly if US yields continue higher. Ultimately, the only “cure” in higher USDJPY risks would be a Fed shift to easing, or a BoJ move toward tightening and abandoning yield-curve-control.
Crude oil prices in rebound mood following a three-day drop of almost 12 dollars that was driven by longs exiting recent established longs in response to global growth concerns, especially in lock-down China, the BBG dollar index jumping to an all-time high and EU politicians discussing a cap on Russian oil prices. OPEC+ meets on Monday to discuss supply and the latest price drop may trigger a price supportive reaction from key members such as Saudi Arabia. In addition, the prospect for additional barrels from Iran hangs in the balance after Iran said the US response was “not constructive”. Slumping refinery gasoline margins (consumer driven) and still elevated diesel margins (gas-to-fuel switch demand) highlight the current themes. The direction of the latter depends on whether Gazprom resumes flow on the Nord Stream gas pipeline from 0100 GMT Saturday.
Gold and silver have been under pressure all week from central bank inflation fighting rhetoric, surging US real yields and the Bloomberg dollar index hitting a record high, have both found a small bid in early Friday trading after gold once again found buyers (short covering) ahead of key support at $1680. Silver, meanwhile, hit a two-year low in response to a fresh China lock-down driven selloff among industrial metals, especially copper which just like silver now trades down around 24% on the year. Investment metals may struggle as long as the market believes the Fed will be successful in combatting inflation and until we see a major correction in the dollar and bond yields. In addition, silver needs to see a recovery in the outlook for China and copper prices.
US treasury yields have risen sharply over the last two days and could threaten the key 3.50% area top from mid-June (when the market rushed to absorb the anticipation of the first 75-basis point rate hike since 1994) if we see a strong August US jobs report today. Stronger US data of late has seen a steepening of the 2-10 portion of the US yield curve, which trades ahead of the data today at around –25 bps and therefore near the high of the range of the last month.
Another strong report from the US economy as ISM manufacturing came in at 52.8 (exp. 52.0, prev. 52.8), and new orders and employment both rising back above 50, and into expansionary territory, to 51.3 (prev. 48.0) and 54.2 (exp. 49.0, prev. 49.9), respectively. In further relief, inflationary gauges softened more than expected to come at 52.5 from 60.0 in July, reaching the lowest level since June 2020. Jobless claims data also supported the case for further rate hikes by the Fed, printing its third straight decline to 232k coming in below expectations at 248k and last week’s 237k (which was revised down from 243k).
Nvidia and AMD sales to China are in trouble after the US government warned them to stop exporting some AI chips to China. However, Nvidia (NVDA) managed to get a partial exception to export to US customers in China. Regardless Nvidia said in a statement, the export cut back will cost the group $400 million in revenue this quarter, as most of its revenue comes from the Asian country. This leaves Nvidia in a precarious position if the export curbs continue. Nvidia shares fell 8%, taking its shares to the lowest level since May 2021. It also marked the fourth day Nvidia traded under its 50-day moving average. As for Advanced Micro Devices (AMD) its shares didn’t fall as hard, but it lost 3%, closing under its 50-day moving average for the third day in a row. AMD didn’t fall as hard as Nvidia, as AMD did not quantify the potential material damage to the business, and said the impact is not expected to be significant.
The fresh rise in US treasury yields and renewed sense that the Fed will remain tighter for longer has helped to drive a widening in credit spreads again, as junk bond ETFs trade near cycle lows and one Bloomberg measure of high-yield corporate credit spreads creeps back toward 500 basis points (closed yesterday at 494 basis points after bottoming out in August at 411 bps and versus the high in early July of 584 basis points).
Manufacturing PMIs in Asia have seen a clear divergence with general strength across India and Southeast Asia as those economies continue to gain strength from improving domestic demand as reopening benefits continue to flow. On the other hand, South Korea and Taiwan PMIs were seen dipping further into the contractionary territory to come in at 47.6 and 42.7 respectively. The data raised further concerns on the uncertain macro environment and slowing global trade. Meanwhile, South Korea’s August CPI eased to 5.7% YoY and was down 0.1% MoM after six months of gains.
The iron ore price is trading at the $95 level for the first time since July. Yesterday in Asia we saw the iron ore plunge 5% after fresh covid lockdowns were announced in China. And on Friday the iron ore place held steady at $95. The pullback spooked BHP’s investors and traders and BHP shares fell 2% today after losing 8% on Thursday in Australia, which collectively took BHP’s shares to their lowest level since July. As the covid situation in China looks increasingly dark, the technical indicators for BHP have confirmed on the weekly and monthly charts that BHP is likely to face further selling pressure.
Flows through the pipeline have been suspended in recent days for purported maintenance and German sources have expressed concern that Russia is set to further slow gas flows this winter after reducing the flows through this key pipeline 80% over the last few months.
The earnings calendar is running light today and next week. The two earnings releases of importance next week are DocuSign on Thursday and Dollar Stores on Friday.
Next week’s earnings releases
Economic calendar highlights for today (times GMT)
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
