Summary: Global equity markets are in a deepening funk after an ugly Friday close that finally European indices waking up to the large scale correction afoot in Asian and US equities last week. The gloomy mood has extended into trading to start this week in Asia, with the Hang Seng index in Hong Kong down heavily overnight, while the combination of a firmer US dollar and US treasury yields near the top of the range is piling on the pressure on sentiment ahead of a possibly pivotal FOMC meeting this Wednesday.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities closed on a weak footing on Friday and the selloff is continuing this morning on a bearish Asia session. S&P 500 futures are currently at key support area around 4,382 which was the support level from August. A 5% correction in S&P 500 futures sits around the 100-day average and a 10% correction from the highs would take the index down to its 200-day average. The key observation is that the US 10-year yield is grinding higher offering little support and could amplify the selloff in interest rate sensitive technology stocks.
Hang Seng (HSI.I) - down 3% as the situation around Evergrande and the Chinese housing market is intensifying and iron ore price down 10% on steel production cuts. The real estate developer Evergrande has two bond payments due on Thursday so the market will likely be quite volatile this week as information around the developer will flow back and forth. Hang Seng futures around the 24,000 level in early European trading which is a key support area for Hong Kong stocks. The next support level is down at 23,150 which was the key support level back in late September last year.
EURUSD – extended its sell-off and only has the range lows well below 1.1700 as remaining support on this week that features an FOMC meeting and falling equity markets with US treasury yields threatening to break higher. If the FOMC proves more hawkish than expected and we see both rising US yields and risk aversion, EURUSD may be primed for a run at lower supports, like the 1.1500 area, in the days and weeks to come.
AUDUSD – traditionally risk correlated currencies like the Aussie have been in for a drubbing in line with the downdraft in global equities late last week, with special extra pain for Australia as iron ore prices have collapsed on an anti-pollution drive in China and concerns that forward demand could prove weaker for steel on the property market situation there. AUDUSD has corrected down through the local 61.8% retracement level near 0.7250, really only leaving the cycle low just above 0.7100 as support, with the huge 0.7000 area possibly coming into view if the global rout in equities extends. The US FOMC meeting this week (and treasury yields as noted above in EURUSD) is critical for the USD side of the equation.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – cryptocurrencies are having a hard time ignoring the weakness in risky asset prices elsewhere, with Bitcoin and especially Ethereum correcting badly since late last week as Bitcoin trades near 45k and Ethereum is already struggling back at 3,200, not far from the pivotal 3,000 level.
Gold (XAUUSD) dropped to a five-week low overnight with treasury yields rising on taper jitters ahead of Wednesday’s FOMC meeting, and as the dollar received a haven bid following another day of stock market losses led by Hong Kong and its troubled property sector. Silver (XAGUSD) and Platinum (XPTUSD) both touched their lowest levels since November with the economic growth outlook challenged on multiple fronts. Not least in China where iron ore (SCOV1), a key input to its steel industry has slumped 10% to $91 overnight as China steps up restrictions on industrial activity in some provinces.
Crude Oil (OILUSOCT21 & OILUKNOV21) trades lower for a second day with China demand worries, a continued recovery in US production and a stronger dollar ahead of this week's FOMC meeting sapping investor demand. Last week the rally was halted at $76, the July 29 high, and more importantly it has raised the question whether current and improving fundamentals are strong enough to warrant a push above trendline resistance from the 2008 record peak, currently at $77. We don’t believe they are, therefore, leaving the market at risk of a short-term pull back, initially towards the 21-day moving average $72.75.
The FOMC meeting this week might hold a surprise for the bond market (IEF, TLT). August’s non-farm payrolls disappointed expectations and the recent CPI readings were weaker than estimated. Consequently, the bond market discards the possibility that the Federal Reserve will announce tapering this week. However, the University of Michigan survey shows that respondents are expecting inflation to stay high also in the long run. That could be enough for the central bank to consider tapering straight away rather than waiting for the November‘s Fed meeting. If that were the case, it will catch the bond market by surprise as 10-year yield continue to trade below 1.5%. Certainly, a dovish message has the potential to compress yields further, adding to the fact that September is typically a bad month for stocks, playing in favor of bonds. Either way, 10-year yields will find strong support at 1.20% and resistance at 1.4%.
What is going on?
Chinese mainland markets closed until Wednesday potentially aggravating the uncertainties facing Chinese companies in the property sector, although markets were open in Hong Kong overnight and will be open tomorrow, with a holiday there on Wednesday.
US debt ceiling debate situation heating up this week, with the House to vote on whether to raise the $28 trillion debt ceiling and US Treasury Secretary Yellen warning of the consequences it the ceiling is not raised, with some nerves on the issue for those that recall the 2011 and 2013 debt ceiling debates that shutdown the US government and impacted markets for some time until the situation was resolved.
What are we watching next?
FOMC Meeting this Wednesday – ahead of this week’s important FOMC meeting, the market has taken the view that the Fed is unlikely to shift current expectations, with Fed Chair Powell’s dovish Jackson Hole speech on transitory inflation and a lower-than-expected August CPI data seen as evidence that the Fed is unlikely to do much more than firm up its messaging on the timing of a taper. But other voices at the Fed are impatient and the Fed may want to taper purchases more quickly than the market expect in order to have more flexibility down the road with signaling eventual interest rate hikes. In any case, the Fed will be updating its forecasts for the economy and its own policy rate at this meeting, and the market will have to absorb any hints from these adjustments.
Central bank meetings all week – Tomorrow we have Sweden’s Riksbank on tap after a much hotter than expected August inflation number out of Sweden. And meetings from the UK’s BoE and Norway’s Norges Bank look potentially pivotal, as the market is leaning hard in anticipating the BoE bringing forward its first eventual rate hike, while NOK traders are anticipating a rate hike from the Norges Bank and follow up guidance. Elsewhere, the Bank of Japan meeting on Wednesday is somewhat lower on the priority list, as the coming election in Japan and eventual fiscal focus there dominates the outlook. In EM, Hungary’s central bank is expected to hike rates again tomorrow, China ‘s PBOC and Brazil’s central banks meet Wednesday, Turkey’s central bank meets Thursday and South Africa’s meets on Friday.
Canada election today and results - although there is little market anticipation surrounding this election, as Trudeau’s gambit to gain a ruling majority via a snap election has backfired and his Liberals may lose power in a hotly contested election, although whether he limps to a slim victory or the Conservatives manage to win, a minority government with a weak mandate for change appears the likely result.
Earnings Watch – we are three weeks from the Q3 earnings seasons starting up so earnings are light this week, but some names are still worth watching. Lennar today will give colour on the US housing market which is still running hot, but the key focus is the inflationary pressures in building materials. Tomorrow, the key focus is on FedEx as the company has moved into a position where is has to pass on rising wages and last delivery costs to their customers.
Economic calendar highlights for today (times GMT)
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