Global Market Quick Take: Europe – 2 September 2024

Key points:

• Equities: Chinese equities down on more signs of weakness
• Currencies: US dollar recovered last week, and the euro headed for its worst week since April
• Commodities: Crude slumps as OPEC+ prepares to hike output, Copper and silver lower on China woes
• Fixed Income: Bonds decline as markets brace for corporate debt surge and upcoming US jobs data
• Economic data: Eurozone and UK manufacturing PMI’s, US Holiday

The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.

In the news: Dow Snags Record Close as Index Marks Fourth-Straight Monthly Gain (Barron’s), Crucial September jobs report kicks off a new month: What to know this week (Yahoo), Populists Surge in Germany’s Regional Votes, Humbling Scholz (Bloomberg), China's electric vehicle makers scramble for EU tariff deal, with price floor on the table (Yahoo)

Macro:

• Core PCE, the Fed's preferred measure of inflation, rose by 0.2% MoM in July, matching the prior and expected 0.2%. The YoY print rose 2.6%, matching the prior pace but beneath the 2.7% forecast. The annualised Core PCE rates saw the 3-month ease to 1.7% (prev. 2.3%, rev. 2.1%) and the 6-month ease to 2.6% (prev. 3.4%, rev. 3.3%). The headline numbers rose 0.2% MoM, in line with the forecast, but picking up from the prior 0.1%. The report reaffirmed disinflation remains in progress and continued to provide room to the Fed to begin the easing cycle, however the pace of the rate cut still remains a debate and could depend more heavily on labour data, particularly the non-farm payrolls report due this week.
• The final University of Michigan for August saw the headline revised marginally higher to 67.9 from 67.8, but shy of the expected 68.0. Current conditions were revised up to 61.3 from 60.9, while forward looking expectations were left unchanged at 72.1. Looking at the inflation metrics, 1yr ticked lower to 2.8% (prev. 2.9%) and 5yr was unrevised at 3.0%.
• Euro-area inflation softened further in the August prelim report, coming in at the slowest since mid-2021, at 2.2% YoY from 2.6% in July. Core inflation also eased to 2.8% YoY after three straight months at 2.9%, and this could give the ECB room to cut rates again next week.
• China’s NBS PMIs were reported over the weekend and signalled economic weakness again. Manufacturing PMI dipped further into contraction to 49.1 in August from 49.4. Non-manufacturing activity picked up, but very slightly, to 50.3 from 50.2 in July. This saw the composite PMI at 50.1 in August from 50.2 previously, continuing to highlight the need for further stimulus.

Macro events (times in GMT): US Labour Day Holiday, Eurozone Manufacturing PMI (Aug final) exp unchanged at 45.6 (0800), UK Manufacturing PMI (Aug final) exp unchanged at 52.5 (0830), US weekly crop condition report (2000)

Earnings events: The market is off-season from earnings but there are still some companies reporting earnings this week as their fiscal quarters do not track the calendar quarters. Some of the more interesting releases to watch are Zscaler tomorrow and Dollar Tree on Wednesday. Zscaler is interesting because of demand for cyber security and Dollar Tree is exposed to the lower income population in the US that is showing some signs of stress.

• Tuesday: Partners Group, Swiss Life, Zscaler, Ashtead
• Wednesday: Vantage Towers, Copart, Alimentation Couche-Tard, HP Enterprise, Casey’s General Stores, Dick’s Sporting Goods, Dollar Tree, Hormel Foods
• Thursday: Sun Hung Kai Properties, CVC Capital Partners, BNP Paribas Fortis, Sekisui House, Broadcom, Samsara, Guidewire Software, DocuSign, BioMerieux
• Friday: Puig Brands

For all macro, earnings, and dividend events check Saxo’s calendar.

Equities: A negative session in Chinese equities down 1.7% as more indicators are suggesting Chinese growth is still weak as the Chinese government is still failing to shore up the property sector. Futures are flat in Europe suggesting little impact from the first German regional election showing a big defeat for the sitting government with far-right parties gaining. The week will start at a slow pace with few earnings releases and macro figures in the first two days. Later this week, the key focus will be on US labour market data ranging from JOLTS job openings, ADP employment change, and Nonfarm Payrolls figures on Friday. US equity markets are closed today due to Labor Day holiday.

Fixed income: U.S. Treasuries fell on Friday, driven by the anticipation of a large corporate bond supply in September, estimated at around $125 billion, with a significant portion expected in the three days following Labor Day. Additionally, PCE inflation data supported expectations of a less aggressive Federal Reserve rate-cutting cycle. The data showed that inflation is rising at a pace consistent with the Fed's projections, neither accelerating out of control nor decreasing sharply enough to justify rapid or substantial rate cuts. This suggests the Fed will likely adopt a cautious, measured approach to rate cuts to avoid reigniting inflationary pressures while maintaining economic stability. As a result, the 10-year Treasury yield increased to approximately 3.91%, up from 3.77% earlier in the week, while two-year yields ended the week at 3.91% after dipping to 3.85% mid-week. The yield curve steepened notably, with the spread between 10-year and 2-year yields tightening to -1.7 basis points, the tightest since the summer of 2022. European sovereign bonds saw slight declines, with German Bunds experiencing a modest rise in yields despite benign euro-area inflation data. Market slightly adjusted its expectations for ECB rate cuts, now anticipating 64 basis points of easing by the end of the year. Market focus shifts to the U.S. Nonfarm payrolls on Friday, but before that the focus will be on the Eurozone and U.S. PMI numbers, US ISM Manufacturing index and the Bank of Canada policy meeting on Wednesday.

Commodities: Crude oil trades lower towards key support after suffering a steep drop on Friday as traders priced in expectations that OPEC+ will proceed with previously announced output hikes, starting with 180k b/d from next month. Together with a soft demand outlook, especially in China, they more than offset short-term supply disruptions in Libya, where an estimated 500k b/d may currently be offline. Gold trades below USD 2500, ahead of a month that in recent years has proved to be challenging, with traders watching key US data to determine the scale and pace of incoming US rate cuts. Silver trades at a two-week low relative to gold, after copper and iron ore extended Friday’s drop as China’s property woes deepen, and the nation’s growth target increasingly looks out of reach. US futures markets are either closed or have reduced trading today due to the Labour Day holiday.

FX: The US dollar recovered last week after heavy selling in the last few weeks, despite PCE data giving room to the Federal Reserve to cut rates this month. Market, however, remains undecided about the magnitude of the rate cut as the strong growth narrative continues to hold up. This week’s labor market data – from JOLTs to ISM surveys and jobless claims, but most importantly the August jobs report – could provide further insights. If cooling in the labor market remains orderly, market may be forced to remove excessive easing expectations from this year, pushing the US dollar higher. The euro was an underperformer last week, with inflation coming in softer and ECB speakers also hinting at further rate cuts. The New Zealand dollar led the gains and Canadian dollar also moved higher as short covering likely extended further following a strong GDP report. The Australian dollar was relatively weaker and will have its eyes on RBA Governor speeches this week. The Japanese yen weakened and is extending its losses in early Asian session.

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