Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Summary: A mixed session in the US equity market yesterday after the prior two days of strong gains, even if little damage was done as the market remained relatively stable despite a huge drop in US consumer confidence in August, likely on the spread of the delta variant of covid. Chinese equities posted a strong bounce-back overnight even as a private manufacturing PMI suggested the sector is shrinking.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - Nasdaq 100 futures are extending momentum today, trading around the 15,630 level as market expectations of low rates for longer are supporting sentiment in growth stocks. However, the rally in equities is now getting quite stretched in terms of both valuation but also technically, so we urge investors to prepare for an abrupt setback in equities.
EURUSD – the foray above 1.1800 was cut short yesterday, as we trade back slightly below that level this morning. Yesterday’s price action may have been affected by end-of-month rebalancing flows, although without reading anything into the timing, the chart suggests a moderate bearish reversal that now must be overcome if the bulls are to prove their case. Given that the recent rally was launched from around the 1.1750 level in the wake of the Fed Chair Powell speech on Friday, a return to that level would point to the risk of a return to range lows and possibly beyond.
USDJPY – is poking back at the top of the range and threatening a push back toward the key cycle top just above 111.50 if it can break free, although we might need to see US long treasury yields poking higher first. US yields were modestly higher yesterday, supporting the move back above 110.00 in USDJPY, but would need to threaten back toward 1.40% (vs. Current 1.33%) - possibly on stronger than expected employment data through Friday’s US jobs report – to justify a significant break higher.
Gold (XAUUSD) - holds above $1800 but still struggling to set up a decisive attack at the key $1835 resistance level. Silver (XAGUSD) has lost some momentum after twice getting rejected at $24.20, resulting in the XAUXAG ratio rising from key support at 75, a level that has now been rejected on four occasions this past week. Stock market strength and a 10 bp rise in US 10-year real yields since yesterday has left the market cautious, and with technicals mostly neutral the upside potential still seems limited.
Crude Oil (OILUSOCT21 & OILUKNOV21) - trades steady ahead today’s OPEC+ meeting, expected to start at 3pm Vienna time, where the group will meet to assess the global supply and demand situation. The aftermath of Hurricane Ida is net oil negative and fuel positive, with production cuts being more than offset by refinery shutdowns and less mobility. Chinese imports of crude oil have stalled since June but there are now signs of a renewed pickup, and with the delta virus impact starting to ease we expect the OPEC+ will decide to go ahead with the planned 400k b/d production increase from October. Overall, Brent and WTI remain rangebound with the global recovery not broad enough to justify higher prices at this stage.
Ten-year US Treasury yields look poised to test their 200-days moving average (IEF:xnas, TLT:xnas). Treasury yields rose amid an intense sell-off in European government bonds. Yet, the focus continues to be on this week’s job numbers as they will influence the Federal Reserve’s decision regarding when to begin tapering purchases under the QE program. If job figures exceed expectations, we anticipate a tapering announcement already by September’s FOMC and beginning as soon as October. In that case, we will see yields rising and the yield curve steepening with the 10-year yields rising as high as 1.5% ahead of the Fed meeting. In case job numbers disappoint, tapering may be delayed, giving a boost to US Treasuries. In that case, 10-year yields could drop again to test 1.12%. Any rally would be short-lived as we expect a revival of reflation trade in autumn.
What is going on?
Mixed data in Asia: Australia’s Q2 GDP estimate was stronger than expected at +0.7% QoQ, though provided little solace as the country is now grappling with its worst covid outbreak since the start of the pandemic. Elsewhere, the China Caixin Manufacturing PMI for August suggested the sector contracted slightly with a reading of 49.2 vs. 50.1 expected and 50.3 in July. South Korea’s Manufacturing PMI dropped to 51.2 for August from 53.0 in July, but exports rose to 34.9% year-on-year vs. 34.0% expected.
Strong results from Meituan and NetEase. The two technology giants of China have eased concerns over Chinese equities in the short-term with CSI 300 futures up 1.8% in today’s session. We continue to see increased uncertainty of future profitability of Chinese technology companies and very few Chinese companies that have reported in Q2 are providing earnings guidance highlighting that even Chinese companies do not know how they will be impacted by the ongoing regulation.
Worrying U.S. data: the U.S. August Consumer Confidence Index slipped sharply due to the renewed spread of the Delta variant and inflation concerns. It was out at 113.8 against 125.1 in July, below the 124.0 forecast. This confirms the plunge observed in the U.S. August Michigan Consumer Sentiment survey. According to the Conference Board, it is too early to assess inflation concerns could result in consumers curtailing their spending in the months ahead. But this is a real risk to monitor in the coming months. In the housing market, prices continue to jump. June S&P Case-Shiller 20-City increased by 1.77% M/M (SA) and 19.08% Y/Y (NSA). June’s jump was the largest in data going back to 1988 due to a tight supply of homes.
August Eurozone CPI estimate climbed to 3.0% Y/Y against estimated 2.7% and prior 2.2%. The increase mostly results from higher commodity prices and transportation costs but, first and foremost, from base effects. This is a key factor driving CPI distortion in France, for instance. August French CPI was out at 1.9% Y/Y. Last year, the summer sales took place in August. This was not the case this year, hence the apparent acceleration in prices of manufacturing products (+1.3% Y/Y).
U.S. grain and soybean futures have touched their lowest prices in weeks after hurricane Ida caused power outages and damage to export facilities, thereby raising concerns about extended disruptions to shipments from the Gulf Coast which accounts for about 60% of U.S. exports. Also domestic corn and soybean supplies look set to increase as farmers begin harvests in the coming weeks.
Hawkish comments from ECB’s Holtzmann and Knot drive yields higher in the euro area (VGEA, IS0L, BTP10). Before Holtzmann and Knot’s comments, eurozone’s yields rose slightly due to the strong CPI readings which saw inflation in the euro area rising to 3% YoY. Yet, the hawkish commentaries of the two ECB‘s members accelerated the selloff in the European government bond space with Italian BTPS suffering the most with 10-year yields soaring 10 basis points on the day. We believe that the selloff will be short-lived as it is unluckily that the ECB will decide to scale back stimulus already from next weeks. Additionally, the recently adopted symmetric inflation target framework should enable them to remain accommodative despite the spike in inflation. Yet, we remain cautious duration and dislike government bonds with maturity over 10-years offering a yield close to zero.
What are we watching next?
Conflicting data risk from the US through Friday’s jobs report? Headlines may focus on the latest jobs data from the US this week, with the private payrolls change from the ADP for August up today and the official nonfarm payrolls change data on Friday. With many pandemic benefits set to expire in September, some workers may have scrambled this month to take jobs, or this effect may be delayed a month or more. Regardless, it is important to balance any employment data, which is often badly lagging relative to the overall state of the economy, with something like the ISM Services survey release also on Friday, which may show further evidence of a deceleration in the economic recovery. With fewer lower income earners receiving benefits in September, retail sales may be set for a sharp drop next month as well, in a particularly large further drop in the post-stimulus check hangover.
US finished with “nation building” - what are geopolitical implications? The evacuation from Afghanistan complete, US President Joe Biden said that the US exit from Afghanistan marks the end of US attempts at nation-building. This could lead to new geopolitical developments in coming months and years as powers that may have hesitated to act in various regions may be emboldened to do so under the assumption that the US will not intervene, and as those assuming an alliance with the US may question the strength of the US commitment to their defense. Already EU countries are scrambling to talk about the need for a common defense force and Japan Defense Ministry is requesting a record $50 billion annual budget to build out better defense capabilities.
Earnings to watch today. Pernod Ricard has reported annual results (ending 30 June) this morning showing operating earnings ahead of analyst estimates and revenue almost back to pre-Covid19 levels. The alcoholic beverage company expects solid organic growth in the current fiscal year as societies continue to open up.
Economic calendar highlights for today (times GMT)
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