Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Summary: Markets are jumpy, with US equities trading back and forth over the key supports at the former lows of the cycle in the major indices. The action settled near those important support levels and then futures traded softer overnight in an Asian session that saw the downward spiral in the Japanese yen accelerating despite stern words from Japan’s Ministry of Finance. It seems only a change of course from the Bank of Japan has the chance of slowing the yen’s slide.
US equities continued to slide lower yesterday as the US 10-year yield advanced to close at 3.35% getting closer to the recent high of 3.5%. The culprit was the much stronger than expected ISM Services yesterday pushed the Fed Funds forward curve lower indicating higher policy rates for longer. S&P 500 futures fell 0.9% and is trading lower again this morning in early European trading hours sitting around the 3,897 level.
Hong Kong stocks notably underperformed their mainland counterparts for the second straight session. Hang Seng Index lost 1.7% and Hang Seng Tech Index dropped 2.4% while CSI300 was flat. Heavyweight financial names HSBC (00005:xhkg) and AIA Group (01299:xhkg) tumbled nearly 3%. China internet names traded in the Hong Kong bourse also contributed to leading the indices lower, Alibaba (09988:xhkg) and Tencent (00700:xhkg) dropped about 2%, and Bilibili (09626:xhkg) fell by almost 6%. The Covid19-related lockdowns, a weakening yuan, the disappointing August trade data from China, and the rise in US interest rates hurt the market sentiment.
While the focus is chiefly on the cratering Japanese yen (see more below), the US dollar is broadly stronger again and thriving on higher US treasury yields after a strong US August ISM Services data point yesterday, as well as on weaker risk sentiment. EURUSD found more separation from parity and traded to new lows briefly yesterday ahead of the ECB meeting tomorrow, while AUDUSD, for example, trades this morning below its lowest daily close for the cycle, if not below the intraday low of 0.6682 from July. The USDCNH bears watching as well, as 7.00 has now rolled into view.
The USDJPY spike accelerated again yesterday in the wake of strong US data, as Market the world wonders how long Japan can allow the pressure from rising yield differentials globally to pile into the country’s currency, given the Bank of Japan’s insistence on capping yields out to 10 years under its yield-curve-control policy. The situation has created a pressure cooker of a situation on the yen and tremendous volatility, which could get worse still if US 10-year treasury yields continue back higher toward the 3.50% peak from June. The next important economic data point for the US is Monday’s August CPI – and the next chart focus in USDJPY is 147.66 the 24-year high of 1998. Stern verbal warnings from Ministry of Finance officials overnight hardly even registered on the market. The BoJ must change policy for JPY to find its lows.
Crude oil hits lowest since January as demand concerns have once again overtaken worries about supply with China lockdowns and restrictions on movements now impacting 46 cities. In addition, a surging dollar, weaker equity markets and central banks in hiking mode continue to negatively impact the general level of risk appetite. In Europe the energy crisis has raised concerns about a ‘Lehman’ moment with utilities buckling under the weight of growing margin calls. Instead of supporting prices, the token 100k b/d OPEC+ production cut announced on Monday has had the opposite effect with the market concluding the group worries about demand going forward. WTI futures slumped below $86/barrel while Brent dropped below $92. Focus on EIA’s Short-Term Energy Outlook for September and API’s weekly inventory data.
US Treasury yields rose sharply in the wake of the strong US ISM Services survey for August, which suggests that the US’ dominant services sector remains in strong expansion, while price pressures for the month eased. The 10-year yield benchmark traded near 3.33% this morning, above all but the highest two daily closes back in a mid-June spike to 3.50%. Above current levels, US treasury yields are likely to dominate focus across markets, likely driving US dollar and risk sentiment direction.
One week into September, the Bloomberg Commodity Index trades down more than 4% with losses seen across all sectors led by energy and industrial metals. The prospect of aggressive Federal Reserved Monetary tightening has lifted the dollar to a record against a broad basket of currencies while the yield on ten-year US government bonds has climbed to 3.34%, just below the 3.5% June peak. In addition to rising interest rates, soon also from the European Central Bank, the market is also dealing with an energy crisis in Europe and lockdowns in China hurting growth and demand in both areas. With the stock market suffering declines and geopolitical tensions being elevated, some safe-haven demand has helped cushion precious metals, the best performing sector so far this month.
With the recent US restrictions on Nvidia selling its most advanced AI chips to Chinese customers Xi Jinping invoked the so-called whole nation system to coordinate and allocate resources for China to become fully independent from the technologies that the US is trying to curb going to China. This speech bolsters our view that the world is moving towards a bipolar world with more fragmented supply chains and economies.
While the S&P Global Services PMI survey continued to signal weakness with a 43.7 revised print for August, the BLM’s historically more close watched ISM Services survey on the other hand expanded further to 56.9 from 56.7 in July, slightly above expectations. Business activity accelerated to 60.9 from 59.9, while the prices paid component remained elevated at 71.5, in contrast to the decline we saw to 52.5 for the manufacturing sector. New orders rose to 61.8 from 59.9 and employment rose into expansionary territory at 50.2 from 49.1.
Norway is the largest supplier of natural gas to Europe and the country’s prime minister Jonas Støre said the country is open to discussing shorter- and longer-term gas delivery arrangements that cap prices, saying that the discussions would have to occur with the country’s oil and gas producers, chiefly Equinor, but that it is important to not jeopardize production levels.
More than half of the fifty-six nuclear reactors are down due to corrosion issues on reactors which could take years to solve. Nuclear production is now at its lowest point, around 23,000 MWh per day on average versus 40,000 MWh in the same period last year. So far, this has not created a power emergency as electricity demand is usually not elevated during the summer (around 45 GWh per day). But it might become an issue when higher winter consumption will push electricity demand around 80-90 GWh on average. This could cause an electricity shortage at the worst time ever (see Chart of the Week : The energy crisis is hitting France, 29 August 2022).
In U.S. dollar terms, China’s exports in August come in weaker at +7.1% y/y (Bloomberg consensus: +13% y/y; July: +18.0% y/y). The resurgence of pandemic control restrictions, production disruptions due to power rationing, weaker demand from U.S. consumers, and a high base last year contributed to the deceleration. 46 cities in China are implementing various degrees of lockdowns or restrictions on mobility, affecting nearly 300 million people and close to 25% of the country’s GDP. Imports also were slower than expected, coming in at +0.3% y/y (Bloomberg consensus +1.1% y/y; July: +2.3%).
Australia’s Minister for resources has again been called on to ‘pull the trigger’ and limit gas exports given the projections show Australia will have an energy shortage next year. The Minster said although it has the matter under control, it cannot guarantee it won’t be limiting exports. Japan imported AUD 17bn of the fossil fuel from Australia last year. As such Japan says it’s watching the situation closely.
After a July rate hike of 100bps, Bank of Canada meets again today. The consensus is calling for a 75bps rate hike to bring rates to a restrictive territory, given that inflation continues to run well above target and economic demand is holding up well. The pace of tightening is however likely to slow down in October, and so the messaging will be key to watch at today’s meeting. Canada’s Ivey PMI for August is also out today after dipping sharply in July to just below 50.
A 75-bp hike that takes the policy rate to 0.75% is the favoured scenario, although not fully priced. To surprise the market and bolster its claim that it is serious about getting ahead of inflation, the ECB will have to move 100 basis points. Guidance will also be important, as the ECB is expected to take the rate to at least 1.5% through the December meeting (two more meetings after the meeting tomorrow).
According to Reuters, the EU energy ministers will try to find an agreement on a gas price caps (yesterday, European gas jumped 31 % as Russia kept Nord Stream link shut) and on providing companies facing high margin calls emergency liquidity support (several utilities are already on the edge of bankruptcy in Germany and in Austria, for instance). The ministers will also focus on reforming more deeply the European electricity market. Two main options are on the table: the ‘Iberian exception’ and the Greek non-paper (see EU Emergency Energy Meeting : A Never Ending Story, 31 August 2022).
Today’s key earnings release is NIO which one of the most prolific EV-makers in China. Revenue growth is expected to slow down to 16% y/y in Q2 as Covid restrictions slowed down consumer markets in Q2. Expectations are looking for revenue growth to accelerate to 66% y/y and a narrower EBITDA loss of CNY 1.7bn.
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