Market Strategist
Summary: USD back on the front-foot amid risk-off spurred again in Asia by China’s PMI miss. Country Garden’s last-minute repayment of the dollar bond coupon also brought the focus back on the inadequacy of measures from Chinese authorities, weighing on AUD. The RBA meeting was a non-event, and AUDUSD will need further China boost or fresh YTD lows may be threatened. Sterling supported by September rate hike bets, masking the economic concerns that are likely to rise into Q4.
After a quiet overnight session due to the Labor Day holiday in US and Canada, risk off sentiment was sparked again in Asia. Key catalyst was China sentiment turning bad again, with a miss in Caixin services PMI and a near-miss in Chinese developer Country Garden’s coupon payments.
China’s Caixin services PMI fell to 51.8 in August, its lowest levels this year, from 54.1 in July. The numbers reignited concerns that China’s services sector is weakening after last week’s official data had shown similar trends.
Meanwhile, Country Garden entered the final hours of a grace period to pay interest on dollar bonds. While the payment was eventually made, markets were not relieved as the company has a lot more US dollar debt that it will need to work through. The latest efforts from authorities to arrest the slump in the property market helped markets rally at the start of the week, but the measures are skewed to only support tier-1 and stronger tier-2 cities. Smaller locations make up more than two-thirds of the Chinese home sales, and they continue to be in doldrums. Country Garden, with its bigger exposure to low-tier and weaker tier-2 cities, may not be able to gain much from the policy support measures.
Overall, China’s measures so far are a mere relaxation of over-regulation that can stop or slow down further damage, but not particularly stimulus actions that can reverse the damage. The hustle between weak high frequency data and policy actions is likely to continue.
This led to a broad risk-off sentiment in Asia, taking the dollar back higher with AUD being the underperformer. AUDUSD slumped to 0.6420 from 0.6460+ levels at the Asia open, and the RBA announcement was a non-event. The central bank kept its cash rate unchanged at 4.10% for a third meeting in a row, while still maintaining a tightening bias, as we discussed in the FX Watch yesterday. Still, warnings on the economy and the labor market ramped up, with the statement also hinting at the increased uncertainty around the Chinese economy. But the market was left without any fireworks in typical Lowe style, at the Governor’s last meeting.
AUDUSD may see 0.64 level as the first key barrier, break below which brings the YTD low of 0.6365 in focus. Q2 GDP is out tomorrow and may confirm that economic momentum is weakening. Bloomberg consensus expects 0.4% sa QoQ and 1.8% YoY from 0.2% and 2.3% in the first quarter. Of larger concern maybe the jobs numbers next week, with RBA warning that unemployment rate may increase to 4.5% in late 2024. A sharp increase from July’s 3.7% could mean that RBA would be expected to end its rate hike cycle.
The UK national data office – the Office for National Statistics (ONS) – revised the 2021 GDP growth higher by 1.7%. That means that the UK returned to pre-pandemic growth much earlier than believed and that the revision leaves Germany exhibiting the “sick man of G7” symptoms. A better GDP profile may be a good news for UK assets for now but that masks the troubles brewing for the UK economy in the months to come.
BOE Chief Economist Huw Pill’s speech last week underscored a less hawkish BOE outlook, but markets are still expecting two additional rate hikes with a September rate hike priced in with near 90% probability. Final August PMIs will be due today and any downward revision can potentially shift focus to economic concerns. Markets remain complacent about the medium-term trajectory for the UK economy.
As noted in the FX Watch yesterday, Bank of Canada is expected to leave the overnight lending rate unchanged at a 22-year high of 5% after two back-to-back hikes in June and July. While Canadian economy is more closely linked to the US economy and oil prices, any optimism fuelled by these has waned with Q2 GDP turning negative and risking a technical recession. BOC had paused the tightening cycle earlier than other central banks at the start of the year, only to restart in June. There are signals that BOC may remain a leader in the easing cycle, and any hints could prove pivotal for CAD. Labor data for August is also out on Thursday and another decline could further spook recession concerns.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
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