Summary: Risk sentiment closed last week on a sour note, with US equities broadly lower. The action this week is off to a slow start as Chinese regulators made new moves impacting major platform companies there, while a typhoon looks set to disrupt major Chinese ports. US data focus this week on August CPI up tomorrow and Retail Sales up Thursday.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - despite a negative close on Friday in US equity futures with risk-off momentum accelerating and a negative Chinese equity market overnight, US equity futures are bouncing this morning. The VIX Index closed at 20.95 on Friday and is getting close to levels where it could spark a bigger risk-off move. In S&P 500 the 4,450 level is now clearly the short-term support level to watch if risk-off resumes.
EURUSD – the ECB meeting last week offered no surprises, and the euro is defaulting to its passive role again, declining against the safe haven trio of USD, JPY and CHF as risk sentiment finished last week on a sour note and hasn’t improved at the start of the new week. The next important level now that 1.1800 has fallen this morning looks like 1.1758, the 61.8% Fibonacci retracement of the recent rally as risk sentiment and US data are likely to act on the USD side of the equation this week as the euro continues to trade passively.
AUDUSD – AUDUSD recently squeezed higher from a base near 0.7100 after a long sell-off, rebounding well above the pivotal 0.7400-15 area on the way up, but not able to take the price action into the January-early June range above 0.7550. Since early last week, the pair has settled lower, perhaps in part on plunging iron ore prices in China combined with the RBA’s dovish guidance on policy that seems to have little chance of lifting. Now the focus shifts to whether the recent squeeze established a major low for building a base. The next key level for avoiding a full test of the cycle lows is the 0.7250 area 61.8% Fibonacci retracement of the recent rally.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – cryptocurrencies are off to a weak start this week, with Bitcoin mired below last week’s lowest daily close and below 45k while Ehtereum is likewise bogged down near the lows since the traumatic spike last Tuesday and below 3,300.
Gold (XAUUSD) trades below $1800 but still above key support at $1780, while silver and platinum have seen renewed selling with their relative values against gold under pressure again. Focus on Tuesday’s consumer price index and Thursday’s retail sales, and how the results could impact the Federal Reserve’s taper timeline.
Crude Oil (OILUSOCT21 & OILUKNOV21) trades near the top of its recent range in response to a very slow recovery in US production following Hurricane Ida, and after Vitol said Asian demand would ‘come roaring back’ in Q4. Almost half the crude production from the US Gulf of Mexico has yet to be restarted with the loss of barrels so far exceeding 30 million. In Brent, a break above $73.7/b could see it challenge the July 29 high at $76.15/b next, while support remains the 21-day moving average at $71/b. Focus this week on monthly oil market reports from OPEC today and the IEA on Tuesday.
Grains witnessed a very volatile Friday following the release of the monthly WASDE report from the US Department of Agriculture. The headline numbers, showing a bigger-than-expected rise in corn and soybean stockpiles, initially sent prices lower before recovering strongly in response to the agency boosting its forecast for exports, and the fact most of the findings had already been accounted for by the recent selloffs. Corn (CORNDEC21) led the turnaround, jumping 5.3% before settling higher by just 1.5%.
What is going on?
Chinese tech companies trade lower on new regulatory initiatives, as China is set to break up Ant Group Co.’s Alipay separating its payments and credit lending business, and separately as it called for improving the working conditions for gig workers by platform companies and for the companies to stop blocking links to competing services. Besides separating the payments and credit business of Alipay, the underlying user data are also being exported to a government joint-venture. Alibaba, Meituan, and Tencent were some of the largest losers during the session.
New major Chinese port disruptions on typhoon. With global supply chains out of China already snarled, a major typhoon has several major Chinese ports in its path, including Zhoushan and now Shanghai, with warnings issued for ships to avoid the path of the storm. Fujian province also reported 22 new cases of covid, another factor that could lead to further disruptions.
U.S. August PPI came in above expectations. The PPI for final demand increased 0.7% from the prior month and 8.3% from a year ago. The PPI less food, energy and trade services was up 0.3% from the prior month and 6.3% from a year ago. A variety of factors across the production pipeline explain this increase: material shortages, rising labour costs and shipping bottlenecks.
July UK monthly GDP was disappointing. It was out at 0.1% versus expected 0.6%. The slowdown is partially explained by the rise in Covid-19 cases and the product and labour shortages. This is likely to push CPI close to 4% by end-year. This week’s CPI release will be a key market focus.
Bank of Russia hiked by only 25 basis points on Friday. Investors expected a hike of 50 basis points. The statement signals there will be at least one more hike till the end of the year. Monetary policy will be mostly determined by the evolution of seasonally adjusted month-over-month inflation, in the short- and medium-term.
The German federal election of 26 September is getting closer. Polls are now stable. In the Polit Barometer released on 10 September, the centre-right CDU/CSU is at 22% while the centre-left SPD is at 25%. It seems the CDU/CSU may have reached its floor. But it may struggle to motivate its voters to vote. Its candidate, Armin Laschet, is unpopular even among CDU/CSU voters. The Greens are at 17% and the pro-business Free Democratic Party (FDP) at 11%. In our view, the FDP might be in the position of kingmaker after the election. The negotiations to form a new coalition government will take time. An off-budget vehicle to finance the fight against climate change will be a key focus of negotiations (see our latest report here).
China’s efforts to save electricity and cut emissions, especially from its heavy polluting metal industries have raised supply fears and driven aluminum prices to a 13-year high and nickel to its highest since 2014. Also, in the firing line we find the highly pollutive steel sector which will be closely monitored ahead of the 2022 Winter Olympics in order to ensure blue skies. With steel production falling, so has demand for iron ore, and overnight the futures price in Singapore hit a fresh nine-month low at $129/t, down almost 100 dollars from the May peak.
What are we watching next?
Norway election outcome – Norway's general election is today and the left of center parties are expected to swing into power, although their ability to form a governing coalition could extend the uncertainty beyond election today. The most significant policy focus is on climate and to what degree the climate-focused parties on the left can alter the future course of Norway’s investment in fossil fuel production.
Risk sentiment into this Friday’s options expiry – the Friday session in the US was one of the weakest in almost a month and underlines the risk of a pattern we have noted in recent months of significant market volatility and deep sell-offs as the third Friday of the month approaches – the expiration date of options on the cash S&P 500 index. The third Friday of this month is this Friday, the 17th.
US data in focus this week – three data points in focus this week are the August CPI up tomorrow (expected at 5.3% year-on-year after the 5.4% print in July), the Aug. Retail Sales data and to what degree US spending is decelerating as the stimulus check effect fades further and with unemployment benefits rolling off in early September. Finally, preliminary University of Michigan Sentiment is up on Friday after the August survey showed this measure of sentiment at an even lower level than the worst month of the pandemic outbreak in April of next year.
Earnings to watch this week. Oracle was set to report last Friday but postponed it to this week. The earnings calendar is running thin at this time of year with the only other important earnings release to watch besides Oracle is from Inditex (parent company of the Zara fashion brand).
Economic calendar highlights for today (times GMT)
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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