Summary: Another day brought another record high for US equities yesterday, and the positive mood extended in places overnight as Japan and Korea rallied steeply, with much of Asia following suit, although Chinese equities have lurched lower once again on new regulatory moves that have unsettled investors as well as a weak August non-manufacturing survey suggesting that the service side of the Chinese economy contracted for the month.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - another strong session for the US market yesterday as not only were all-time highs posted, but the price action is taking the broader market beyond the pace of prior already strong gains – a possible “melt-up” scenario that could eventually spell more volatility in both directions.
EURUSD – the price action crept higher as the US dollar dribbled lower on falling Fed rate expectations and strong risk sentiment, and EURUSD has now retraced more than half of the distance to the next key upside pivot just above 1.1900 as we watch for US data for the balance of this week (as noted below) and whether this refreshes the market’s outlook on the US dollar, as the euro trades passively – firmer against the safe havens like the USD, JPY and CHF but neutral elsewhere.
AUDUSD – a very weak Australian building approvals number overnight, and weak Chinese economic data drove a bit of AUD softness in the crosses, particularly in the plunging AUDNZD pair, but AUDUSD managed to tread water and even rise slightly to new local highs as the pair guns for a full reversal of the sell-off wave that started from 0.7427 earlier this month. Tonight sees Australia’s Q2 GDP print, although the critical focus Down Under is the course of the latest Covid outbreak which has been the worst for the cycle and is a challenge to the country’s zero tolerance policy.
Gold (XAUUSD) - is making another attempt to the upside following Friday’s dovish speech from Fed chair Powell. Following a small setback yesterday, both silver and gold climbed higher overnight in response to fresh dollar weakness and softer yields. However, another record high in the S&P 500 and surging global stocks continue to limit demand for gold and silver as a portfolio diversifier. For that to happen, gold needs to find fresh momentum on its own, something that can only be achieved by breaking above the range highs just below 1,835 that were tested three times in July and into early August. If broken it could unlock further gains toward the next key zone above 1,900.
Crude Oil (OILUSOCT21 & OILUKOCT21) - trades flat ahead of Wednesday’s OPEC+ meeting where the group will meet to assess the global supply and demand situation. This despite weaker than expected manufacturing data from China and an expected short-term drop in US refinery demand with hurricane Ida causing power outages and lower mobility from flooding. The OPEC+ group is expected to restore another 400,000 barrels per day, not least considering the delta variant, now fading, has not shown to have a material negative impact on demand. Depending on the outcome, Brent may have another go at resistance above $75.
This week’s non-farm payrolls are key for the bond market (IEF:xnas, TLT:xnas). Powell’s speech at Jackson Hole put a lot of focus on this week’s job numbers as they will influence the central bank’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?
China’s non-manufacturing sector contracted in August, manufacturing also weak. The August Non-manufacturing PMI for China came in at a weaker than expected 47.5, suggesting that the services and construction sector actually contracted in the month, which was marred by an outbreak of Covid that required travel and activity restrictions during the month. The Aug. Manufacturing survey was barely in expansion at 50.1 as the virus outbreak also impacted supply chains.
German Bunds don’t budge highest CPI reading in 13 years, opening up for solid European government bond issuance (IS0L, VGEA). Yesterday, the German CPI harmonised to make it comparable to other European countries, recorded the highest yearly increase at 3.4%. However, German government bonds didn't react to the news and yields actually closed slightly lower on the day. It can be explained by the fact that while yearly inflation figures are high due to a base effect, monthly data show that inflation plunged to the lowest level since November 2020, which could be a sign that monthly inflationary pressures are falling in Europe. Today Italy issues 5- and 10-year BTPS and we expect them to receive solid demand.
In Europe, the cost of gas (GASNLBASEOCT21), emissions (EMISSIONSDEC21) and with that power (POWERDEBASESEP21) continues to climb on low stocks of gas ahead of the peak winter demand season. Concerns about the impact of hurricane Ida’s impact on US LNG export capabilities coupled with lower supplies from Norway and Russia helped send Dutch TTF gas prices towards €50/MWh while the carbon offset contract breached €60/tons for the first time. All adding extra costs on consumers and industry in Europe.
What are we watching next?
Euro Zone preliminary Aug. CPI data today - the German inflation number for August was out yesterday and registered the highest level in nearly 30 years at 3.9% (and as noted above 3.4% for the EU Harmonized reading) but elicited little reaction as the month-on-month reading slipped to 0.0%, even lower than the 0.1% expected. The Euro Zone figure is expected at +0.2% month-on-month and +2.7% year-on-year for the headline and +1.5% YoY for the core vs. 2.2%/0.7% in July.
US Consumer Confidence survey today and US economic data later this week. We’ll closely watch today’s US Conference Board Consumer Confidence survey for August after the University of Michigan survey suffered a massive drop this month, likely on the impact of the delta variant in the US. As well, the covid resurgence possibly contributed to the drop in the preliminary Aug. US Markit Services PMI earlier this month. Later this week, the August US ISM Services survey is out on Friday, as well as the usual focus on payrolls (ADP private payrolls number tomorrow) and the Friday nonfarm payrolls change.
Earnings to watch today. The high-flying cyber-security firm Crowdstrike is out reporting today, as is China’s NetEase, which has stumbled since February and was sent lower still yesterday on news that China will limit online gaming.
Economic calendar highlights for today (times GMT)
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Head of Fixed Income Strategy
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Head of Commodity Strategy