What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US markets closed near the cycle highs in the US ahead of the three-day weekend as US markets are closed for Labor Day holiday. September is traditionally one of the weakest months seasonally, and this remains one of the most aggressively extended bull markets in history.
EURUSD – EURUSD executed a precise test of the 1.1909 high since June on Friday in the wake of the weak US jobs report, but as US treasury yields nonetheless rose by the close of trading, the price action consolidated back lower after the rather persistent run higher from the base below 1.1700 over the last two weeks. The pair has room to consolidate back toward perhaps 1.1800 without threatening a capitulation back lower, although we are still in a rangebound market between 1.1668 and 1.1909 until the bulls can prove themselves with a rally that takes out 1.2000. The ECB meeting this week should prove important for EUR sentiment as the US macro calendar goes quiet this week.
AUDUSD – the Aussie was one of the strongest performers last week, and AUDUSD blasted back above the pivotal 0.7200-25 zone that was so crucial on the way down. Given the lack of a particularly supportive backdrop for the Aussie, short-covering of the very unloved currency may have been the key driver as the country remains among the most hampered by Covid-restrictions, given their zero-tolerance policy. The rally has brought a significant neutralization of the recent bear move, but Australia probably needs a distinctly positive catalyst (outlook for change of Covid restrictions, deepening focus on commodities resuming their rally or some hint in the RBA meeting tonight) to follow through higher and fully reverse the downside risk with a move above the 0.7500-0.7600 zone. The first major Fibonacci retracement support (38.2%) of the rally wave off the lows come ins a 0.7336.
JP225.I (Nikkei 225) - Japanese equities remain strong in the wake of the resignation of Japanese PM Suga late last week, with price action extending strongly again to start this week, taking the Nikkei 225 within striking distance of 30,000 and not much higher, the cycle highs above 30,700.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – Bitcoin has stirred a bit at the weekend, finally poking more determinedly above the 50k level and trading near 52k this morning after sitting out the steep rally in Ethereum and some of the smaller crypto-coins over the last week.
Gold (XAUUSD) trades near a seven-week high after Friday’s lower-than-expected non-farm payrolls potential delayed the Fed’s taper timing. However, with the dollar trading stronger in response to a surprise post-NFP pickup in Treasury yields, the yellow metal has yet to crack key resistance at $1835. Silver (XAGUSD) meanwhile took off after the XAUXAG ratio finally broke below 75, and the price took out the resistance-turned-support level at $24.50. With US ten-year real yields still stuck below –1% the focus remains on the dollar and its ability to fight back following recent weakness.
Crude Oil (OILUSOCT21 & OILUKNOV21) - trades lower as US Gulf coast refinery demand remains negatively impacted by hurricane Ida, and after Saudi Arabia reduced their official selling price (OSP) Asian buyers by more than expected. A move that could signal a desire to retain market share at a time of increased competition while the Asian market recovers from a demand slump caused by the resurgence of the delta coronavirus variant. Brent failing below $75 and WTI below $70 may signal another short-term peak in a market that has become increasingly rangebound. Focus this week on tomorrow’s Chinese trade data which includes oil and EIA’s Short-term Energy Outlook on Wednesday.
High wage inflation leaves US Treasuries vulnerable ahead of high supply week (IEF:xnas, TLT:xnas). Inflation is more important than jobs. That is the message that the bond market sent on Friday as the non-farm payrolls report missed expectations, but wage inflation continues to strengthen. It leaves US Treasuries vulnerable to more selloff especially during a week of heavy supply where the Treasury will issue 3-, 10- and 30-year bonds starting from tomorrow. The Beige Book will also be more important than usual as it will shed some light over supply chain disruptions, providing more information regarding whether inflation is transitory or not. Ten-year yields are flirting with their 200-days moving average at 1.33%, if they break above this level they will find resistance at 1.40% next.
What is going on?
US Aug. Jobs Report: slower payrolls growth than expected, earnings surprise to upside. On Friday, the official August US nonfarm payrolls change disappointed with a reading of merely +235k, far below expectations of >700k and the prior two very strong months. This suggests hiring may have slowed as the delta outbreak has spread in the US. Net revisions were +135k for the prior two months. Average Hourly Earnings rose far more than expected at +0.6% month-on-month, though in part this was due to a 0.1 drop in average weekly hours worked. The Unemployment Rate dropped to 5.2% as the more erratic “household survey” showed larger employment gains.
Chinese Vice Premier Liu He voices support for private sector – in the wake of a series of new policy initiatives that have spooked markets in China, Vice Premier and chief economic adviser for Xi Jinping vowed that “the principles and policies for supporting the development of the private economy have not changed...and will not change in the future.”
Aluminum jumped to a fresh 15-year high in China overnight as political unrest in Guinea added further fuel to a rally that has taken one of the industrial metals with the most bullish fundamentals up 40% this year. Diven by the prospects for strong demand increasing the visible deficit in China and the West, the news from Guinea may further increase the deficit through rising supple threats. China, the biggest producer of aluminum source more than half of its Bauxite, a feedstock used to make alumina, which is further processed into aluminum from Guinea. So far, however, there are no reports of disruptions, but the development may further add to the underlying support currently building for industrial metals.
What are we watching next?
US markets closed today for Labor Day holiday.
ECB meeting this Thursday - last week may have given the impression that ECB hawks are back. After an overly dovish summer, ECB hawks are sending signals to the market. They are pushing for some kind of exit strategy. Last week, Bundesbank chief Jens Weidmann warned that the ECB shouldn’t disregard the risk of higher inflation. It is unlikely to have any impact on the outcome of this week’s ECB meeting, in our view. The ECB will mostly upgrade its staff macroeconomic projections and discuss the pace of bond purchases for the last quarter of this year, which should be slower than previously, given that the ECB had already declared the intent to “front-load” purchases earlier this year.
Busy Central Bank meeting calendar this week: tonight, we have an RBA meeting, at which the market will watch for whether the RBA will look through the near-term effects of covid lockdowns, as the policy focus switches to rapid vaccination roll-out and other countries provide a model for the covid effect soon ending. Elsewhere, besides the ECB meeting this Thursday note above, we have a Bank of Canada meeting on Wednesday (no change expected as Sep 20 election dominates focus there), a Polish central bank announcement also on Wednesday (eventual rate hikes increasingly priced in, but central bank keeping transitory inflation narrative, guidance important at this one) and a Russian central bank meeting on Friday, where another 50 bps hike to 7.00% is expected as the bank is in full inflation-fighting mode.
Earnings to watch this week. The earnings season slows this week with most major Chinese earnings releases out of the way, so we will see little impact from earnings going forward.
- Tuesday: Coupa Software, Partners Group
- Wednesday: Lululemon Athletica, New Oriental Education, Copart
- Thursday: Sun Hung Kai Properties, Zscaler
- Friday: Oracle, Kroger
Economic calendar highlights for today (times GMT)
- US Markets Closed for Labor Day
- 0830 – UK Aug. Markit/CIPS Construction PMI
- 1110 – UK Bank of England’s Mann to speak
- 0430 – Australia RBA Cash Target
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