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Thursday’s Asia Pacific session was a pretty downbeat, with the Hang Seng, Shanghai Composite and Kospi 50 indices all losing roughly 1.0%, despite a positive hand-over from US markets yesterday evening, where the S&P 500 posted another record close just shy of the 4500 mark. The tone of the Covid-19 related news this week in Asia remains negative (excluding China, where the outbreak appears to have been brought under control). However, today’s downside in the region’s equity markets seems to have more to do with pre-FOMC speak profit-taking (the bank’s annual Jackson Hole symposium begins today) amid what has thus far been a pretty strong week for regional bourses. MSCI’s main Asian equity index (which excludes Japan) is still up 3.5% on the week. The downbeat sentiment in Asia Pacific markets is weighing on US and European stocks this morning; the Stoxx 600 is down about 0.4% but remains supported close to record levels above 470, while S&P 500 futures point to a 0.1% drop at the open, with futures trading in the 4480s.
Consumer survey data out of Germany for the month of August showed a worsening of consumer sentiment in the region this past month, and this may be contributing to the slightly more defensive tone in European equities this morning. Consumers in Germany demonstrated higher levels of concern about accelerating inflation and rising Covid-19 infections, with the headline GfK Consumer Sentiment index falling to -1.2 this month from -0.4 in July, larger than the expected drop to -0.7. The decline in consumer sentiment this past month echoes the findings in business sentiment surveys (PMI and IFO) released earlier this week. Despite this, Eurozone yields are still trading close to one-month highs; German 10-year yields are around -0.42%, following yesterday’s sharp 5bps rally from closer to -0.48% (which at the time was the strongest one-day rally in German 10-year yields since May). Some market commentators have partly put this rise in yields down to more upbeat commentary on the state of the Eurozone economy from ECB officials; on Wednesday, ECB Vice President Luis de Guindos said that the ECB could revise up its macroeconomic projections for the eurozone again in September following recent solid activity indicators thus far in Q3.
In further notable commentary from ECB members, the bank’s Chief Economist Phillip Lane was on the wires yesterday talking about how the bank is in no rush to make any final decision on what the bank’s QE policy might look like once the Pandemic Emergency Purchase Programme (PEPP) expires in March next year. This has been interpreted by some as dovish, as some market commentators had been hoping for the ECB to begin discussions on the matter at the September policy meeting. Therefore, it’s probably best not to read too much into the recent rally in Eurozone bond yields, which may have been more to do with pre-Jackson Hole position adjustment than anything else. Nonetheless, Eurozone bond traders will be intently monitoring further ECB speak from influential governing council member Schnabel this afternoon at 1600BST. Sticking with bond markets and across the pond, US bond yields are sitting close to monthly highs just under 1.35%, up around 10bps from lows hit at the start of the week just above 1.25%. On the session, the US treasury yield curve is pretty much unchanged. As Eurozone bond traders switch their focus to ECB speak, US bond market traders are now switching their focus to Fed’s Jackson Hole symposium, which gets underway later this afternoon. We are now set to be bombarded by Fed speak until the end of the week, with Fed Chair Powell’s address at 1500BST on Friday of course the main event.
Turning to commodity markets; the downbeat sentiment in Asia markets that has leaked across into European and US markets is also weighing on most commodity prices. Front-month WTI futures are down just under 1.0% and have dropped below $68.00 again, despite yesterday’s weekly US EIA inventory data showing a larger than expected draw on headline crude oil stocks. Some analysts are citing an easing of supply shortage concerns triggered by the abrupt outage of a more than 400K barrel per day (bdp) Pemex (Mexico’s state-owned oil producer) as a negative for oil markets this morning. The latest reports from Pemex suggest that 70K bdp in production is already back online at the rig, with another 110K expected to return soon. Copper is down about 0.5% and precious metals are flat amid subdued USD and US bond market conditions, with these markets all now largely in wait-and-see mode ahead of Powell’s speech tomorrow.
Speaking of the US dollar; the DXY is consolidating close to weekly lows in the 92.80s, with traders reticent to place further bearish bets just in case the tone of Powell’s remarks (and the remarks from other FOMC speakers over the next three days at Jackson Hole) is more hawkish. It seems likely that ahead of Powell’s speech tomorrow, the DXY is going to remain close to 93.00. The performance on the day of the US dollar’s G10 FX rivals is mixed, with modest underperformance being seen in CHF and AUD. Losses in the Aussie could be explained by further bad news out of Australia, where record new Covid-19 infections in Australian state New South Wales were reported on Thursday, with daily infections surpassing 1000 for the first time. Recently releases ECB minutes from the July policy meeting did not contain much new information and EUR is for now unfazed.
The Day Ahead
The next thing for traders to watch out for is the release of US data at 1330BST, including the second estimate of Q2 GDP growth and weekly initial jobless claims. This data is likely to be overshadowed, however, by the start of the Fed’s annual Jackson Hole symposium from 1400BST and a barrage of central bank speak; FOMC’s Bullard will speak at 1300BST, Fed’s Kaplan at 1530BST and ECB’s Schnabel at 1600BST. US bond market participants will also be keeping an eye on a 7-year note auction at 1800BST.
