Dollar, US stocks rebound after good September business survey data

It was a strong session for US equity markets yesterday, with the S&P 500 gaining nearly 1.0%, the Dow closing 0.7% higher and the Nasdaq 100 gaining about 0.8%. As to why US stocks were able to snap out of the recent negative trend, traders have cited factors including; 1) a strong NY Fed manufacturing survey for September (the headline index unexpectedly shot higher to 34.3 from 18.3 last month), which has served to ease some of the recent concerns about a US growth slowdown – eyes will be on today’s Philly Fed manufacturing survey, also for September, to see if it sends a similar message, 2) dip-buying, after the S&P 500 brushed close to its 50DMA on Tuesday (buying the dip back to the 50DMA has been a highly profitable strategy for most of the last 12 months) and 3) bullish bank forecasts – traders have been passing round new forecasts from JP Morgan, who sees the S&P 500 rallying to 4700 by the end of the year and then pushing above the 5K level sometime in 2022.

In pre-market trade, US index futures are a tad softer amid some modest profit-taking ahead of more important US data later in the session (the August Retail Sales report and the latest weekly jobless claims numbers are out at 1330BST) and European bourses are this morning largely playing catch up to the positively seen on Wall Street yesterday; the Stoxx 600 is up about 0.8% on the session around 467.50, though is still about half a percent below earlier weekly highs at the 470 level and still about 1.8% below the record levels at 476 printed in mid-August. ECB President Lagarde is scheduled to speak from 1300BST, and markets participants will keep an eye on her remarks, but European equities are likely to continue to take their cue from their US counterparts amid what could turn out to be further market-moving US data out later in the session. In terms of US and European, the better-than-expected recent US data has helped push US 10-year yields above the 1.30% mark yet again, though yields remain well within recent ranges, while German 10-year yields continue to challenge the -0.3% mark. Meanwhile, stock market sentiment in the Asia Pacific region was much more downbeat, with the Shanghai Comp and Hang Seng indices both dropping nearly 1.5% on the session, the Nikkei 225 down 0.6% and the Kospi 50 down over 1.0% amid a combination of geopolitical concerns and further regulatory concerns in China.

In terms of the latest geopolitical news of note; a new security partnership between the US, UK and Australia was announced overnight that will see the latter deploy nuclear-powered submarines in the Indo-Pacific region, a move widely seen as being aimed at countering rising Chinese influence in the region. China of course condemned the new partnership and there are fears this could lead to a worsening in global trade relations if China responds with economic sanctions. Meanwhile, South Korean and Japanese markets continue to suffer in wake of the recent North Korean missile test. Heightened global geopolitical concerns may be feeding into the stronger US dollar this morning, though the mixed nature of G10 performance this morning (the NZD is the best performer and the Swiss franc the worst) does not suggest FX markets are being driven by a safe-haven bid. Instead, recent strong US business sentiment data from the NY Fed has likely allayed some concerns about a slowdown in US growth. As noted above, today’s US data will add further clarity as to recent US economic performance and therefore could be seen as a “make or break” for the DXY’s recent rebound back into the upper 92.00s from previously beneath 92.50. Increased optimism about US growth naturally is also extrapolated as marginally reducing the likelihood of a more dovish Fed, a marginal dollar positive. Indeed, the performance of G10 majors this morning makes much more sense if viewed through the lens of relative central bank policy divergence; NZD is the best performer with the RBNZ on course to hike in October and CHF and EUR are amongst the worst with their respective central banks not expected to meaningfully tighten monetary policy for years.

Aside from the currencies already named, JPY, CAD, AUD and GBP are all flat and awaiting further drivers. The Aussie has mostly managed to shrug off what was a much worse than expected August labour market report; it showed the economy shedding nearly 150K jobs as a result of the strict lockdowns in New South Wales and other regions, more than the 90K drop expected. The unemployment rate did drop sharply to 4.5% from 4.9%, but this was mainly due to a much sharper than expected drop in the participation rate to 65.2% from 66.0% in July. Pound sterling has been largely immune to political developments this week which included a cabinet reshuffle and new guidance on the government’s winter Covid-19 plans (including the scrapping of the requirement to take a Covid-19 test before entering the UK for vaccinated travellers). UK jobs and inflation data has instead taken the spotlight, and though the latter was artificially boosted by government restaurant subsidies this time last year, both point to a more resilient than expected UK economy, which could support GBP moving forward given it supports the case for BoE rate hikes by mid-2022.

The Day Ahead

From a US perspective, today is all about whether the slightly more positive tone brought about by the strong September NY Fed manufacturing survey can be maintained amid the release of August Retail Sales, the September Philly Fed manufacturing survey and the latest weekly jobless claims numbers. All three will be released an hour before the US cash open at 1330BST. Otherwise, Canadian Housing Starts data for July, set for release at 1315BST might be worth watching if you are a Loonie trader, but the US data is likely going to set the tone for the session.