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So far it’s been a moderately risk off start to the week; global equities are for the most part trading lower, risk-sensitive commodities (crude oil and industrial metal prices) are mostly lower, risk-sensitive currencies (which in the G10 include AUD, CAD and NOK) are underperforming and safe haven assets such as bonds (US yields are down) and the yen, Swiss franc and US dollar are performing better. There are three main reasons being cited for the market’s cautious tone this morning; 1) weaker than expected Chinese economic data for the month of July which showed the YoY pace of growth in retail sales, industrial production and fixed asset investment all slowing much more than expected, which Chinese authorities blamed on Covid-19 containment measures and natural disasters (i.e. the severe flooding in the north in July), 2) concerns about the ongoing acceleration in the spread of the Covid-19 delta variant in Asia (lockdown are being reimposed and extended across Australia and state of emergencies in Japan are being widened) and the US and, finally, 3) the shockingly rapid collapse of the Western backed Afghan government over the weekend; the Taliban entered Kabul (effectively meaning they have taken control of the country) and are expected to announce a new Islamic Emirate of Afghanistan, all whilst US evacuation operations in the country’s capital continue.
The long-term broader market implications of the return to power of the Taliban in Afghanistan remain unclear, and this uncertainty, if nothing else, might be helping underpin safe haven assets this morning, which are already getting a boost from bad Chinese data and Covid-19 concerns. Following a downbeat Asia session, where stronger than expected Japanese GDP data for Q2 failed to outweigh the above noted negatives, European equity bourses are trading in the red across the board; the Stoxx 600 is down about 0.5%, snapping a ten-session winning streak that saw the index surge to unprecedented levels following on from a much stronger than expected earnings season. JP Morgan are still bullish on the index moving forward and look for another 4-7% upside before the year’s end. Across the pond, major US equity index futures are modestly lower, with E-mini S&P 500, Nasdaq 100 and Dow futures each down about 0.25% prior to the open. As with European equities, US bourses had also been pressing on to record levels in recent days and today’s modest pullback from these levels ought not be any major cause for concern just yet.
Turning to US bond markets; 10-year yields are admittedly off lows but are still down by about 2bps on the day around 1.28% having dropped sharply from above 1.35% highs last Friday. Safe-haven demand and weak Chinese data on Monday have helped keep yields under pressure, but a big catalyst of the recent downside was a much weaker than expected preliminary University of Michigan Consumer Sentiment survey for the month of August, which was released last Friday and showed one of the largest MoM drops in the survey’s history. Weakness in the survey was as a result of renewed pandemic fears amongst consumers, which may strengthen some of the arguments being made by more dovish FOMC members for a more patient unwinding of the central bank’s bond buying programme. Certainly, the survey’s potential dovish implications for the FOMC and associated fall in US bond yields has weighed on the US dollar. The Dollar Index (DXY) was trading close to multi-month highs around 93.00 last Friday prior to the release, but then slipped back to 92.50. Amid the aforementioned increased demand for safe havens, the DXY is this morning doing a little better and has managed to crawl back into the 92.60s. The dollar, and indeed also US bond yields, may be able to derive some further bullish traction later in the week if there is a hawkish tone from Fed Chair Powell’s speech on Tuesday and the FOMC minutes on Wednesday. But we have a fair number of US data this week as well and last week’s bad consumer confidence data has raised the prospect of more disappointment; the closely followed NY Fed Manufacturing survey for August is out today ahead of the Philly Fed Manufacturing survey on Thursday, both of which will provide a timely update on the state of US manufacturing. Meanwhile, July retail sales data might show US consumers taking a hit due to rising Covid-19 infection rates. Preliminary Markit PMI surveys of sentiment in the manufacturing and services sectors so far this month will also be out on Friday and worth a watch.
Elsewhere in G10 FX markets; as noted, havens JPY and CHF are doing well, with USDJPY down about 0.2% to under 109.50 and USDCHF down about 0.15% to under 0.9150. The Aussie is down about 0.5% on the session versus the buck, pushing AUDUSD back under 0.7350 ahead of the release of RBA minutes on Tuesday, while downside in crude oil prices is weighing on the Loonie (which is down about 0.3% versus the US dollar) ahead of a raft of key Canadian data releases later this week that include July CPI and retail sales data. The kiwi is outperforming its fellow non-US dollar counterparts ahead of what is expected to be a hawkish outcome from this Wednesday’s RBNZ policy meeting; a 25bps rate hike and guidance for further hikes before the end of the year. EUR and GBP are both quite subdued, with EURUSD around 1.1775 and GBPUSD comfortably above 1.3850, with the former set to take its cue from the US dollar this week ahead of Eurozone PMIs on Friday, while traders of the latter will also be taking note of some key UK data releases including the latest CPI, retail sales, jobs and PMI reports (PMIs also set for release on Friday).
The Day Ahead
As noted, the August NY Fed Manufacturing survey is out today at 1330BST and will be closely scrutinised as an early indication into the health of the US manufacturing sector. At the same time and likely to have less of an influence on markets is the release of Canadian Manufacturing Sales data for the month of June. Otherwise, things are likely to be quiet as traders await key risk events later in the week and mull overarching market themes such as the China slowdown, the pandemic and the fast-evolving geopolitical situation with regards to Afghanistan and the surrounding region.
