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Equity markets are in the red on the final trading session of the month. Sentiment took a turn for the worse again in Asian markets overnight, with the Nikkei 225 dropping 1.8% on concerns about the spread of Covid-19 in Japan and lockdown extensions, while the Hang Seng dropped 1.3% and Shanghai Comp. dropped 0.4% as concerns about regulatory action from Chinese authorities and about a slowing Asian growth impulse lingered. These latter two indices look on course for respective losses on the week of around 6.0%, despite the best efforts of Chinese authorities to sooth concerns about recent regulatory actions in calls with banks/financial institutions. This is weighing on sentiment in European markets, with the Stoxx 600 down about 0.6% just after midday European time, despite the positive impulse from decent earnings from a number of major European banks. US equities are also in the red, with underperformance being seen in Nasdaq 100 futures, which are down about 1.1% in premarket trade in wake of last night’s underwhelming earnings from tech giant Amazon. E-mini S&P 500 futures are down about 0.6% and Dow futures are down about 0.2%, though the former continues to trade within this week’s 4380-4420ish ranges, leaving it less than 1.0% from record highs.
Similarly, the Stoxx 600 is only about 0.7% below record levels, having remained supported above 460 after surging above 464 for the first time yesterday. Despite the modest losses being seen across US and European equities on Friday, global equity indices are still on course for what will be a sixth straight month of gains. Equity analysts for the most part seemingly continue to view market conditions as strong, given expectations for a continued vaccine-fuelled global economic recovery, continued accommodative policy from central banks and a continued lack of alternative investment options as real yields on developed market bonds remain close to record lows. This week’s FOMC meeting does not seem to have changed such expectations and their current trajectory towards a gradual tightening of monetary policy seems to please equity investors. Weaker than expected Q2 GDP data yesterday (the annualised quarterly rate of US GDP growth came in at 6.5%, below forecasts for 8.5%) and higher than expected initial jobless claims only acts to reduce the argument for any “rush” towards tightening at the FOMC, though jobs data next week and inflation data later today have more of an impact on thinking at the world’s most important central bank. For now, expect bad data to be good for equity markets, for in line with expected data to be neutral and very strong data to perhaps be slightly negative.
Turning now to other asset classes; US bond yields are on the back foot, weighed on by the aforementioned week US data yesterday ahead of today’s key Core PCE (inflation) print. 10-year yields are back below the 1.25% mark down about 2bps on the session, though to be fair this leaves them largely within recent ranges. European yields are flat, despite a hotter than expected preliminary estimate of Eurozone CPI in the month of July (YoY rate came in at 2.2% versus forecasts for 2.0%) and a stronger than expected first estimate of Q2 GDP growth (the QoQ rate came in at 2.0% versus forecasts for 1.5% growth). The Eurozone unemployment rate also saw a larger than expected drop in June to 7.7% from 8.0% in May. The combination of weak US data yesterday and strong Eurozone data today is providing a helping hand to EURUSD. The pair has rallied above the 1.1900 level for the first time since this time last month.
This coincides with broad dollar weakness that has left the DXY at around one-month lows below the 92.00 level. Profit taking in wake of the FOMC earlier in the week, whose incrementally more hawkish message was already “in the price”, is being cited as another reason for today’s weaker dollar. Month-end dollar selling could also be a factor given models from a number of banks pointed at this. ING are not convinced the recent drop in the dollar will turn into a more meaningful move lower; “we wouldn’t read too much into the recent USD correction or conclude this is a sign that the greenback’s momentum may have peaked already, at least not just yet… the global reflationary story remains mixed at best and evidence that China-related sentiment remains volatile due to fears of more regulatory crackdowns by Beijing could continue to have the effect of keeping many investors jittery and exacerbate portfolio outflows from emerging market assets… (and) both factors are dollar positives”. Meanwhile, investors reasons that though strong Eurozone might be giving EURUSD a boost, it will not change monetary policy expectations given the ECB’s recent dovish shift on rate guidance to reflect its newer, more dovish inflation target.
Looking at the performance of G10 currencies on the day; things are reasonably subdued with, with GBP, EUR and CHF each up about 0.1% versus the buck on the session, CAD and NZD flat, JPY down about 0.1% and AUD down about 0.3%. In other words, USD weakness has eased for now after yesterday’s pressure, though a softer than expected Core PCE print today (which would feed further into the Fed’s transitory inflation narrative) could add momentum to the bearish push. With regards to the individual G10 currencies; GBP has had a strong week given falling Covid-19 infections reducing fears of a return to economic restrictions, helping GBPUSD move back towards the 1.4000 level, while AUD has been an underperformer this week on a combination of bearish Aussie factors including 1) lockdown extensions in Australia resulting in further downgrades from analysts to their Q3 growth forecasts, 2) strife in Chinese equity markets due to regulations and downside in Chinese base metal (a key Aussie export) prices due to fears about economic growth there and 3) calls for a dovish shift in RBA QE policy (i.e. for them to accelerate the pace of bond buying) given recent economic weakness. AUDUSD thus continues to struggle to reclaim the 0.7400 handle, with resistance in the form of the 21DMA at 0.7420 not helping.
Finishing off with a quick look at key commodity markets; oil prices are very slightly lower on the day, tracking the broad downside being seen in the global equity space, but look set to end the week relatively on the front foot, with WTI prices remaining supported for now in the mid-$73.00, having gained about 2.0% from week starting levels close to $72.00. There haven’t been any crude-oil specific developments this week, but confidence that global oil demand will continue to recover has been given a boost by 1) the fact that infections are falling in the UK, which is seen as a few weeks ahead of other highly-vaccinated developed nations in the current Covid-19 wave, 2) a change in tone from international travel authorities with regards to international travel (it looks as though travel restrictions between highly vaccinated nations will ease sooner than expected and this has given travel & tourism industry stocks in Europe a boost) and, finally, 3) the fact that various high frequency mobility tracker metrics have continued to show mobility holding up in highly-vaccinated developed countries despite rising Covid-19 infection rates. All suggests that oil demand will continue to grow in the coming months and that crude oil markets will remain in a deficit for at least the rest of the year. Finally, amid the sudden onset of USD weakness amid post FOMC selling and yesterday’s weak US economic data releases, gold has finally had an opportunity to shine. The precious metal has rallied back towards monthly highs and currently trades just under the $1830 mark, having managed to jump above its 200DMA at $1822. Remember that US real yields fell to fresh record lows this week, so as long as they remain subdued and the dollar doesn’t post too strong a rebound from current levels, gold should remain supported, and could advance above July highs at $1834 and head on towards pre-hawkish June FOMC meeting levels above $1850. This latter assumption (for more USD weakness) is absolutely no guarantee, however, given the reasons outlined by ING above.
The Day Ahead
US data at 1330BST will capture the headlines today. Core PCE data for the month of June is out and is the Fed’s favoured gauge of inflation. Markets expect prices to have risen at a YoY pace of 3.7% in July, up from last month’s 3.4%. A stronger than expected reading is unlikely to trigger too much of a reaction given markets (for the most part) still seem to firmly believe in the Fed’s transitory inflation argument. But a weaker than expected print, especially if the YoY rate of inflation falls compared to last month, might lead to a “peak inflation” narrative, which could trigger some further unwinding of the US reflation trade (i.e. more downside in the dollar and in US bond yields as inflation expectations fall, combined with likely upside in equities on expectations for a more accommodative Fed in the years ahead). US Personal Income and Spending data, also for the month of June, and the monthly estimate of Canadian GDP growth for the month of May are all also out at 1330BST and are worth a watch. Then at 1500BST, we get the final consumer sentiment survey from the University of Michigan.
