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Risk appetite is starting the month of August on the front foot. Global equity markets are enjoying a decent rebound following last Friday’s more negative tone; in Asia, the Nikkei 225 and Shanghai Composite indices were both up nearly 2.0% and the Hang Seng index was up nearly 1.0%, despite weaker than expected Chinese Caixin Manufacturing PMI data released overnight. Traders cited “dip-buying” and hopes for economic support from Chinese policy makers, as hinted at by Chinese economic analysts cited by the State-run China Daily over the weekend, as behind the rally in the region. Meanwhile, over in the US, bipartisan US Senators finalised the text of a $1T infrastructure spending package, which paves the way for the bill to be finalised with a matter of days. The combination of the positive impulse from the Chines/Asia equity rebound and US fiscal optimism is giving equities a lift in the US and Europe this morning, with E-mini S&P 500 futures up about 0.6% in pre-market trade and back above 4400, meaning the S&P 500 index could well hit record highs today, and the Stoxx 600 index also up 0.6% and having already hit record levels above 464.50 this morning. Earnings season in both regions is now drawing to an end and has broadly been a tailwind for major US and European equity indices, many analysts think; according to Refinitiv data, 89% of the nearly 300 S&P 500 companies to report so far on the latest quarter reported better than expected earnings, with earnings now expected to have climbed an average of 89.8% in Q2, up from forecasts for earnings to have risen 65.4% back at the start of July. Moreover, according to Refinitiv data, 67% of recent earnings reports from Stoxx 600 companies have exceeded expectations. Broadly stronger-than-expected earnings help to ease concerns that equity valuations may be unduly elevated.
Turning to other asset classes; US and European bond markets are seeing a comparatively more subdued start to the week. The US treasury yield curve has steepened very slightly (5-year yields -1.5bps and 30-year yields +1.5bps), but 10-year yields are broadly unchanged thus far on the session around 1.23% and continue to trade within recent ranges either side of the 1.25% mark. Yields in Europe are mostly flat, meanwhile. Subdued price action is not overly surprising given the plethora or risk events coming up this week that include US ISM Manufacturing PMI (today), ISM Services PMI (Wednesday) and NFP (Friday), as well as rate decisions from the RBA, BoE and a plethora of other EM central banks (including the RBI, BoT, BCB, CBR and CNB). We also get the US Treasury’s quarterly refunding announcement on Wednesday (i.e. how much they will be borrowing next quarter) which could trigger some choppiness in bond markets. The US data will undoubtably be the main driver of the macro tone, given the Fed’s data dependent policy stance right now, where they want to see actual progress towards their policy goals. Speaking of the Fed; influential FOMC member (and touted future Fed Chair) Lael Brainard was speaking to the press over the weekend and seemingly played down the importance of the coming jobs data, the Jackson Hole Central Bank Symposium event later this month and even the September FOMC meeting. She essentially said she wants to see where the US labour market is at in the month of September before making an assessment on whether “substantial” progress has been made towards the Fed’s employment goal (remember the Fed wants to see substantial progress towards its goals before it announces a tapering of its QE programme). That would suggest that Brainard will not support a taper announcement at either Jackson Hole or the September FOMC, regardless of how the jobs data comes out in the interim. Given Brainard generally represents consensus thinking on the FOMC pretty well, her stance might suggest that even if this month’s NFP is really strong (leading some to call for an immediate taper announcement) or really weak (leading some to call for a delay to the taper announcement), the FOMC might be willing to look through this week’s data. This is in fitting with the FOMC’s usual approach to analysing US data, where the bank does not look too much into individual data releases, but rather observes trends (like a three-month average NFP number).
Looking at commodities; Brent and WTI prices are both about 1.0% lower this morning, the former falling back towards $73.00 and the latter falling back under $75.00. Market commentators/analysts are citing Asia Covid-19 delta variant fears as one factor that is weighing on prices at the start of the month; new Covid-19 cases were reported in 14 different Chinese provinces last month and there were reports of officials discouraging resident in Beijing from travelling unless necessary. The country’s zero-Covid-19 policy requires it to enforce strict lockdowns if infection rates rise too much, a risk to crude oil demand. Meanwhile, lockdowns in other large emerging Asian economies such as Thailand and the Philippines continue to be tightened or extended, while in Australia, Brisbane is the latest city to go into lockdown and the state of Queensland will now be in lockdown for another week. So oil demand remains at risk due to possible lockdowns to contain Covid-19 contagion in low vaccine coverage regions of the world (like Asia). But confidence remains high that high vaccine coverage parts of the world, such as Europe and North America, will not go back into lockdown despite rising infection rates, with US NIH Director Dr Fauci over the weekend talking about how the US is unlikely to return to the kind of lockdowns seen in 2020 and Q1 of this year. Crude oil market participants will need to continue to balance these demand-side risks going forward, but should also keep an eye on supply-side factors; as expected, OPEC+ rose to the most since April 2020 last month as the cartel continues to ease recent output cuts. Elsewhere, geopolitical tensions are elevated in the Middle East after an attack on an Israeli tanker last week that the US and UK think Iran was behind. Israel will likely respond soon. All the while, an NYT article over the weekend was negative on the state of US/Iran negotiations and the fading prospect for the two nations to return to compliance to the 2015 JCPOA Nuclear Pact. Overall for crude oil markets, it seems likely that prices will remain underpinned as long as the Covid-19 outbreak in China does not get too severe, given continued expectations for global oil demand to continue to recover and for markets to remain under-supplied for the rest of the year. If US/Iran talks fail, this only further underpins the undersupply narrative (though OPEC+ countries will raise output to make up for lower Iranian output eventually, meaning the net difference will be very little).
Finally, turning to FX markets; the US dollar is a little softer this morning, though G10 FX markets are broadly subdued ahead of key risk events later in the week. The DXY is currently consolidating around the 92.00 level, about 0.2% down on the day amid a lack of demand for safe haven currencies. Weaker than expected Chinese PMI data and downside in Chinese steel and iron ore prices overnight seems not to have weighed too heavily on the antipodes, with the AUD up about 0.2% and NZD flat versus the buck on the day. Aussie traders will be keeping their toes out of the water ahead of tonight’s RBA rate decision, while Kiwi traders will be biding their time ahead of pivotal jobs data during the Wednesday Asia Pacific session that could make or break the prospect for a rate hike from the RBNZ later in the month. GBP, JPY and EUR are all roughly flat also, with sterling and the euro unmoved by broadly in line with consensus final manufacturing PMIs released this morning, as well as stronger than expected German retail sales numbers. GBP traders are likely to be cautious ahead of Thursday’s BoE rate decision.
The Day Ahead
US ISM Manufacturing PMI data is scheduled for release at 1500BST today and will undoubtedly be the main event of the session. Markets expect the headline index number to remain at elevated levels above 60.0. A weaker than expected number could trigger “peak-US growth rate fears” that could weigh modestly on USD. Otherwise, it ought to be a fairly quiet session.
