Global markets are seeing a mixed/somewhat subdued start to the week, which is not too surprising given the dearth of upcoming key data releases, central bank events (RBA, RBNZ, RBI) and further developments in key political themes. There will also be a heavy slate of central bank speak. Amid low liquidity conditions last night given the absence of Chinese, South Korean and New South Wales (Australia) market participants, all on account of public holiday market closures (China is shut for the rest of the week), sentiment was downbeat. Speculation that teetering Chinese property developer Evergrande is set to default on a maturing $260M bond (which was due on Monday and needs to be paid by the end of the week) has begun the countdown to the companies first official default, though shares were halted amid reports that a property developing rival might be on the verge of buying a 51% stake of Evergrande’s main property management unit, which could sure up the companies’ finances in the short-term. News of the most severe incursion by Chinese fighter jets into Taiwanese airspace yet, which drew harsh criticism from the US, may also have rattled some nerves and the Hang Seng ended the session down over 2.0%, the Nikkei 225 dropped over 1.0% and the Kospi 50 was down about 1.6%. Japanese markets haven’t been too responsive to recent political developments; new PM Kishida was recently confirmed by parliament and is set to pick his cabinet ahead of the general election which is slated to take place on 31 October (LDP leader Kishida is slated to be re-elected as PM).
European stocks, meanwhile, trade modestly in the green with the Stoxx 600 up about 0.1% as the pan-European index continues to find decent support at the 450 level. Conversely, in pre-US open trade, US index futures are mostly in the red, with S&P 500 futures having failed to hold above the 4350 level overnight and ebbing back towards 4300. US market sentiment got a slight last Friday when the September ISM manufacturing survey held up better than expected (new orders were strong) despite further evidence of severe supply chain disruptions and actually strengthened back above the 60 level. Core PCE, meanwhile, continues to follow in the footsteps of US CPI and on Friday was revealed to have hit 30-year highs at 3.6% YoY in August.
The major focus for US markets in the week ahead will be 1) how labour market data affects the Fed’s tapering plans – consensus is that as long as the data isn’t catastrophic (the median forecast is for about 500K jobs to have been added in September), that should cement expectations for an official taper announcement in November. Though the Fed may try to say otherwise, they are clearly becoming more worried about inflation, which seems to be lowering the bar for the gradual removal of extraordinary stimulus measures implemented at the start of the pandemic, 2) can Congress reach a deal to suspend or extend the debt ceiling and can the Democrats find a compromise on Biden’s economic agenda (i.e. on the infrastructure and social spending packages). Both of these themes have the ability to drive macro sentiment; the dollar has been striding higher in recent weeks and strong US data (ISM Services PMI on Tuesday or NFP on Friday) could help inject further upside impetus, while any evidence of progress towards deals in Congress could support risk appetite, but simultaneously seem unlike to dent the dollar too badly.
Other key macro themes include the ongoing chatter about how the energy crisis might drive stagflation – focus will remain on natural gas prices and any measures taken by governments to shelter consumers from gas price rises in the near term (France just announced that it would freeze in place prices until next April) and economists will likely be reassessing their economic forecasts for Europe (where the crisis is most acute) but also Asia and the US to reflect this increased and unavoidable burden on consumers. OPEC+ meet today and all signs point towards the cartel sticking to its previously outlined plan to increase output by 400K barrels per day, despite growing calls for more output hikes as the natural gas shortage also pushes other fossil fuel (like coal and oil) prices up – the outlook for crude oil prices remains strong this week and WTI is currently trying to push above $76.00 to test annual highs. Elsewhere, central banks will be in focus with the RBA and RBNZ deciding on policy; the former is unlikely to make any market-moving changes to policy or policy guidance, while the latter is expected to be just the second G10 central bank to hike interest rates (by 25% to 0.5%) since the start of the pandemic (the Norges Bank was the first to move a few weeks ago, hiking rates to 0.25% from zero). The main focus for kiwi markets will be the RBNZ’s guidance for further rate hikes, given this hike is fully priced in by markets.
In other key market themes to note this week, US/China
With major global equity bourses sitting a few percent below recent record highs set back at the start of last month after an uptick in volatility in recent weeks that has also seen developed market bond yields edge up, but the safe-haven US dollar perform very well, market strategists are assessing the outlook for asset classes moving forward; one line of thinking is that markets might be taking an overly pessimistic view on things at the moment. Sure, there is a “wall of worries” about 1) financial stability (given the Evergrande situation) and economic growth in China (the country’s credit impulse remains in sharp contraction, a lead indicator or slower growth ahead), 2) inflation given sharply higher energy prices and 3) the fact that major central banks are gradually moving closer to removing extraordinary stimulus. But, as has happened in the past, as the “wall of worries” has failed to come into fruition, that can be a bullish impulse for stock markets and risk assets. Some analysts are pointing out that the Covid-19 news is getting better; fears of overwhelmed hospitals in much of the already reopened “West” from a few months ago have not materialised and the news on Friday about a new drug from Merck that could cut Covid-19 deaths in half (vaccines already significantly reduces chances of hospitalisation) only further contribute to the idea that societies and markets will become increasingly used to living with the virus (and thus ignoring it) in the coming months. Meanwhile, some analysts suggest that some of the recent growth fears may recede in the coming months, as base effects again come to the rescue given that lockdowns were reimplemented across many Western economies during Q4 2020 into Q2 2021. That should keep YoY GDP growth rates looking strong, even if QoQ growth momentum isn’t as good as hoped a few months earlier.
Looking quickly at what FX and bond markets are saying this morning; despite the downbeat tone to US equity markets in pre-open trade, FX markets are a little more risk on, with safe havens USD and JPY lagging and the DXY slipping back to the south of the 94.00 level, while NZD leads that pack (ahead of an RBNZ rate hike on Wednesday), up 0.5% on the day versus the buck, followed by GBP (despite recent negative Brexit rhetoric, with the UK threatening to trigger article 16 to override the NI protocol), up about 0.4% on the session. Stable weekly sight deposits according to this morning’s latest data has helped CHF also gain nearly 0.4% versus the buck while EUR, CAD and AUD are all up 0.2-0.3%. In terms of bonds, the US yield curve is a little steeper and yields are higher (2Y +1bps, 10Y +3bps to just under 1.50% and 30Y +3bps to 2.07%), while yields in Europe are modestly higher.
Today, markets will be focused on the outcome of the OPEC+ meetings and an announcement from the US Trade Secretary about China, which is expected to say that China has failed to live up to its Phase One trade deal commitments. Otherwise, there is US Factory Order data for the month of August out at 1500BST.
