Markets Today: Three reasons to be cautious

After a positive APAC lead, equities came under pressure again on Friday night following news the Biden administration was considering a new investigation into Chinese subsidies and their damage to the US economy

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Todays podcast

Overview Ain’t No Fun

 

  • S&P 500 records longest losing streak since February. Dow and NASDAQ down too
  • USD regains mojo on Friday and closes higher on the week
  • 10y UST lead move up in core yields on Friday. Gilts and Bunds higher on the week
  • Biden administration discuss a new investigation into Chinese subsidies
  • US PPI stronger than expected. Supply bottlenecks not easing (yet?)
  • Fed Mester still keen for QE tapering this year. Calls on Fed goals clarity
  • Today’s Calendar: NZ ANZ business survey, Japan PPI, China MTLF
  • Coming Up this week: RBA’s Lowe, AU Employment, NZ GDP, US CPI and China’s August activity readings

 

Ain’t no fun waiting ’round to be a millionaire
Ooo it ain’t no fun, waiting ’round to be a millionaire – AC/DC

After a positive APAC lead, equities came under pressure again on Friday night following news the Biden administration was considering a new investigation into Chinese subsidies and their damage to the US economy. US equities closed lower on Friday with the S&P 500 down for a fifth day in row, its longest losing streak since February. 10y UST yields lifted on Friday with a stronger than expected US PPI print and rise in commodity prices at play. The USD regained its mojo, edging small gains on the day and closing higher on the week.  AUD starts the week at 0.7357 and NZD at 0.7118.

News during our Friday session that President Biden and Xi were back on speaking terms, proved to be a short-lived positive lift on sentiment . While the fact that the two leaders spoke to each was a welcome development, their first chat since February, details of the call revealed a degree of frustration on the US’s amid a sense of lack of cooperation from China’s part. Then, during the overnight session, headlines hit the screen revealing the Biden administration was considering a new investigation into Chinese subsidies and their damage to the US economy as a way to pressure Beijing on trade. So, while initially markets traded positively on the hopes that a restart in high-level dialogue might eventually lead to a reduction in Chinese tariffs, news during the overnight session delivered the opposite outcome. That said, it is unclear when the White House will announce the outcome of its review and as we know from the Trump era, any action against China is likely to come with retaliations. US farmers, for instance will be watching development very closely.

In the end, for equity markets, what looked like the end of a losing streak for the S&P 500, contributed to yet another down day for the US equity index. The S&P 500 closed 0.77% lower, extending it daily decline to a fifth day, its longest losing streak since February. The NASDAQ and Dow also fell on Friday, -0.87% and 0.78% respectively while in Europe the Euro Stoxx 600 fell 0.26%.  A 3.3% fall on Apple was another negative dynamic on Friday, the  iPhone maker was ordered to make a major change to the way it generates money from its App Store and some commentators noted this could be the beginning more lawsuits against Apple, pointing to the risk of futher downward pressure on the share price.

The Nikkei was the outperformer on the week (+4.3%) boosted by hopes of new fiscal stimulus as the LDP leadership election approaches (September 29). On this score worth noting, Japan’s vaccine czar Taro Kono officially declared his candidacy and signalled the need for a change of thinking on economic policy and a long-standing 2% price target. Kono also said emergency spending that requires bond issuance couldn’t be avoided while commentators also noted that Kono said monetary policy should still be left up to the Bank of Japan to some extent.

Equities Performance

In economic data, US PPI inflation was slightly higher than expected, but the market’s focus is much more on the CPI release, which comes out on Tuesday night. PPI rose 0.7% last month vs 0.6% expected . A 1.5% increase in trade services, which measure changes in margins received by wholesalers and retailers, accounted for two-thirds of the broad rise in services and of note transportation and warehousing prices shot up 2.8%. Again, reflecting ongoing supply and restocking issues in the US economy.

In contrast to the negative vibes in equities, commodities had a nice Friday with Copper +3.93% and Aluminium +2.98% the notable outperformers, although oil prices  up 2% also did very well. The latter reversing the previous day decline following news that China was using its reserves to push prices lower. On the week oil prices were little changed, metals were higher and iron ore was the big loser, down 10%.

Commodities Performance

The increase in commodity prices helped US and European bond yields rebound on Friday from their post-ECB meeting falls.   The US 10-year rate was 4bps higher on the session, to 1.34%, while the 10-year German rate increased 3bps, to -0.33%.  The US 10-year rate is still within the broad 1.10% – 1.40% range that has been in place for the past two months, albeit towards the upper end.  Likewise, US 10-year inflation expectations (so-called ‘breakeven inflation’) are near the top of the recent 2.20% – 2.45% range.

Speaking on Friday, Fed Mester, who becomes a voting member next year, said that she would still like to begin tapering asset purchases sometime this year despite weak August jobs report. Mester also called on the Fed to provide more clarity on how they are assessing their maximum employment and inflation goals.  Specifically, Mester remarked that “A statement that offered more of an explanation of the FOMC’s views on the factors affecting current inflation readings, the outlook for inflation, and the risks around that outlook would give the public a better sense of the FOMC’s assessment than merely saying that elevated readings largely reflect transitory factors,”

The increase in commodity prices helped US and European bond yields rebound on Friday from their post-ECB meeting falls.   The US 10-year rate was 4bps higher on the session, to 1.34%, while the 10-year German rate increased 3bps, to -0.33%.  The US 10-year rate is still within the broad 1.10% – 1.40% range that has been in place for the past two months, albeit towards the upper end.  Likewise, US 10-year inflation expectations (so-called ‘breakeven inflation’) are near the top of the recent 2.20% – 2.45% range.

Speaking on Friday, Fed Mester, who becomes a voting member next year, said that she would still like to begin tapering asset purchases sometime this year despite weak August jobs report. Mester also called on the Fed to provide more clarity on how they are assessing their maximum employment and inflation goals.  Specifically, Mester remarked that “A statement that offered more of an explanation of the FOMC’s views on the factors affecting current inflation readings, the outlook for inflation, and the risks around that outlook would give the public a better sense of the FOMC’s assessment than merely saying that elevated readings largely reflect transitory factors,”

UST yield changes over the past week

Risk aversion in the air gave the USD a safe haven bid on Friday, helping the green back end the day marginally higher with NZD the only G10 pair that managed to record small gains against the USD on the day . NZD closed the week at 0.7110 and trades at 0.7118 this morning. Both the AUD and NZD traded higher during our session on Friday following the Biden and Xi phone call news, the AUD traded to an intraday day high of 0.7410 while NZD climbed to 0.7156, but then as sentiment turn south during the overnight session, both antipodean pairs came under pressure. The AUD ended the week at 0.7357, pretty much where it currently trades early this morning.

A strong Canadian employment didn’t provide much support to the CAD (-0.2%), even as the market slightly brought forward the expected timing of Bank of Canada interest rate hikes.  Canada saw a higher-than-expected 90k increase in employment in August and a 0.4% drop in the unemployment rate, to a post-Covid low of 7.1%.  The Bank of Canada is expected to be one of the first developed market central banks to raise rates, with the market fully pricing the first hike in September next year.

CAD and AUD were the notable underperformers last week, reversing most of the gains from the previous week while NOK was the only G10 pair that managed to keep up with the USD on the week.

FX Performance

 

 Coming Up

Is a relatively quiet start to a busy week that includes RBA’s Lowe, AU Employment, NZ GDP, US CPI and China’s August activity readings among some of the highlights.

New Zealand will be in focus this morning with the September preliminary ANZ business survey due for release as well as a government update on COVID restrictions. New Zealand also gets food prices for August with Japan PPI (0.3% exp vs 1.1% prev.) also out this morning. China’s decision on its 1-Yr Medium-Term Lending Facility Rate could happened anytime between today and Thursday.

Looking at the rest of the week RBA Governor Lowe speaks on Tuesday to the ANIKA foundation in a speech titled Delta, the Economy and Monetary Policy. On the data side, the August Employment numbers loom large on Thursday. NAB expects employment to decline 150k in August, and for the unemployment rate to increase two tenths to 4.8%, but the extent of a fall in hours worked data will be a better indicator of the current labour market impacts of lockdowns given participation effects and definitional nuances.

The US gets CPI figures on Tuesday with headline reading seen pulling back from 5.4% to 5.3%yoy, while core CPI is forecast to remain at 4.3%yoy. Retail sales for August on Thursday will be closely watched for further signs of waning economic momentum.

China publishes its August Activity readings on Wednesday while the UK gets labour market data on Tuesday, Inflation on Wednesday and retail sales on Friday, all for August.

 

Market Prices

 

 

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