Equities and risk-linked currencies gained yesterday, while safe-havens came under selling interest, as investors’ morale was boosted by relatively optimistic remarks with regards to the US-China sequel. As for today, the main item on the agenda may be Eurozone’s preliminary inflation data for August, where soft prints could add to speculation that the ECB would indeed proceed with a strong stimulus package in September.
The US dollar traded higher against all but one of the other G10 currencies on Thursday and during the Asian morning Friday. It gained the most versus CHF, SEK, NOK and JPY in that order, while it lost some ground only versus CAD. Among the underperformers, the currencies that lost the least ground were AUD and NZD.
The weakening of the safe-havens and the strengthening of the commodity-linked currencies points to a risk-on trading environment. Indeed, major EU and US indices were a sea of green yesterday, with the positive sentiment rolling into the Asian session today as well. Although China's Shanghai Composite slid somewhat (-0.16%), Japan's Nikkei 225 rose 1.19%.
Investors’ appetite may have been boosted by relatively optimistic remarks with regards to the US-China sequel. Yesterday, China’s commerce ministry said that both nations are holding discussions over the September round of negotiations, and that both sides should create conditions for progress. Later in the day, US President Trump said in a radio interview that talks “at a different level” are scheduled for next Thursday. That said, he did not give any further details.
Yesterday’s headlines may have calmed somewhat fears with regards to a global economic downturn, but we still believe that the market’s response was overstretched and not proportionate to the importance of the aforementioned headlines. It’s the umpteenth time the market listens to such kind of comments, and yet, a deal is not on the table. Maybe there is also some end-of-the-month portfolio rebalancing behind the market’s response. With no fundamental change in the trade saga, and tariffs still planned to kick in on September 1st, we are reluctant to trust a long-lasting recovery in equities, even if investors continue to add to their risk exposure today as well. Unless, the next round of talks results in concrete progress and brings the two nations just a few steps before signing a final accord.
At this point, it is worth mentioning that the index that gained the most (among the major ones) was Italy’s FTSE MIB. The index got an extra boost after Italian President Sergio Mattarella gave a mandate to PM Giuseppe Conte to head a new coalition government between the FiveStar Movement and the Democratic Party (PD), easing uncertainty surrounding the nation’s political landscape.
From the beginning of August, Nasdaq 100 continues to trade within a wide range, roughly between the 7380 and 7770 levels. After hitting the lower bound of it on Monday, the index reversed and travelled higher again, this way getting closer to the upper side of the range. Although there is a possibility for the price to continue climbing further up, we need to see a clear break above the 7770 barrier first. Until then, we will remain neutral and monitor the price action.
As mentioned above, if Nasdaq 100 moves above the 7770 barrier, this could open the door to the 7825 hurdle, marked near an intraday swing low of August 1st and near an intraday swing high formed on the same day. The bulls might initially take a pause around there, but if the buying continues, a break of the 7825 obstacle could send the price to the 7900 level. That level is near the low of July 25th and near an intraday swing high of July 31st.
Alternatively, if Nasdaq 100 falls back below the 7642 hurdle, which is the high of August 27th, this could send the index back to the middle of its current range. This is where the price could test the 7541 area, which acted as a good bouncing ground for the index yesterday. Nasdaq 100 could get a hold up there temporarily, but if there are still not a lot of interested buyers at that price, this could lead the index further down. A drop below the 7541 obstacle could open the door for a test of the 7498 level, marked near the low of August 28th.
As for today, one of the main events on the agenda may be Eurozone’s preliminary inflation data for August. The headline CPI rate is expected to have remained unchanged at +1.0% yoy, while the core one is forecast to have ticked up to +1.0% yoy from +0.9%. That said, bearing in mind that both the German HICP and CPI rates for the month declined, we see the risks surrounding the headline forecast as tilted to the downside. Even if it stays unchanged and underlying inflation ticks up, both rates would still be well below the ECB’s objective of “below, but close to 2%”.
At their latest policy gathering, ECB policymakers officially opened the door to lower rates and added that additional measures, such as a potential QE restart, may also be introduced. According to Eurozone money markets, following recent comments by ECB member Olli Rehn, who said that “it is important that we come up with a significant and impactful policy package”, investors are now pricing in more than a 10bps cut in the deposit rate for the upcoming gathering, despite the better-than-expected PMIs for August.
Even remarks by ECB member Klaas Knot that a resumption of QE is not needed, were not enough for market participants to alter their view. The euro gained somewhat on Knot’s comments but was quick to give those gains back and trade even lower, suggesting that traders saw this as an outlier view rather than the consensus. Giving an extra reason for EUR-traders to keep that view may have been comments from incoming ECB President Christine Lagarde, who said that the ECB has the tools to tackle a downturn and must be ready to use them if needed. Thus, another set of soft inflation data could add to speculation that the ECB would indeed proceed with a strong stimulus package in September.
From the beginning of this week, EUR/USD continues to move lower and seems it may be heading towards the current lowest point of August, at 1.1026, reached on the 1st day of the month. Also, the pair is trading below its short-term tentative downside resistance line taken from the high of June 28th. For now, we will remain bearish, especially if we see a drop below the above-mentioned 1.1026 level.
If the rate falls below the 1.1026 hurdle, this would attract more sellers into the game, as EUR/USD would confirm a forthcoming lower low. The pair could then slide to the psychological 1.1000 zone, or even to the 1.0985 area, which is the intraday swing low of May 7th, 2017. The rate might get a hold up there initially, or even retrace slightly back up. But if it remains below the 1.1026 barrier, the bears could see this as a good opportunity to take advantage of the higher rate and push it down again. If eventually the 1.0985 zone surrenders to the sellers, its break may clear the path to the next possible support area, at 1.0935, marked near the high May 12th, 2017.
On the other hand, given that the pair had distanced itself from the aforementioned downside line, it may correct slightly higher, especially if it climbs back above the 1.1073 barrier, marked by the low of August 28th. A few buyers could try and lift the rate to the 1.1150 hurdle, which is the high of August 27th, a break of which may send EUR/USD further north. This is when we will aim for a test of the above-discussed downside line, which may provide additional resistance.
In the US, personal income and spending for July are coming out, alongside the core PCE index for the month. Personal income is anticipated to have slowed to +0.3% mom from +0.4%, while personal spending is forecast to have accelerated to +0.5% mom from +0.3%. Bearing in mind that the monthly earnings rate for July remained unchanged, we would consider the risks surrounding the income forecast as tilted somewhat to the upside. The case for accelerating spending is supported by the acceleration in retail sales for the month.
Passing the ball to the core PCE index, the Fed’s favorite inflation metric, the forecast suggests that the yoy rate remained unchanged at +1.6%. That said, bearing in mind that the core CPI rate for the month ticked up, we see the risks surrounding the PCE forecast as skewed to the upside. That said, although this would bring the PCE index closer to the Fed’s 2% objective, we doubt that it could derail policymakers from pushing the cut button when they meet next. Last Friday, Chair Powell himself repeated that the Fed would “act as appropriate” to keep economic expansion on track, while both the US and China announced fresh tariffs on each other’s goods. Despite yesterday’s relatively optimistic remarks with regards to trade talks, further escalation cannot be ruled out yet in our view, which means that the risks of an economic downturn are far from dissipated.
From Canada, we have GDP data for June and Q2. The monthly rate for June is forecast to have ticked down to +0.1% mom from +0.2%, but the annualized qoq rate for the whole Q2 is anticipated to have surged to +3.0% from +0.4%. At their latest meeting, BoC policymakers kept interest rates unchanged and noted that the degree of accommodation provided by the current rate remains appropriate, staying among the very few major central banks that have not turned their eyes to the cut button, although they appeared concerned with regards to the US-China trade conflict.
The last employment report disappointed, but inflation data for the month came in better than expected. Although a strong annualized GDP rate would suggest that Canadian policymakers could maintain their neutral stance for a while more, the latest tensions between China and the US raised doubts on that front and this is evident by Canada’s OIS (Overnight Index Swaps), according to which market participants see an almost 75% chance for a rate cut by the end of the year.
Finally, during the Asian morning Saturday, China’s official PMIs for August are due to be released. Both the manufacturing and non-manufacturing indices are expected to have ticked down to 49.6 and 53.6, from 49.7 and 53.7 respectively.
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