We head into the Asian trading session still scratching our heads, trying to decipher the many moving parts in markets, while looking at a tape that is somewhat more constructive.
The variability of the market has been driven by Trump, although, this is fast becoming an evergreen comment, with narrative from the US President that China had been in touch with US trade officials, wanting to get back to the negotiating table. These talks were later denied by Chinese officials, and the market has done a 180 assessment on Trump’s concern for equities, and perhaps he really is worried about the stock market as a voting mechanism on his tenure as President. Either way, the market has shown a clear interest in supporting drawdowns multiple times through August into 2830, and the defined range of 2946 (also the 50-day MA) to 2830 is firmly on the radar, where a breakout should be respected.
Volumes have been on the light side (20% below the 30-day average on the S&P500), which won’t shock given the time of year, although, breadth has been compelling, with 88% of S&P 500 constituents closing higher on the day. Volatility traders haven’t been overly inspired by the moves in the equity markets, with the VIX index lower by 0.55 vols, where at 19.32%, the S&P 500 implied volatility gauge still suggests the US equity benchmark, and presumably global developed markets equities should have daily moves north of 1%. High yield credit has outperformed IG, with the spreads coming in 5bp against investment-grade credit, and again this is hardly a euphoric move.
The leads for Asia
We can see S&P 500 futures sit 1.7% higher than 16:10aest (I.e. the ASX 200 cash close), so this will inspire Aussie equity traders. Although, the move in the S&P500 futures has overshot the net change in the Aussie SPI futures, where the Aussie index futures sit up a mere 18-points, again from 16:10aest. The broader Asia equity region should open a touch stronger, but it will tell us a lot about psychology if the market sells into the opening strength and that it would not surprise me.
Trump aside, the event risk in the form of economic data has been mixed, and clearly, the USD has been the beneficiary here.
In Europe, the German IFO August business climate survey fell to 94.3, and below the consensus of 95.0, where this read came in the lowest since 2012. The expectations survey fell to the lowest levels since June 2009, and it’s no wonder EURUSD was offered from 1.1150 all through European trade hitting a session low of 1.1094 just before 6 am aest. We look ahead to the start of European trade today, not just because UK traders head back to their desks, offering much-needed liquidity to markets. But because we get the German Q2 GDP data (16:00aest), which is widely expected to print the second quarter of economic contraction, which officially puts Germany, the powerhouse of Europe, in a technical recession.
(yellow – German GDP, white – German IFO survey)
US data was a touch more positive, with July durable goods orders increasing 2.1%, with transportation orders increasing 7%, and non-defence capital goods up 0.4%. Dallas Fed manufacturing index increased 10.0 points, which was stronger-than-forecast and arresting three consecutive months where this index has been contracting. Along with the better tone in stocks, rates markets have responded, with fed funds futures now pricing a 10.2% chance of a 50bp cut in the September FOMC meeting, and the fact we saw US 5-year inflation swaps push up 3bp to 1.91%, is also huge reason why the Fed will remain behind market pricing on rates for the time being.
In US trade tonight (00:00aest) we get the August US consumer confidence report, with expectations this falls from 135.7 to 129. It gets quite messy if we get a strong print here, as the market is positioned for tough times ahead and very late-cycle investments, with a very crowded position in recession hedges, such as JPY, CHF, US Treasury’s and gold. Presumably, at some stage, this positioning will need clear validation and require real cracks to emerge in the soft data — one to watch.
AUD outperforms as the G10 proxy of trade
Staying in FX, USDJPY got a working over yesterday, with traders defended the flash crash lows. I am happy to stand pat on this pair for now, with a preference to fade rallies into the top of the recent range of 106.90. AUD was the star of the show on the day, if for no other reason than its proxy of trade tensions in G10 FX. On the daily timeframe, the support below 67c is clear, and the pair holds the 0.6735 to 0.6820 range for now, where a break here could set a new trend – which way it breaks is obvious yet to be seen, but like the set-up in the S&P500 should be respected.
There is no data to focus on in Australia today, so the AUD will take its direction from moves in the CNH. USDCNH hasn’t been overly interested in Trump’s commentary, where traders have faded CNH strength through US trade, leaving a pronounced Doji candle, and clear indecision on the daily. We were watching to see if the pair could close the gap into 7.1385, but it remains open and a kick higher in this cross through Asia today will likely result in modest selling of risk, with AUD and equity downside.
Watching the CNY fix as a vol event
That is until we get the PBoCs CNY ‘fix’ (11:15aest) by the PBoC, where the run has been for the central bank to lift the mid-point by less than the markets estimates, which has actually been a positive for markets. Could the PBoC see weakness in Trump’s rhetoric and go for the jugular, weakening the CNY by more than forecast and creating higher volatility in Asia?
Perhaps….but it seems that the PBoC wants a stable currency and a limited interest in ‘weaponising’ the CNY as some have viewed it.
Published by Chris Weston, Head of Research, Pepperstone