Firstly, we have subdued performance from overnight markets, with European equities closing lower while US stocks posted modest gains. Secondly, the US yield curve flattened as yields of front end treasuries rose faster than the longer-dated bonds, ahead of the FOMC minutes.
Next, commodity prices remained in the doldrums. Specifically, oil prices were hit further, as the global over-supply problem was seemingly aggravated by a couple of news. US oil producers increased the number of rigs for the fourth-straight week.
Bloomberg noted that Mehdi Asali, Iran’s representative to OPEC, estimated the global oil supply glut at about 3 million b/d. The combination of elevated stockpiles in the US and an increasing production from OPEC, sluggish demand growth, and a stronger US would continue to pressure oil prices.
The release of FOMC minutes for 28-29 July will be the highlight of the week. Markets are still quite divided on the probability of a rate hike by Fed in September, so the minutes as well as the US inflation data may provide some clarity for market speculators. Futures were pricing in a 48% chance for a September move last Friday 14 August 2015. As I have mentioned before, a risk to policy normalisation stems from persistently low inflation.
Falling energy prices and potential deflationary effect from China’s yuan devaluation may prod Fed towards the ‘delay’ decision. On the other hand, labour data continued to show solid improvement in employment, which would help the US economy better withstand higher interest rates.
In China, yuan devaluation chatter might gain less traction as the market gets its head wrapped around the concept of a more market-determined exchange rate. PBOC chief economist Ma Jun said the new pricing mechanism will help the yuan avoid excessive fluctuations, adding that the currency should move in both directions in the future.
Meanwhile, Chinese stocks remained rather insulated from the yuan decline, still supported on government measures. The CSI 300 advanced 4.3% last week. Demand for equities would continue to be bolstered by state funds’ interest.
According to the securities regulator, the China Securities Finance Corp (CSFC) will continue to stabilise the stock market for a couple of years. Bloomberg noted that the agency has $483 billion of firepower and has the potential to increase it by another $322 billion. The CSFC also seemed to have a preference for blue chips and railway shares, judging from disclosures.
The contraction in Japan’s Q2 GDP was lower than expected, at -1.6% year-on-year, which brought some relief buying in Japanese stocks. Economy Minister Amari’s comment that corporate profits are at record high levels also helped sentiments.
The Japanese Yen was also slightly under pressure. The weakness in the Japanese economy’s Q2 performance was attributed to transient factors such as bad weather, and Minister Amari expected a moderate recovery to take hold. As such, a stimulus package is not necessary to spur economic activity.