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The key thematic we have been detailing of late has been an increasing focus on the start of a long awaited normalisation process from the Federal Reserve. The end result being a stronger USD, weakness in commodities and deflationary expectations (as seen by the 35 basis point fall in US five-year breakevens since 18 June). We have also seen a strong widening of spreads between corporate credit yields and US treasuries (a sign of default risk), while MSCI world/MSCI emerging ratio has pushed to the highest level since 2005.
This trade is still very much in play and won’t go away just because it’s a new month. If anything, we have seen more fuel been added to the fire with China producing some further discouraging manufacturing data prints. The official print (released Saturday) came in a 50, but the sub-components such as new orders and new export orders were hardly encouraging. Today’s Caixin compiled manufacturing report deteriorated in its revision and at 47.8 was the lowest level since July 2013. Chinese equities were struggling in early trade, but have seen some buying on the concept of additional support. As detailed before, the eyes of the market are 100% focused on how the Shanghai Composite acts around the 200-day moving average, which now stands at 3,560.
FX markets opened on a flat note, with limited reaction seen to the China data. USD/CAD has printed a higher high and is now at the highest levels since 2004. WTI looks horrible and I see no reason (looking at the daily chart) why I would want to be long right now, but I see every reason why I would want to stay long USD/CAD, GBP/CAD and even EUR/CAD. The trend here is absolutely your friend.
US futures have opened a touch weaker and perhaps this is a reflection of the slight weakness in commodities. Asian equities are generally offered despite a better-than-forecast result from heavyweight HSBC that has helped lift our out of hours FTSE call. In Australia, the ASX 200 notably failed again at the 5,700 level. Aussie earning season ramps up this week with SUN, RIO, DOW, ANN, BEN and JBH in focus. I like the idea of listening to companies that make over 10% of revenue from China, specifically after hearing discouraging rhetoric from the likes of Caterpillar, VW, United Technology and Carrefour. In Australia, this specifically means listening to FMG (97% of earnings come from China), ILU (40%), RIO (38%), BHP (35%), SEK (27%) and MIN (21%).
There has been some discussion today around Fed policy and whether Friday’s Employee Cost Index (ECI), at the weakest level since 1982, should derail a September hike. Marrying up a chart of the ECI and core PCE (personal consumption expenditure – the Fed’s preferred inflation read), there is a fairly limited correlation between the two over the last five years. Still, fed funds futures have lowered their probability for a September move by eight percentage points to 40% and we saw solid buying in the front end of the US curve. That makes this such an interesting week for global markets, especially with Friday’s payrolls report likely to meet the ‘some’ requirement with regards to further improvement in the labour market, for the Fed with another 200,000+ print. Hourly earnings are expected to grow 2.3% year-on-year and that would surely naturalise Friday’s ECI.
It’s not just US data though. In Australia, we get the month Reserve Bank meeting (should be a fairly dull affair), trade, employment and retail data. On Friday the RBA releases its Statement on Monetary policy. I continue to like selling rallies in AUD/USD into $0.7450 to $0.7500, but the risk is whether it moves into this zone and this may be too ambitious. However, there is an elevated risk of short covering, especially in light of speculators increasing their short exposure 24% last week to the most since March.
Elsewhere, the Bank of England inflation report, US ISM manufacturing, core PCE, Vehicle sales and ADP private payrolls will also play into price action. Watch US 2-year bond yields this week for a move above 75 basis points could be the trigger for renewed USD buying.
There is also some focus on the re-opening of the Athens stock exchange (ASE). Some have made the connection between the sharp falls in Greek equity index ETF’s traded on the NYSE and how the market may open. Given the GREE (Global X Greece 20) is 17% lower from where the underlying exchange closed on 26 June, I am personally sceptical the ASE will fall that far, but we do know that stocks will be halted it undergoes a price variance of 7% over a 10 minutes window.