At times, it moves quickly, while other times, slowly. Although the cause for Monday’s bloodbath was not conclusive, the most culpable reason was China.
It is perhaps too easy to blame China. The macro data released over the weekend was nothing that markets didn’t already know. China’s manufacturing remains in decline, the US economy is not recovering really that strongly, global growth is not going to be brilliant this year. There was nothing new.
Certainly, the sharp sell-off in China has perhaps spooked global markets, which translated into a ‘monkey-see, monkey-do’ attitude. This means that the momentum is not likely to sustain. A sense of calm returned to the global markets yesterday. Risk appetite is still nowhere to be found, but at least market players were happy not to push risk equities lower.
But what does this mean for markets for the rest of the week? I think investors will now look to macro data and events for their assessment, as markets resume some normalcy after the year-end holidays. Nothing much on China this week, although Markit services PMI may be of interest, given how the services sector continues to stay resilient in the face of a weakening manufacturing industry.
The more important risk will be on FOMC minutes early tomorrow morning, and US non-farm payrolls on Friday. These two pieces of data should set the stage for March rate hike expectations. There is a possibility that markets will start reacting to the ADP employment data out later tonight.
- US equity markets were flattish. [us500:|S&P 500] maintained above 2000, closing up +0.2%. IT, materials and consumer discretionary remains under pressure, although a number of sectors (mostly defensive) outperformed the index.
- European shares recouped back some of the massive losses incurred on Monday, but the gains were rather modest. DAX regained +0.3%, compared with the over -4% of decline on Monday. Euro Stoxx 600 rebounded +0.6% after dropping -2.5% previously.
- Market participants continued to seek the safety of top sovereign bonds, seeking more of the shorter-dated treasuries. 2-year yields dropped 2 basis points, compared to the -1.4 basis points fall in 10-year yields.
- Moves in the currency markets were mostly driven by euro fall after an inflation report signalled the difficulty in stimulating growth in the euro-area. As a result, expectations for more ECB action were heightened, especially against the backdrop of US policy tightening. This pushed EUR/USD lower to mid-1.07 levels. The dollar index strengthened to mid-99, but was held back by JPY gains.
- Oil continued to stay under pressure in the new year, with WTI falling more than its Brent counterpart, erasing the premium that the former has over the latter. However, the API report, which showed that US stockpiles have fallen last week, helped to bring back buying demand in early Asia session on Wednesday. Eyes will be on the weekly EIA report tonight, where the median estimate is for an increase of 500,000 barrels. Again, the projections are notoriously unreliable, with estimates ranging from a drop of 1.5 million to an increase of 3 million.
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