Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Summary: The rally in equity markets yesterday was cut short as US stocks closed slightly lower after the meltdown Monday. But overnight we are seeing another rally attempt as China is back from a long holiday weekend and has stabilized slightly with a new injection of liquidity from the PBOC and Evergrande claiming it dealt with coupon payments to bond holders on Monday. Today is the main event of the week, the FOMC meeting, as we await a new monetary policy statement and economic and policy forecasts from the Fed this evening.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - S&P 500 futures had an ugly session yesterday but the relatively good news out of China with Evergrande having negotiated a bond payment tomorrow has lifted US equities in early European trading hours. S&P 500 futures are trading above 4,360 and must close higher today in order to avoid slipping into renewed technical selling. The 100-day moving average at 4,325 was today’s intraday support level, so this is the critical level to watch if we get another round of risk-off.
Hang Seng (HK50.I) - Chinese equities are stabilising in today’s session on the news that Evergrande’s onshore unit has negotiated a bond payment due for tomorrow and the PBOC is injecting liquidity into the system through reverse repos. The market seems satisfied for now with Hang Seng futures trading around the 24,130 level with the key battleground today being whether the index can close above yesterday’s close. Our view is that the Evergrande and Chinese housing market situation will stay with us for a while and be a source of volatility.
EURUSD – the EURUSD price action remains heavy after 1.1700 was almost touched in Monday’s session ahead of the important FOMC meeting, where the potential for the pair to break down significantly below the 1.1664 low of this year is likely bound up in whether the FOMC meeting today triggers either a notable sell-off in US treasuries and takes US yields higher – potentially more potently if the longer end of the US yield curve breaks higher. Alternatively, if the market simply decides that the Fed doesn’t matter and other issues – like concerns on China’s property sector, the debt ceiling debate, US fiscal cliff set for early next year, etc. – are still cause for concern, the USD could outperform on its safe haven appeal.
USDJPY and JPY crosses – the JPY has been bid over the last couple of sessions on its safe haven appeal and has even out-performed the US dollar as US long treasury yields have been mired in a range. If whatever the market concludes today in the wake of the FOMC meeting today sees a notable shift in US treasury yields higher or even lower, USDJPY is likely to show high beta to that move, and any new strong dip into “risk aversion” after the FOMC that sees US Treasury yields lower could prove a particularly potent combination for continuing weakness in risk sensitive pairs like AUDJPY, GBPJPY, etc.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – before bouncing in early trade today, cryptocurrencies came under additional pressure yesterday and overnight, in part on the additional noise yesterday from US regulators, as the US SEC Chair Gensler pointed out that past attempts by banks and others to offer private currencies have failed and that the SEC has authority over the space, with “gaps” in oversight like the regulation of crypto exchange possibly set to close if Congress helps empower the SEC. Elsewhere, Michael Hsu, who heads the Office of the Comptroller of the Currency said yesterday that cryptocurrencies and decentralized finance could eventually destabilize the financial system, similar to the role derivatives played in the financial crisis in 2007-09. Bitcoin traded briefly below 40k before rebounding to 42k this morning and Ethereum dropped to near 2,650 before rebounding to 2,875 as of this writing.
Gold (XAUUSD) has managed to bounce to challenge a support-turned-resistance area just above $1780. With no support from a relative strong dollar and higher yields, the recovery following the latest slump seems in part driven by concerns about the potential fallout from the debt crisis at Evergrande, and whether it could sway the FOMC towards a less hawkish announcement today. Silver once again managed to find support in the $22 per ounce area, and with platinum also clawing back some recently lost ground against gold, these two metals should be watched as a guide to the general investment sentiment.
Crude Oil (OILUSNOV21 & OILUKNOV21) trades higher for a second day after the API reported a big 6.1 million barrel drop in US crude inventories. If confirmed by the EIA later today it would drive US stockpiles to the lowest level in three years. In addition, more than 300k b/d of US Gulf production remains offline and the bulk produced by Shell is not expected to return until next year. Time spreads points to an increasingly tight market with the Dec21-Dec22 Brent spread trading at a fresh peak at $6.34/b. Driven by an ongoing recovery in demand and a potential increase in fuel demand as a substitution for surging gas prices.
HG Copper (+2.3%) and iron ore (+11%) leading the metal sector higher following the overnight Evergrande news (see below). Copper has despite the recent unease about Chinese property sector demand managed to hold above key technical support in the $4 per pound area. While the outlook for green transformation demand remains strong, the metal needs to establish a higher high above $4.47 before potentially attracting fresh momentum buying.
The bond market is confident that today’s FOMC meeting won’t deliver a taper surprise (IEF, TLT). Yesterday’s stellar 20-year bonds reopening attracted strong demand from indirect bidders showing that investors are dismissing completely a hawkish surprise by the Federal Reserve today. If that were the case, we might see yields trading between 1.26% and 1.40% until the end of the month. However, if the Fed Delivers a hawkish surprise, yields can move fast and rise to test their resistance at 1.4%.
What is going on?
China’s Evergrande "has resolved” bond payments due Monday, PBOC adds liquidity. Mainland Chinese markets tried to stabilize in their first session this week after a long holiday after the PBOC injected another CNY 90 bn of liquidity and after troubled property developer Evergrande said it would make coupon payments on yuan bonds on the September due date, though there was some confusion on this as the statement was that the company’s bond “has already been resolved through private negotiations”. A much larger payment of $83.5 million is due on an offshore USD bond tomorrow.
FedEx down 5% in extended trading. The US logistics company reported FY22 Q1 (ending 31 August) EPS of $4.37 vs est. $4.92 despite revenue in line with estimates translating into an operating margin of 6.8% vs est. 8.5%. A shortage of workers was the main reason for rising costs due to higher wage growth and it also reduced network efficiency. In some hubs wages were up 25%. The company has chosen to cut its fiscal outlook.
Poland refuses to pay fine for coal mine. In a test of the EU’s relationship with Poland, the government of Poland is refusing to pay a EUR 500k/day fine assessed by the EU’s top court for continuing to operate the Turow lignite (brown coal) mine that feeds a power plant generating some 7% of Poland’s energy. The mine is placed very near the Czech and German borders with Poland and the latter accuses the Czech Republic for its role in the ruling.
Hungary’s central bank hikes rates less than expected, only moving the rate 15 basis points higher to 1.65% rather than the 25 bp hike widely expected. HUF was weaker on the decision. Meanwhile, the government is moving to expand fiscal generosity ahead of next year’s elections and has raised the minimum wage by 20%. Interesting to see where this takes coming inflation prints in Hungary, with the headline CPI reaching above 5% in April before falling back just below that level in July and August.
Solid U.S. August housing numbers. Housing starts rose by 3.9% MoM in August, after July’s sharp contraction of minus 7%. Building permits were up as well, with an increase of 3.9% in August, after +2.3% in July. These figures confirm continued strength in the U.S. housing market. Over the past twelve months, the gains have been mostly driven by multifamily and not by single-family.
The ECB expects eurozone inflation will peak soon. Speaking at a conference organized by the Financial Times, ECB Vice President Luis de Guindos maintained the ECB’s core scenario regarding inflation. But he mentioned upside risks to the outlook and the potential risk that temporary price increases become more permanent. He indicated that the eurozone inflation may reach 3.5% by November, after rising to 3% last month, before it starts to slowly decrease.
What are we watching next?
FOMC Meeting today – longer dated US treasury yields continue to coil in a very constricted range and Fed expectations have been stuck in neutral for weeks, with neither budging notably on the recent market volatility in risky assets. This suggests little anticipation of a surprise at today’s FOMC meeting and keeps the bar rather low for a hawkish surprise scenario, as the Fed has been seen as unlikely to shift current expectations, with Fed Chair Powell’s dovish Jackson Hole speech on transitory inflation and a lower-than-expected August CPI data. But some voices at the Fed are impatient to begin to taper QE and the Fed may want to taper purchases more quickly than the market expect in order to have more flexibility down the road with signaling eventual interest rate hikes. In any case, the Fed will be updating its forecasts for the economy and the Fed funds rate in the so-called “dot plot” at this meeting, and the market will have to absorb any hints from these adjustments.
Earnings Watch – key focus today is General Mills, a US based consumer foods business, and given yesterday’s margin squeeze story from FedEx it will be interesting to see whether General Mills is experiencing the same cost pressures. If so, it could indicate that the Q3 earnings season could be all about margin pressure.
Economic calendar highlights for today (times GMT)
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