Summary: Global markets are in a funk after the FOMC minutes revealed that most Fed officials are ready to taper before the end of this year, a somewhat more hawkish twist than perhaps the market is expecting and a reminder of the fact that the Fed is readying tightening measures even as delta variant and other concerns proliferate. Many cyclical commodities remain very much on their back foot as well overnight in Asia.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - the combined effects of Chinese technology selloff, massive Toyota production cut, FOMC taper talks, and disappointing results from Robinhood are pulling Nasdaq 100 futures lower yesterday with the selloff extending in early European trading hours. Nasdaq 100 futures have given more than half of the gains from the previous local lows and trading below the 14,800 level with the next support level coming in at 14,721.
EURUSD – in the wake of the FOMC minutes, EURUSD has broken down below the key 1.1700 area, setting up a possible run toward at least the 1.1600 area, a major low in late 2020, and possibly the next psychological target into the round 1.1500 level. A more technical level lower still is the 61.8% retracement of the entire 2020 low to 2021 high that comes in around 1.1290, though it is a bit earlier to talk of a level that much lower, and EURUSD will likely show lower beta to an extension of this bout of weak risk sentiment relative to the smaller, more traditionally pro-cyclical currencies.
AUDUSD – the Aussie is in a world of hurt here as a plethora of concerns weigh, including the delta variant outbreak there that is milder than in the US and in Europe, but where the government is enacting harsher lockdowns due to prior success in managing the pandemic with this method. But that approach is up against the contagiousness of the delta variant and Australia is still well behind OECD peers elsewhere in its vaccination rate. In addition, China growth concerns and plummeting iron ore and other metals prices are also weighing. The prices for iron ore, Australia’s number one export, are down over 30% from their mid-July highs. Technically, the 0.7400 area resistance was recently confirmed and the break below 0.7300 this week could augur for a test of the massive 0.7000 level if this bout of weak risk sentiment continues.
Crude oil (OILUSSEP21 & OILUKOCT21) slumped to the lowest since May in response to Covid-19 risks to demand and a stronger dollar after the Fed signaled it may start tapering asset purchases within months. WTI trades below $65 following mixed signals from the weekly stock report which showed rising gasoline stockpiles and another drop in crude stocks. Further weakness from here would once again turn the spotlight back on OPEC+ with verbal market intervention potentially being followed by talks of pausing agreed production increases until a clearer demand picture emerges.
Copper (COPPERUSDEC21) traded down for the fourth day in Asia after breaking trendline support in the $4.20 area. Focus now on the 200-day SMA at $4.02 followed by $3.75. The recent slowdown in Chinese macro numbers, the spreading of Covid-19 in China and now also an even stronger dollar (see above) all potential risks that in the short term may challenge the long-term bullish outlook for copper as demand for green transformation metals heat up. Against these headwinds the market needs to weigh the potential threat to supplies from disruptions in Chile, with the latest caused by strike action at Codelco’s Andina mine which supplies 1% of the world’s copper.
What is going on?
FOMC minutes suggest Fed ready to taper sooner rather than later - the Fed minutes clearly spelled out that most Fed members see a reduction of the pace of asset purchases starting already this year because the inflation goal was “hit” and progress toward the employment goal is being made. The minutes made clear that not all Fed officials are on the same page, however, and expectations for the future trajectory of the Fed funds rate were only adjusted a couple of basis points higher for the mid- to late 2023-time frame. Next steps for the Fed communications to the market noted below.
Alibaba shares hit lowest level on record in Hong Kong trading. There are signs of significant outflows from foreign investors in Chinese technology shares weighing down the Hang Seng Tech index. The selloff comes despite a bailout of Huarong Asset Management as the situation in Evergrande is still quite dynamic. Tencent’s earnings release yesterday confirmed that revenue growth is slowing down in China.
July UK inflation tumbles to 2% from 2.5% in June. But inflation is likely to rise sharply in the coming months. The temporary drop last month came from a broad range of categories, but were most notable in recreation and culture. On the contrary, the price of second-hand cars increased by 7%. Base effects from 2020 also played a role in pushing inflation lower. Looking ahead, we expect inflation will pick up in the coming months, probably close to the Bank of England’s 4% forecast. The jump in inflation will partly reflect the impact of Brexit on supply chains but, first and foremost, rising energy prices, higher labour costs (amid record labour demand) and the unwinding of measures to boost hospitality in 2020. In our view, the UK is one of the European countries where inflation is the most likely to derail temporarily in coming months. In contrast, the Eurozone numbers remained unchanged. CPI is holding at 0.7% year-over-year.
Robinhood shares plunge 9% in extended trading on weak guidance. This was the first quarterly results for the fast-growing US retail brokerage company and while net revenue and profits came in line with estimates. It was the guidance for revenue in Q3 based on seasonal effects and concerns over future crypto trading activity. Robinhood said it earned more in crypto trading compared to equities and stock options combined with Dogecoin being 62% of all crypto trading.
Mixed U.S. real estate market data. Housing starts collapsed in July (down 7.0% MoM versus -2.6% expected) while building permits went the other way (up 2.6% MoM versus 1.0% expected). The drop in housing starts is mostly explained by multi-family units. But housing starts were revised up slightly for May and June.
Toyota shares decline 4% in trading on production cut news. The Japanese newspaper Nikkei reports that Toyota is cutting global production in September by 40%. The carmaker has so far been portraying that they had minimal issues with semiconductors compared to all others in the industry and investors loved it. But now that narrative is breaking down and it underscores how serious the situation is in the global semiconductor industry.
New Zealand finds new Covid cases but spins optimism – the New Zealand dollar was steady around 1.0500 in AUDNZD as a total of 21 Covid cases were identified, all linked to the original community case identified earlier this week and a traveler just arrived from Japan, with some 100 places of interest identified. Authorities expressed optimism that they can get ahead of the outbreak, with an announcement Friday on next steps for the current 3-day lockdown set to expire before the week-end and the 7-day local lockdown.
Australia sees strong jobs report in July - although the Australian dollar was not particularly reactive as concerns on the current Covid delta variant outbreak in multiple Australia cities, weak metals prices and a general risk-off tone weigh. The July payrolls was +2.2k after the huge surge of +29.1k in June and +115k in May, a solid performance given expectations for mean reversion to –43k payrolls change in July. The Unemployment Rate in July, meanwhile, plunged to 4.6% vs. 4.9% in June and 5.0% expected, the lowest since 2008.
A solid 20-year US Treasury auction and no reaction to FOMC minutes show the market dismisses early tapering completely (TLT). Yesterday’s 20-year US Treasury auction preceding the FOMC minutes attracted the highest foreign demand since October last year. Later ok, US Treasuries hardly moved upon publication of the FOMC minutes despite it is becoming evident that members are now opened to tapering and less confident about inflation being transitory. We believe that a hawkish surprise during next week’s Jackson Hole meeting could put upward pressure on the long part of the yield curve. Thirty-year US Treasuries look particularly vulnerable, offering well below 2%.
Inflation-linked gilts may not protect any longer against inflation (GILI). The recent inflation misses in the UK highlights investors' dangers by buying inflation-linked gilts at -3%. Amid a rising interest rate environment, inflation-linkers will lose value as the market will be compelled to sell them to enter higher-yielding nominal gilts. Even when held until maturity, inflation-linked gilts will provide a negative return unless the Retail Price Index keeps well above 3% a year. If inflation surprises on the upside, it is best to hold these instruments outright until maturity rather than through funds.
What are we watching next?
Can the market pull itself together after the FOMC minutes on taper fears? The US market tumbled badly yesterday, a fairly clear sign that the concern level has notched significantly higher that the Fed is intent on tapering the pace of its asset purchases sooner rather than later (see above). Technically speaking this is the seventh “significant” consolidation from new highs in the US S&P 500 index this year. On all of the prior significant sell-offs of 2021, those that saw draw-downs from the prior top of more than a couple of percent, support was quickly found (in a week or less) in all but one occasion in February and March. Is the market ready to buy this dip or is a more major bout of market volatility?
Next steps from the Fed - the bottom line in the wake of the FOMC minutes is that most on the Fed seem ready to taper and before the end of the year – but when? The next steps will include any hints from Fed Chair Powell himself at next week’s Jackson Hole Fed symposium, and then the sense of whether the September 22 FOMC meeting is live for an actual taper announcement, with purchases to actually slow starting October 1, for example.
Earnings to watch today. With significant outflows out of Chinese technology companies and the growth slowdown evident in Tencent’s earnings yesterday, the key focus today is of course on the social and content platform Bilibili.
Economic calendar highlights for today (times GMT)
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Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy