Eurozone, France, Italy Provisional CPI; France Housing Starts, Consumer Spending, GDP, PPI; Italy GDP, PPI; U.K. BOE Effective Interest Rates, Monetary/Financial Statistics, Money/Credit; updates from Siemens, Bertelsmann, Bunzl, Old Mutual, Harmony Gold
Weak economic data from China that pointed to slowing economic growth will likely weigh on European shares on Tuesday. In Asia, most stock benchmarks retreated in subdued trading, along with the dollar, Treasury yields and oil, while gold bounced higher.
European share are likely to start Tuesday modestly lower, following a subdued Asian session, as weaker-than-expected Chinese economic data overshadowed fresh records on Wall Street.
China’s official nonmanufacturing PMI surprisingly fell into contractionary territory in August, dragged by rapidly cooling service activity that was hit by the latest Delta variant outbreak. The official gauge of factory activity also dropped more than expected in the same month due to weakening demand and was the lowest reading in 18 months.
On Monday, the S&P 500 notched its 53rd record close of the year as technology stocks lifted major indexes. Nasdaq also posted a new record, its 32nd fresh high of the year.
Technology and other so-called growth stocks boosted the market, after Jerome Powell on Friday stressed that the central bank should not overreact to a recent jump in inflation. While the central bank is expected to begin reducing its bond purchases later this year, Fed officials have emphasized that the timing of such a move won’t impact any later decision to raise interest rates from near zero.
“On the one hand, the Fed said that it will taper but it will not raise interest rates, which is good for the growth stocks,” said Irene Tunkel, chief U.S. equity strategist at BCA Research. “On the other hand, people are really worried about Delta.”
The dollar was little changed in a cautious Asian session so far, with concerns over China’s economic growth weighing on sentiment. A further slowdown in China’s economy is expected, driving some cautious tone in Asia, IG said.
The greenback stabilized on Monday and Goldman Sachs said it thinks “the broad dollar should find some stability now that the Fed’s taper timeline is largely priced in.”
Goldman Sachs estimates a tapering announcement in November, a December start and a September 2022 conclusion to the process. “To recommend outright USD shorts we would like to see evidence that the current wave of covid outbreaks around the world has peaked, as well as further signs that U.S. inflation pressures have come down.”
UBS said that tapering of asset purchases by the Federal Reserve shouldn’t have a particularly long-lasting effect on the dollar as attention shifts to other central banks where interest-rate rises are “much more imminent.”
The initial reaction to Friday’s confirmation by Jerome Powell that asset purchases should be scaled back later this year has been positive for risky assets and negative for the dollar, especially against developed-market commodity exporters, UBS said. “This may also reflect oversold levels and valuation gaps that opened up during the month of August when risk sentiment was under pressure.”
A slightly earlier-than-expected Fed taper could give greater support to the dollar, especially against emerging-market currencies, UBS said.
Following Powell’s Jackson Hole speech, RBC is looking for opportunities in trades that avoid the dollar in both the FX spot and options markets. Within options, RBC favors a short EUR/AUD volume trade, said global head of FX strategy Elsa Lignos.
Treasury yields continued to fall in Asia, extending Monday’s retreat as traders turned their attention to a crucial jobs report due this week.
The lack of specifics from Powell is a big reason why money continued to flow into Treasurys and U.S. stocks, some analysts said. They said his remarks underline the importance of near-term economic data in determining when tapering is likely to begin, ensuring a sharp focus on Friday’s August jobs report. But for now, investors interpreted his comments as a continuation of easy policy until at least the Fed’s next meeting in three weeks, and possibly the next few months.
Columbia Threadneedle’s Anwiti Bahuguna said the decline in yields has more to do with bets that both growth and inflation have peaked than to Powell’s speech.
Friday’s much-expected remarks sounded “very neutral to me,” she said, noting the market reacted as if Powell was more dovish than he really was. The speech left her seeing the Fed’s stance at this point as “hawkish in the nearer term, and we really don’t know what it means for the long term, we just have to wait and see the data.”
AmeriVet said: “We need more time and data to sort out the debate,” about how fast the Fed will remove stimulus. “We don’t need to see continued gains of 800,000 [jobs] per month for the Fed to meet its ‘substantial progress’ criteria for asset purchases.”
Oil futures were lower in Asia as Hurricane Ida hampers exports of refined products such gasoline and diesel, according to commodity-analytics company Kepler.
U.S. refined-product exports from the Gulf of Mexico have been on halt since Aug. 29, likely “marking a gap in exports rarely seen over the past half decade.” This should weigh on demand for crude oil feedstock amid declines in refined-product output. However, continued plant shut-ins are also crimping oil supply, which may provide support to prices.
Citi’s bull case for coal is now its base case. The bank has been surprised by the strength in thermal-coal prices, which have surged to $170/ton, while hard coking coal is roughly $250/ton. Citi cites mine suspensions in Inner Mongolia and China’s Covid-related border closures with Mongolia, as well as China’s ban on Australian imports during a time of rising demand, as reasons for strong coal prices.
“Our commodity team’s bull case was for Newcastle 6,000 prices to average $160/ton in the September quarter and $160/ton in the December quarter before moderating to an average of $130/ton in 1H calendar year 22,” although the benchmark Newcastle thermal-coal price could even average closer to $165/ton this quarter given how strong prices have been so far, Citi said.
Gold recovered its Monday losses in Asia, as Treasury yields fell, diminishing the allure of interest-bearing fixed-income assets. But its gains may be capped.
Phillip Futures said the trajectory of least resistance for the precious metal is upward after the Jackson Hole symposium, but investors may not be in a rush to chase prices higher after initial positioning.
Copper and aluminum prices were also higher as expectations firmed of worsening global supply deficits for both base metals, said Goldman Sachs.
Deferred demand from earlier this year, as well as reduced metal production due to power constraints and extreme weather, are contributing to market tightness, Goldman Sachs said. The bank said metals tend to outperform during Fed rate hikes and are relatively immune to Covid-19-related risks, adding that it expects copper and aluminum prices to reach $11,500 a ton and $3,200 a ton, respectively, in 12 months.
Citi said there has been a significant swing in the attitude of investors toward commodities this Northern Hemisphere summer. Following a selloff early in the season, which erased a significant amount of the market’s second-quarter gains, most commodities are now rebounding, it said.
“While far from the peaks reached earlier in the year, it indicates that the uncertainties that raised the risk profile across many commodities are being reduced enough to potentially trigger a new wave of investment flows into the sector.”
TODAY’S TOP HEADLINES
China’s Service-Sector Activity Contracted in August
China’s official nonmanufacturing purchasing managers index surprisingly fell into contractionary territory in August, dragged by rapidly cooling service activity that was hit by the latest Delta variant outbreak.
The official gauge of factory activity also dropped more than expected in August due to weakening demand, official data showed Tuesday.
Oil Industry Surveys Damage After Hurricane Ida Slams Louisiana
Energy companies were assessing the health of refineries, pipelines, petrochemical plants and offshore oil platforms along the central Gulf of Mexico on Monday, the day after Ida struck Louisiana as a powerful Category 4 hurricane.
Widespread flooding and power outages affecting more than one million customers across the state could leave gasoline makers along the banks of the Mississippi River scrambling to restart operations after they assess damages this week, analysts said.
Robinhood Stock Drops After SEC Chairman Warns on Payment for Order Flow
Shares of Robinhood Markets Inc. tumbled on Monday after the head of the Securities and Exchange Commission signaled that he was open to banning payment for order flow, a practice that accounts for most of the online brokerage’s revenues.
Robinhood shares closed 6.9% lower after Barron’s published an interview with SEC Chairman Gary Gensler in which he said a full prohibition of payment for order flow was “on the table” as part of a broader agency review.
Australian Billionaire Offers Premium to BHP Bid for Noront Resources
SYDNEY-Wyloo Metals, owned by Australian billionaire Andrew Forrest, proposed to pay a premium for Noront Resources Ltd. over an existing takeover offer made by BHP Group Ltd.
Wyloo said it would pay Noront shareholders 70 Canadian cents (US$0.555) a share for their interest in the mining company, a 27% premium to the C$0.55 offered by BHP last month. Investors who don’t want to sell their stake could remain as shareholders under a new leadership team that would include Dr. Forrest as chairman, Wyloo said.
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Expected Major Events for Tuesday
04:30/NED: Jul Retail turnover
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