Markets
This week was/is correction time on different markets. However, those corrections didn’t come in a synchronic way and the interconnection between different markets often was rather loose too. Earlier this week, bonds and the dollar corrected from recent previous trends. Yesterday, it was (US) equities’ moment of correction. European equities took a promising start, but sentiment dwindled throughout the day and was completely killed as US tech stocks fell prey to hefty profit taking. The Nasdaq lost almost 5%, with the Dow and the S&P respectively losing 2.78% and 3.51%. We didn’t see a specific trigger for the move. The VIX volatility index already ticked higher, despite the ongoing rally, suggesting some underlying market stress building. There is also plenty of market talk on unidirectional positioning of retail investors, contributing the setback.
Bonds this week reversed the steeping trend that culminated after chair Powell last week announced the review of the Fed policy framework adopting a symmetric policy framework and giving more weight to maximal employment. However, the trend of declining real yields and rising inflation expectations stalled and a corrective bull flatting brought LT US and German yields again within established ranges. This trend continued yesterday. Intraday, bonds received some additional support from the equity sell-off, but the impact was limited given the force of the sell-off. US yields declined further between 0.3 bp (5-y) and 1.7 bp 30-y. Germany outperformed with yields declining between 0.4 bp and 3.3 bp. The impact of the risk-off on intra-EMU government bonds spreads was limited. Earlier this week, the dollar rebounded, admittedly partially inspired by the move in bonds (US real yield bottom). Even so, yesterday’s intraday USD price action was modest, but also a bit remarkable. The dollar gained further early in the session (when sentiment was still mainly risk-on), but even ceded slightly ground later, when equities sold off. No safe haven bonus for the dollar. EUR/USD tested the 1.18 area early in the session, but closed the day little changed at 1.1852. Similar story for the trade-weighted dollar (close 92.74). Recent sterling outperformance against the euro came to a halt, with EUR/GBP rebounding from the 0.8865/70 area to close at 0.8924. However, most of this sterling correction also already occurred before the equity sell-off.
This morning, the WS sell-off also hits Asian markets. However, except for Australia (-3.1%) losses on most Asian market are more modest (1-1.5%). The yuan is holding rather strong despite the risk-off (USD/CNY 6.84 area). USD/JPY also holds to a tight sideways trading pattern near the 106 barrier (no outright safe haven role for the yen).
Later today, investors will primarily look out how the equity/tech correction will unfold. Regarding the data, there is only one topic that really matters: the US payrolls. US month monthly job growth is expected to slow to 1.35 mln in August from 1.76 mln in July . The unemployment rate is expected at 9.8% from 10.2%. We see downside risks to the report (cf. ADP). At the same time, it will be difficult to get a clean interpretation of report as there are statistical/methodological issues (problems with seasonal adjustment due to the corona crisis). In this context, we see a rather low chance for a positive/risk-on reaction to the report. We expect core bonds to remain well bid with US/German 10-y yields holding with established ranges. Yesterday’s price action (no USD gain despite risk-off) was no strong vote of confidence for the dollar. The 1.17/1.18 area might already be a rather solid support for EUR/USD.
News Headlines
France may extend its furlough program, created during the pandemic to protect jobs, finance minister Le Maire said while presenting aspects of his new stimulus plan. His comments indicate the government could spend even more than the earmarked €100bn. Le Maire also expects the economy to do slightly better this year than the 11% contraction they have currently forecasted.
Speaker of the House and the Trump administration have informally agreed to a stop-gap funding bill to avert a government shutdown at the end of this month. The spending bill is free of any controversial items and thus contains no additional coronavirus aid as talks in Congress are still deadlocked.
