Monday has an orderly look about it after last Friday’s US employment data threw no negative curveballs. Regional markets are drawing a sigh of relief after the Non-Farm payrolls came in at 1.4 million as expected, and pleasingly, the unemployment rate shrank to 8.40%, an impressive outperformance. That allowed the US dollar to hold onto most of its recent gains, and although US yields shot higher, stock markets contained losses. Compared to Thursday’s meltdown, US equities closed lower, but not emotionally so.
The weekend’s headlines have been dominated by the Financial Times revealing, amongst others, that Softbank has bought massive amounts of equity call options on US big tech stocks, partially explaining their recent outperformance. That, of course, has drawn in the retail FOMO herd who had a taste of two-way price action last week as big tech stocks sank. In the greater picture, the stock market correction looks just that, a correction. The underlying drivers of the buy everything trade remaining well and truly intact. That said, the correction could quickly move 10-15% more, but still, leave equities well and truly in a bull market.
Geopolitics entered the fray again over the weekend, with news that the US was considering export bans on components for Chinese chipmaker SMIC. Threats of the prohibition on Tencent’s WeChat app continuing to percolate in the background. Although SMIC’s stock has fallen 15% in Hong Kong this morning, the fallout has been relatively contained. Markets have appeared to be adjusting to the constant US and China tit-for-tat as the new normal and getting on with life despite it.
US Treasury Secretary Mnuchin stated today that an agreement on funding the US government through to December remains on track, avoiding any shutdowns. Those talks though are separate to the attempts at follow-on fiscal stimulus packages, where both the Republicans and the Democrats remain frustratingly far apart. In all likelihood, the improvement in US data is likely to entrench Republican stubbornness, as they take the view that the US economy may recover of its own volition, without needing more government money. Time will tell on this point, but if US data runs out of steam before the US election in November, there may be a good dose of buyer’s regret running around.
Bank Negara, the Bank of Canada and the European Central Bank all have rate decisions this week, which are among the week’s data highlights. Bank Negara will likely hold fast despite a higher ringgit giving welcome breathing space. A decision on whether to keep Malaysian bonds in the FTSE Russell world bond index, which occurs later in the month, is likely to stay Negara’s hand, fearful of negative ringgit outflows.
The Bank of Canada is unlikely to surprise with rates at an already record low of 0.25%. The impact on the pro-cyclical Canadian dollar will be negligible, with its direction more closely tied to that of international stock markets and global recovery sentiment, than Canadian monetary policy.
The European Central Bank will probably have the most potential for fireworks. The ECB will keep rates at 0.0%, with the press conference afterwards likely to be of more interest. With the EUR/USD rally stalling for now and recent rumbling about the rise of the euro by ECB officials, Mrs Lagarde may try to help the process along with more direct comments on the rise of the single currency. That has the potential to deepen the EUR/USD correction, although I struggle to see it going any further than the 1.1500/1.1600 zone.
China’s Balance of Trade data has just been released. In US dollar terms the trade balance came in at $59 billion for August, lower than July but well above consensus. Exports rose 9.50%, while imports fell by -2.10%. Although imports fell, the headline export and BoT numbers should reassure investors that China’s recovery remains on track with both the domestic and export sectors firing on all cylinders.
