The week’s wobbles continued overnight as markets- equities in particular – adjust to the rediscovered concept of two-way price risk. US equities attempted a comeback yesterday in New York, but by mid-session it had run out of steam. Wall Street closed lower with no apparent drivers, other than the defeat of the US Republicans follow-on stimulus bill, much slimmed down and dead on arrival in the Senate anyway.
That may well have been enough, with the risk of no follow-on stimulus before the election in November increasing by the day. With Republicans and Democrats light-years apart and unwilling to budge. Combined with disappointing Initial Jobless Claims data of 884,000 new claims, it suggests that the United States’ easy employment wins are over. Further gains being much harder to come by with Congress politicising fiscal stimulus.
ECB optimism lifts euro
The European Central Bank was more upbeat than expected, moving its 2021 inflation forecasts higher. That said, it noted that it expected to utilise its EUR 1.35 trillion quantitative easing facility fully. More importantly for short-term pundits, it indicated that the rise of the euro was concerning and that it would monitor movements closely. That wasn’t enough for bearish traders, with the single currency spiking to 1.1900 initially, before retreating to close slightly higher on the day, supported by EUR/GBP buying.
Pound slips on Brexit tensions
The Brexit situation in the United Kingdom entered dangerous territory overnight, with the European Union threatening legal action over the UK’s attempt to rewrite the separation treaty unilaterally. Sterling suffered overnight and looks set for further losses, as financial markets rapidly reprice Brexit risk that had been long dormant.
Tonight sees the release of US Inflation for August, with the headline number expected to climb to 1.20% YoY, with Core Inflation expected to remain unchanged at 1.60% YoY. A 1.20% print or an unexpected rise in the Core Inflation number is most likely to be felt in the long end of the US yield curve. A sharp increase in US long yields may set US equity markets up for another gloomy day at the office.
In Asia, the data calendar is quiet. China New Yuan Loans is due to be released with no set time. It could come out over the weekend as well; such are the whims of Beijing. We are looking for an increase over last month’s CNY 993 billion to CNY 1.200 trillion, reinforcing that China’s recovery remains on track. A fall in the headline number could spook Asian markets in the near-term.
More than a few eyes, including the author’s who is based here, will be cast at Indonesia today. The announcement on Wednesday night that Jakarta would re-enter full lockdown again this Monday saw the Jakarta Composite Index immediately fall 5.0%, hitting its circuit breaker for the day. The Bank of Indonesia was also intervening selling USD/IDR.
The Jakarta administration appears to have upset the central government, with various ministries either supporting or completely contradicting Jakarta’s intended response. Few details have emerged of what the full lockdown means this time, either from Jakarta or the central government. With Jakarta’s public hospitals forecast to run out of Covid-19 capacity next week though, this typically Indonesian debacle will send shivers through investors spines, with nobody and everybody in charge it seems. Expect Indonesian equities to fall again today and the Bank of Indonesia to be back selling USD/IDR in the spot and non-deliverable forwards markets. Indonesia’s travails, as South East Asia’s largest economy, are like to cast some shadows of its neighbours, Singapore and Malaysia, as well.
