Stock markets enjoy some recovery, but not for long
While central banks keep talking about a transitory inflation, investors seem to walk on thin ice, wondering whether the combination of supply chain disruptions, rocketing energy prices and labor shortages need to be taken more seriously as initial symptoms of stagflation.
Although there is no convincing evidence of stagflation yet, headlines have been more depressing than cheerful around business struggles lately, and that was enough to ghost traders and knock down stock markets once again on Monday.
The next day found the pan-European STOXX 600 index trying to heal its wounds from three-month lows, mainly on the back of financials and technology shares, as global bond yields lost some steam. Yet, the downfall in equities could still find more legs in the coming months as the energy crunch may intensify during the winter season on higher demand, while the property drama in China could make matters worse if more developers join Evergrande’s club like Fantasia Holdings Group did on Monday. Not to mention a potential dramatic ending in the debt ceiling debate in the US and a disappointing Q3 earnings season.
Turning to Wall Street, S&P 500, Nasdaq 100, and Dow Jones opened with moderate gains, trading up by around 0.45%.
Dollar index steady; traditional safe havens pull back
In FX markets, the US dollar index was in a wait-and-see mode ahead of Friday’s nonfarm payrolls report, remaining muted slightly below the almost one-year high of 94.49. The ISM non-manufacturing PMI index could provide some early warnings about the labor situation in the US and the rising input costs during the month of September at 14:00 GMT, though the preliminary Markit PMI readings have already stated a soft slowdown in previous weeks. Therefore, the impact on the greenback could be anemic.
The latest upturn in safe-haven currencies took a halt as investors engaged in some risk taking, helping dollar/yen bounce back above the 111.00 level after three days of declines. Dollar/loonie was less fortunate, as elevated oil prices kept supporting the loonie. Technically, the pair seems to be trading near the neckline of a bearish head and shoulder pattern at 1.2585 in the daily chart. Should the bears claim that territory, the price could tumble towards the 200-day moving average at 1.2525
Meanwhile, weaker-than-expected producer prices out of the Eurozone could only softly lift the euro as traders looked at July’s upside revision, though gains were quickly reversed in the next hour, with euro/dollar easing back to Monday’s low of 1.1587.
On the other hand, pound/dollar continued to strengthen for the fourth consecutive day, reaching an intra-day high of 1.3641 despite production cost pressures keep escalate.
RBNZ could raise interest rates
The Reserve Bank of New Zealand will be the highlight of the Asian session as the central bank is scheduled to announce its policy decision at 01:00 GMT.
Unlike its Australian counterpart, which stood pat on policy, keeping interest rates at record lows and sounding a warning about surging house prices on Monday, the RBNZ is widely expected to hike its benchmark rate by 25 bps to 0.50%. That is below the previous estimate of 50 bps, which suggests that some caution is speaking to investors’ mind, especially after a well-telegraphed rate hike was postponed during the August gathering.
Another delay cannot be ruled out, as some lockdown restrictions are still in place. That said, with the economy running hot, inflation standing above the 1-3.0% range target, and the labor market remaining tight, a 25 bps rate hike is possible. If true, the RBNZ would be the second central bank to raise borrowing costs post-Covid after Norway’s central bank. However, for the kiwi to speed up, the RBNZ needs to show confidence that the tightening phase will continue without breaks.
Kiwi/dollar was last seen weak at 0.6953. A major resistance territory for the pair remains the 0.7088 – 0.7100 area.
