Newsquawk EU Mid Session: FX havens underpinned by dented risk sentiment ahead of a busy week - 16th August 2021

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Analysis details (10:46)

EQUITIES

European equities (Eurostoxx 50 -0.7%) have kicked the week off on the backfoot in the wake of lacklustre Chinese data and ongoing COVID concerns. Chinese Industrial Production and Retail Sales data both missed expectations with the stats bureau noting that the recovery remains uneven, citing sporadic virus outbreaks and natural disasters. In Australia, sentiment was also pressured by the ongoing COVID-19 situation that has forced an extension of lockdowns across several state capitals, whilst Japan is likely to extend the state of emergency to additional prefectures as soon as this week. A lot of newsflow has centred around events in Afghanistan whereby the Taliban has taken control of Kabul which prompted a mass exodus of foreigners and embassy personnel from the city. However, the market implications at this stage remain unclear as the West ponders its response to events, if any. In terms of market commentary, JP Morgan notes, that Q1 and Q2 European reporting seasons have produced significant positive surprises, to the tune of 24% and 16%, respectively. Since January, consensus projected European EPS for the year has been revised higher by 16%, the strongest move on record. As such, JPM has set out new index targets, “looking for a further 4-7% upside into year end, with SX5E at 4500, on top of the already very strong 19% Eurozone equity return delivered ytd, ex dividends.” Sectors in Europe are mostly in the red with underperformance in Basic Resources, Travel & Leisure and Retail. Retail names are lagging post-Chinese Retail Sales with Kering (who account for nearly 30% of the Stoxx 600 retail index) lower to the tune of 1.8%, whilst LVMH is down 2.5% and Burberry sits at the foot of the FTSE 100 with losses of 2.6%. To the upside, Real Estate and Telecoms are the only sectors in positive territory. The notable individual outperformer is Faurecia (+8.7%) after agreeing to acquire the Hueck Family's controlling stake in Hella (-3.0%) in a deal valued at EUR 6.7bln. Elsewhere, Deutsche Lufthansa (-3.2%) are lower on the session after the German Economic Stabilisation Fund said it will be selling a maximum 5% stake in Lufthansa over the next few weeks, accounting for around 25% of its total stake.

FX

DXY, JPY, CNH - Safe haven flows see the DXY and JPY retaining their underlying bids caught since the deterioration in the APAC mood. Sentiment weakened as Chinese retail sales and IP missed the mark – and thus backed the notion of a slowdown in the world’s second-largest economy’s growth momentum. Further, geopolitical developments in Afghanistan have dominated the news, but it is too early to assess any near-term market implications. Meanwhile, the Yen may also see some tailwinds from the above-forecast Q2 GDP growth metric, although it’s worth noting the data may be stale as the COVID situation in Japan has worsened since the Tokyo Olympics - which kicked off at the start of Q3. The DXY sees mild gains after finding a floor around Friday’s 92.470 low and looks ahead to the NY Fed Manufacturing – which would mark the first August data point, whilst traders also keep tomorrow’s Fed Chair Powell appearance and Wednesday’s FOMC minutes in mind. USD/JPY has declined further below 110.00 and whilst taking out its 100 DMA (109.35) to the downside. The pair eyes mild support at 109.19 (2nd Aug low) ahead of the psychological 109.00. The CNH meanwhile has remained somewhat stabilised after overnight choppiness on the back of further evidence pointing to slowing economic growth momentum, but some observers expect China to negate these effects with looser policy. However, CNH bulls felt some reprieve after the PBoC conducted the MLF at a maintained rate of 2.95%, which adds to the likelihood of the LPRs being maintained later this week. That being said, reports last week suggested that any form of easing will likely take place in the RRR and interest rate. USD/CNH resides under just 6.4800 within a 6.4750-4815 range, with the 200DMA.

AUD, NZD, CAD - The non-US dollars are all softer with the common denominator being risk sentiment. The AUD is the marked underperformer amid the disappointing Chinese data overnight, coupled with the ever-deteriorating Aussie COVID picture. That being said, the AUD/USD currently remains within the ranges seen in the past two sessions, with the 0.7333 proving to be formidable support. Some have been flagging AUD/JPY – a key APAC risk gauge – as the cross inches closer to 80.00 to the downside, dipping below 80.25 from today’s 80.87 peak. NZD/USD meanwhile is in the red but losses are cushioned in anticipation of an RBNZ rate hike later this week. Thus, the AUD/NZD cross has dipped below 1.0450 and continues to print fresh YTD lows as the cross eyes 1.0418 (2nd Dec 2020 low) ahead of 1.0400. The Loonie remains on the backfoot amid headwinds from COVID-suppressed oil prices, whilst the weekend saw Canadian PM Trudeau calling a snap summer general election on September 20th, some two years ahead of schedule – although a rebound in polls could pave the way for Trudeau to secure a majority government from the current minority. USD/CAD inches higher towards 1.2550 and its 200 DMA at 1.2565 as the Loonie looks ahead to July inflation data this week.

EUR, GBP - Both the Single Currency and Sterling trade flat vs the Buck and against each other. EUR/USD tested but failed to breach 1.1800 to the upside whilst GBP/USD recovered from a 1.3837 base and once again makes its way to the 50 DMA around 1.3882. Analysts at ING note of a downside bias for the EUR amid a lack of firm bullish catalysts, with ECB-Fed policy divergence and summer trading conditions posing tail risks for the EUR/USD pair – “we could see the pair moving back to the lower half of the 1.1700/1.1800 range”, says the Dutch Bank. GBP meanwhile eyes a plethora of data including retail sales, employment and inflation, with traders eyeing indications to back the BoE’s upbeat outlook. EUR/GBP remains flat on either side of 0.8500.

FIXED INCOME

USTs have commenced the week with a modest bid in decent volumes in-spite of the relatively thin docket for today’s session; upside that was present initially but clearly exacerbated overnight on the soft China data. A narrative of note as the likes of ING look for a further slowdown in August given flood events, a notable factor in their view behind the overnight data dip, and COVID. Currently, USTs retain an underlying bid but have pared back the vast majority of aforementioned upside, hovering around the 134.04 mark vs session high 134.12; yields are lower across the board, but the curve does not have any overwhelming bias as action is most substantial in the belly. EGBs initially benefitting from the UST bid, but failed to capitalise on this and over the quiet European morning have dipped into negative territory on the session. Bunds are a handful of ticks lower overall with little near-term support offered aside from the psychological 176.50 and last-week’s 176.21 low. It is worth caveating/highlighting that this price action comes amid a thin docket today and this week for the EZ and we do see the return of notable supply with some EUR 14bln set to feature vs last week’s EUR 4bln via one auction; however, a plausible concession narrative should perhaps be taken with a pinch of salt, as Rabobank highlight that net issuance this week will likely be EUR 3bln into negative territory, accounting for ECB activity. Elsewhere, Gilts have been following their EZ peers but within smaller parameters thus far. UK related newsflow features as today marks the end of the ‘pingdemic’ for the double jabbed and PM Johnson will likely postpone a Cabinet reshuffle until ~November; however, the read across of these factors is limited thus far.

COMMODITIES

WTI and Brent front month futures remain subdued as the complex keeps an eye on the global COVID situation alongside the growth momentum slowdown experienced in the second-largest economy. Meanwhile, the situation in Afghanistan has grabbed all the headlines today as the Taliban overthrew the government, but from a market standpoint, the direct impact at the moment is too early to tell – but it’s worth keeping in mind that Russia, China and Iran have signalled an acceptance of the new government. Aside from this, traders will also be cognizant of the start of Hurricane season near the Gulf of Mexico (GoM), with Tropical Storm Fred set to make landfall around the Florida panhandle, whilst Grace reawakened to a Tropical Depression with the trajectory pointing towards the west of the GoM. WTI resides just north of USD 67/bbl after briefly losing the level (vs high 68.12/bbl), whilst Brent trades around USD 69.50/bbl (vs high USD 70.45/bbl). Elsewhere, spot gold trades with modest losses around USD 1,775/oz, but in a USD 10/oz range as the yellow metal balances a firmer Buck and softer yields. Base metals meanwhile are mostly lower across the board, with LME copper back under USD 9,500/t as the overnight Chinese data backs the notion of growth momentum slowing in the world’s largest copper consumer.

16 Aug 2021 - 10:45- Fixed IncomeData- Source: Newsquawk