Newsquawk EU Mid Session: Sentiment sullied whilst the Kiwi takes the spotlight ahead of Powell - 17th August 2021

To download the report, please click here If you would like to subscribe to receive the research sheets directly in your inbox, you can now do so under the Research Suite section of the portal. To subscribe simply check the box next to "Email these reports" under the desired category.

Analysis details (11:07)

EQUITIES

European equities (Stoxx 600 -0.2%) started on a softer footing before trimming losses with the Stoxx 600 pulling back from its longest winning streak in over 10 years. Losses in Europe came in the wake of a despondent Asia-Pac session with downside observed in China amid further scrutiny from regulators in Beijing after issuing draft regulations on banning unfair competition in the internet sector. COVID concerns in New Zealand have also added to the negativity with NZ entering into a three-day nationwide lockdown (Auckland will lockdown for seven days); adds to recent restrictive measures in Australia and Japan. The situation in Afghanistan continues to dominate headlines, however, it is not posing much in the way of market significance at this stage. That said, the defiant tone of President Biden last night will have ruffled some feathers in the Democratic Party. Whether this has any follow-through into Congressional support for Biden’s economic agenda remains to be seen. In the immediacy, focus for the US turns to today’s Retail Sales and Industrial Production metrics; US equity futures are softer with the RTY lagging peers with losses of 1.1% vs. ES -0.4%. Note, DJIA constituent Walmart (2.8% weighting) is due to report at 12:00BST, whilst Home Depot (6.2% weighting) beat on top and bottom lines but comp sales missed, and thus shares are -4.5% in the pre-market. Sectors in Europe are mostly lower with laggards predominantly consisting of pro-cyclical names. Notably lagging the trend is Basic Resources amid gains in BHP (+6.2%) after the Co. announced alongside encouraging earnings that it is to pursue a petroleum merger with Woodside and change its structure to a single primary listing on the ASX. Elsewhere, Just Eat Takeaway (+2.8%) is the second-best performer in the FSTE 100 post results after posting a small-than-expected loss in H1 2021. Finally, Swiss Life (-1.3%) sits at the foot of the SMI post-H1 results which saw the Co. report a 7% decline in Premium Income.

FX

NZD - An eventful session for the Kiwi to say the least, as domestic COVID fears are stoked on the eve of the RBNZ policy decision. The central bank was initially wholly expected to hike its OCR by 25bps tomorrow with another 50bps of tightening seen through the rest of the year, but one community-transmitted COVID case in Auckland has put a spanner in the works. The case has prompted the government to issue a three-day nationwide lockdown alongside a seven-day Auckland-specific lockdown in a bid to stem a potential outbreak at the root. This development has triggered an unwind of hawkish bets, with Westpac and ASB now expecting an unchanged OCR tomorrow (both previously called for 25bps hikes), whilst the OIS strip now prices in some 80% of a hike tomorrow (vs prev. 100%). Granted, COVID has always been a risk flagged by the government and central bank, and it is also worth keeping in mind the string of strong data seen from NZ – with desks at the time noting that the Kiwi economy is fast heading into full employment and sharp increases in inflationary pressure – with both areas poised to run hotter than the RBNZ’s prior round of forecasts. Nonetheless, the hawkish unravel took NZD/USD below the 50 DMA (0.7014). through the 0.7000 level, and to a current low of 0.6907 – just shy of its 0.6881 YTD trough. Meanwhile, the AUD/NZD cross has also been in focus as a play between the RBA and RBNZ's diverging policy stances and the overall dichotomy between the Aussie/Kiwi economies. The cross rebounded to around 1.0540 from firm support around 1.0420 (30th Nov low) - a level which traders have been heavily flagging in recent days.

AUD, CAD - The AUD and CAD are the next set of straddlers after the Kiwi, with the common denominator for the high-beta softness once again a risk-averse tone. Zooming in, the AUD continues to tackle rising domestic cases and fears of a China slowdown. The Aussie currency came under pressure after the RBA Minutes noted that board members considered the case for a delay to the taper despite reaffirming the previously announced change in bond purchases at the meeting. However, the notable upside in AUD/NZD has kept the AUD somewhat cushioned but failed to stop AUD/USD from printing a fresh YTD low at 0.7279 (vs high 0.7341)– briefly dipping under the 24th Nov 2020 low of 0.7283. The next area of support is seen around 0.7265, marking the 20th and 23rd November low. Elsewhere, the Loonie remains underwhelmed by the COVID-hit (and sentiment-hit) crude prices, with the pair topping 1.2600 (vs low 1.2567).

DXY - The Dollar index had retained an underlying bid as the risk remains defensive, whilst traders look ahead US Retail Sales, and later Fed Chair Powell’s appearance at 18:30BST/13:30EDT who will be hosting a town hall discussion, but focus will likely fall on the accompanied online Q&A against the backdrop of Fed officials tilting towards the hawkish side. Rosengren (2022 voter) has become the latest to suggest that in his view, substantial further progress was made – and his preference would be to start tapering in the fall, potentially October or November and no later than December, contingent on another strong job report. DXY remains caged to its 92.616-777 range, with some questioning why the non-Dollar declines are not providing much more upside. On this, it is worth noting that the antipodeans do not contribute to the DXY basket.

JPY, CHF - The safe-haven FX diverge with the JPY remaining softer amid its domestic COVID situation. Japan's government confirmed it is to seek an extension of the coronavirus emergency in Tokyo through to September 12th and will extend it to seven additional prefectures. Furthermore, the widening yield spread between the US-Japanese 10yr yields remains supportive for USD/JPY. The pair match confirmed yesterday’s 109.12 low as interim support before recoiling to a high of 109.42. Meanwhile, the USD/CHF eyes 0.9100 to the downside from a 0.9136 intraday peak.

EUR, GBP - Sterling and the Single Currency are also experiencing a mild divergence, but Sterling remains subdued by its high-beta properties after shrugging off an overall upbeat jobs report. The EUR similarly side-lined the mostly in-line EZ GDP (2nd) and employment data – although the YY topped forecasts at 1.8% (exp. 1.5%). EUR/USD remains within a tight 1.1761-84 range whilst GBP/USD meanders on either side of 1.3800 but closer to the bottom of its 1.3787-3845 range with traders also flagging the 200DMA at 1.3776. EUR/GBP continued rising further above the 0.8500 mark to a peak of 0.8535 ahead of its 50 DMA at 0.8548.

FIXED INCOME

Core debt remains bolstered and has extended on overnight upside which saw USTs bid in-line with APAC bonds and amid a dip in equity futures given the COVID situation, particularly in New Zealand, and China’s market regulator issuing draft regulations. USTs are in proximity to session peaks printed in European hours as a broader risk-off move was seen following the announcement that New Zealand is returning to lockdown after one COVID case; albeit, the move was more gradual/contained when compared to the initial FX reaction. Technically, the session peak of 134.19+ is within reach of potential 61.8% fib resistance of the recent move lower that lies at 134.20. Crossing to EGBs, where Bunds are portraying the same picture as their stateside counterparts though technically have a larger band of clean air prior to the next resistance mark at 177.61 which is the high from August 5th. The mornings issuance was well received, but prompted little reaction, as is generally the case for uneventful short-end issuance. Leaving the EZ and turning to Gilts that have been tracking the broader macro themes rather than taking impetus from the mornings jobs data that showed hourly earnings increasing notably, as expected, perhaps reflecting the labour shortages, although this view is caveated by mechanics from the reference period – a labour issue that doesn’t look set to resolve itself soon as vaccines continue to climb. Note, the 2046 Gilt sale saw the b/c pick-up from the prior even given a lower average yield that was below 1.00%; however, the benchmark was unreactive to the sale. Finally, BTPs have, broadly speaking, been fairly contained in summer trade since the highs printed towards the start of the month on the lighter trading activity and as the volume of specific newsflow dips. In-light of this, the BTP-Bund spread has been in a ~10bp parameter for the month so far.

COMMODITIES

WTI and Brent front month future remain subdued amid the overall market risk sentiment, concerns of peak China growth and ongoing COVID concerns as reports of new cases prompt tighter restrictions across some APAC economies. WTI Sept oscillates on either side of USD 67/bbl (vs high USD 67.65) whilst Brent Oct resides just north of USD 69/bbl having dipped below the figure in a fleeting move. Goldman Sachs notes that the move lower in oil prices continues to reflect concern around the impact of the COVID-19 Delta wave on demand; base case remains that this will be a transient demand hit. GS believes the deficit will persist through to year-end, eventually requiring sharp increases in OPEC's output and a further rebound in shale activity and is still forecasting Brent to hit USD 80/bbl by Q4-2021. While breakthrough infections are increasing concerns about the medium-term demand outlook, GS sees growing and offsetting downside risks to global supply and estimate global demand at around 98mln BPD vs August view of 97.8mln BPD. Elsewhere, spot gold and silver have been grinding higher as yields continue to dwindle, with the former some USD 5/oz off USD 1,800/oz (vs low 1,784/oz). LME copper remains subdued by the risk tone alongside China concerns. BHP meanwhile in its earnings noted that they expect Chinese iron demand to be lower than today, which is in-fitting with China’s move to cut its steel output target.

17 Aug 2021 - 11:06- ForexData- Source: Newsquawk