Risk aversion dominated for most of yesterday’s Asian and European trading sessions. Geopolitics (Taliban taking control of the Afghan capital Kabul), slowing Chinese growth momentum at the start of Q3, and tighter restrictions in Asia/Down Under to stop the spread of the Delta Covid-variant all soured the mood. Main European stock indices lost 0.5% to 1%. Core bonds thrived with US Treasuries outperforming German Bunds. Safe haven currencies JPY (USD/JPY 109.24 close) and CHF (EUR/CHF 1.0746 close) stood out on the FX market, with the dollar slightly outperforming those other two majors (EUR & GBP). It wasn’t until just before the European close that US stock markets staged a remarkable intraday comeback, without any specific driver. The Dow Jones and S&P 500 overturned opening losses to end 0.3% higher, both setting an umpteenth all-time high. Nasdaq underperformed, losing 0.2% on the day. The sudden risk improvement brought both US Treasuries and the dollar off their best intraday levels. Daily US yield changes eventually ranged between +0.2 bps (2-yr) and -1.6 bps (7-yr) with the belly of the curve outperforming the wings. German yield differences varied between -0.2 bps and +0.2 bps across the curve. EUR/USD closed at 1.1778 from a 1.1784 open.
The largest Asian stock benchmarks this morning defy the WS rebound. This time around, Korean and Chinese indices underperform (-1.5%). Korean markets were closed yesterday while China issued draft rules to target unfair online competition (see below). Risk aversion again translates into a better bid for core bonds and a firmer dollar. New Zealand reported its first new possible community case of Covid-19 since February. It sends a shock wave through NZ markets that completely discounted the start of a tightening cycle at tomorrow’s RBNZ meeting. NZD swap yields drop by 13 bps to 8 bps as the curve bull flattens. NZD/USD drops from 0.7020 towards 0.6950. Today’s eco calendar contains July US retail sales. Consensus expects a modest decline for both the headline (-0.3% M/M) and control group (-0.2% M/M) outcomes. Last Friday’s (August) University of Michigan consumer confidence for the first time suggested that households could start spending less as inflation bites. It’s definitely something to keep a close eye on. Fed chair Powell hosts a town hall discussion with educators but this doesn’t seem the venue to drop big hints on future policy. In the meantime, more Fed governors seem to center around the idea that we’re one strong payrolls report away from a (September) QE tapering announcement. Once the winding down of the current $120bn monthly net purchases starts, the process will likely go much faster than in the previous cycle with some indicating a mid-2022 potential end date. Such scenario strokes with an end 2022 rate hike, which is a wildcard for the updated September Fed dot plot. Near consensus UK labour market data this morning can’t break the deadlock for sterling. EUR/GBP changes hands just north of 0.85.
AUD/USD slips towards 0.73 this morning after the RBA published the minutes of its August policy meeting. The central bank back then stuck to a bullish assessment of the economy, although tweaking growth forecasts a little to the downside for the current fiscal year as Australia continues to struggle with virus outbreaks. It also kept its guidance for reducing the pace of bond buying to A$4 bn per week when the current envelope is exhausted in September. The minutes revealed board members discussed to delay the tapering should the virus bring Australia’s recovery off track. While this is not new (the policy statement mentioned this as well), it does grab more market attention in the current atmosphere where Australia as recently as yesterday extended regional lockdowns.
China’s State Administration for Market Regulation published draft rules aimed at preventing unfair online competition in the country’s latest move to tighten its grip on the nation’s internet giants. It follows other measures that have an impact in areas ranging from antitrust to data security and ride-hailing. Chinese (tech) stocks have suffered heavy losses from the rapidly changing and more hostile regulatory environment.