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US markets are being shaken by the Federal Reserve (Fed) hawks, as most FOMC members want to start dialing back the bond purchases before the end of this year.

Louis Fed President Bullard even wants to see the Fed done with the QE program by the end of the first quarter of 2022. Will the Fed talk the walk?

Looking at how the Covid situation evolves right now, there is probably little chance of seeing the Fed done with the bond purchases within a quarter. On the contrary, there is a growing likelihood of seeing the actual Fed expectations soften in the coming months. What happened in New Zealand this week is a proof that things could change fast.

In this sense, worsening Covid news, soft economic data and deteriorating sentiment could convince the Fed members that removing support prematurely, as would say Jerome Powell, is not a good idea.

For now, the hawkish readjustments to the Fed policy boosts volatility in stock prices as the market is about to lose its main catalyzer of gains: the cheap liquidity. The Fed support was the major driver behind the impressive post-pandemic rally, the end of the support could be the end of it.

The VIX index jump more than 20% as a reaction to the Fed minutes, and it’s probably just a start before things get worse from September.

There is hope though: the threat of a taper tantrum is real and will likely keep the Fed reasonably dovish when it comes to a concrete action.

In the FX, we see the greenback advancing to the highest levels since November on the back of a clear hawkish shift in the Fed policy stance. The DXY has potential for at least a 5-7% recovery if the Fed walks the talk, which would bring us somewhere near the 98-100 region in the coming quarters, especially knowing that there is little chance we see other major central banks, such as the European Central Bank or the Bank of Japan shifting towards a less dovish policy view.

Gold remains offered near the $1800 per ounce, but rising volatility, and a further turmoil in equities could reverse the sentiment and trigger important gains in the yellow metal.

US crude, on the other hand, is now testing the $63 pb support and the next bearish target for the bears is $60 per barrel mark, where stands the 200-day moving average. The major catalyzer is the rising Covid worries and news of measures being taken to avoid a further contagion worldwide. Even the latest drawback in the US inventories couldn’t give a smile to the oil bulls, while the US inventories declined more than 3 million barrels last week, more than twice as much as the 1.5 million barrels penciled in by analysts. The actual mood points at deeper pullback in oil prices, and price recoveries could be interesting top selling opportunities for those targeting a return to the $60 pb mark.

Market movers today

• There are no significant global economic releases.
• In Norway, we expect mainland-GDP rose 1.7 % q/q in Q2, confirming our expectations of a quick recovery as restrictions were removed (see more details in the Nordic Macro section).

The 60 second overview

The market sentiment continues to be dominated by the negative impact of the delta variant as well as speculation of Fed tapering as shown in recent minutes from the latest FOMC meeting as well as Chinese government's regulatory clampdown on private companies such as the tech companies as well as a slowdown in the Chinese economy.

Hence, we are seeing a stronger dollar on the back of weaker risk sentiment as well as support for safe-haven assets such as US Treasuries and German government bonds combined with wider credit spreads and weaker equity markets.

This morning there has been a broad based decline in equity prices across the Asian region and the VIX index has been rising in recent days.

However, given the lack of a clear direction in the markets and the uncertainty on both the macroeconomic outlook and Fed tapering, bond yields are caught in tight trading intervals, although we do see real interest rates continuing to be very low as shown e.g. in the auction yesterday of French inflation linked bonds, where an 8Y inflation linked bond was sold with a real yield close to -1.8%.

Equities: Here we go again with volatility coming back into equities and it always comes as a surprise to investors when equities have been on long trajectory higher. Yesterday it was centred on European stocks but volatility is elevated in Asia this morning as well. No surprise defensives outperforming on a day like yesterday but more interestingly, the tech sector holding up very well and showing much more defensive characteristics than one and two decades ago. Also, small caps underperforming with Russell 2000 posting sixth straight decline. In US Dow -0.2%, S&P 500 +0.1%, Nasdaq +0.1%, Russell 2000 -1.2%.

As mentioned above, Asian stocks are lower this morning with China once again leading the declines. US futures slightly lower while European futures are in green.

FI: Bond yields continued to decline despite the expectations of a tapering announcement from the Federal Reserve in September. We did see a modest widening between 10Y BTPS and 10Y Bund as most investors are preparing for a possible tapering by ECB. We do not believe that ECB will begin tapering after next month's meeting.

FX: The weakening risk sentiment supported further dollar strength yesterday, notably against AUD and Scandies. Following the Norges Bank meeting yesterday, we still firmly believe in a September hike.

Credit: Credit saw a decisive sell-off yesterday with iTraxx Xover widening 3bp (to 237.6bp) and Main 0.7bp wider (to 47.1bp). HY bonds widened 4bp and IG closed almost 1bp wider.

Nordic macro

We expect mainland-GDP in Norway rose 1.7 % q/q in Q2, confirming our expectations of a quick recovery as restrictions were removed. If proven right, this would be significantly stronger than Norges Bank expected in the June MPR at 0.8 %, hence supporting the case for a September hike.

Technical analysis

The MACD indicator line is slightly above 0, pointing up

The RSI is above 50.

What the possible outcomes are

XAUUSD recovered some losses after yesterday’s decline and trades now at 1,785. In the absence of significant news, the U.S. dollar index (DXY) remains the only indicator of the pair's moves.

If the price passes the initial resistance level of 1,789.42, it could test the next higher at 1,795.71.

Alternatively, if the price reverses, then it could reach the first support level of 1,778.85.

A pass below the first level can move the price up lower toward 1,770.62.

Key levels

Support 1,778.85 1,770.62

Resistance 1,789.42 1,795.71

US stocks wavered after mixed economic data from the US. Data from the Labor Department showed that the number of Americans filing for jobless claims declined from 377k to 348k last week. This was a better number than the expected decline to 363k. As a result, the number of continuing jobless claims declined from 2.89k to more than 2.82k. On the other hand, the Delta variant has led to manufacturing challenges. The Philadelphia Fed manufacturing index declined from 21.9 in July to 19.4 in August. This decline was worse than the median estimate of 23.0. The top corporate news was at Johnson & Johnson where the CEO stepped down and that Amazon is planning large retail location in the US.

The Japanese yen was little changed after the country published relatively weak inflation data. According to the statistics agency, the national consumer price index rose from 0.1% to 0.2% on a month-on-month basis. As a result, the CPI made a modest improvement to -0.3% on a year-on-year basis. Meanwhile, the national core CPI that excludes the volatile food and energy prices, rose from 0.1% to 0.2%. As a result, the Bank of Japan will likely maintain its policies in the near term.

The key events to watch today will be the retail sales data from the UK and Canada. Analysts expect the UK data to show that retail sales declined from 9.7% in June to 6.0% in July. On a month-on-month basis, they expect that sales declined from 0.5% to 0.4%. The core retail sales are expected to drop from 7.4% to 5.7%. The UK will also publish the latest public sector borrowing data. The other key event will be the latest Canadian retail sales numbers that are expected to show that sales bounced back by 4.4% in July. In the US, Fed member Robert Kaplan will deliver a speech almost two days after the bank released its minutes.

EURUSD

The sell-off of the EURUSD pair accelerated in the overnight session. The pair moved to a low of 1.1678, which was the lowest level since November last year. On the daily chart, it moved below the March low at 1.1700. It also declined below the 25-day and 50-day moving average and is along the 38.2% Fibonacci retracement level. The pair has also formed an M-pattern. Therefore, the overall sentiment is bearish, with the next key support being at the 50% Fibonacci level at 1.1500.

GBPUSD

The GBPUSD pair relentless sell-off continued in the overnight session. It declined to a low of 1.3623, which is the lowest it has been since last week. On the daily chart, the pair moved below the 25-day and 50-day moving averages while the Relative Strength Index (RSI) has moved close to the oversold level at 30. It is slightly above the key support at 1.3571. Therefore, a bearish breakout below this level will see it drop further to below 1.3600.

UKOIL

The price of Brent crude oil dipped sharply on Thursday as investors continued worrying about Delta variant cases. The price declined to a multi-month low of 65.87. On the four-hour chart, it moved below the important support at 67.62. Also, the price remained below the 25-day moving average while the MACD has moved below the neutral level. The overall trend of oil prices is bearish.

General trend

• AU and NZ bond yields extend declines.
• Equities in Shanghai and HK extended declines.
• Shanghai Consumer Staples index drops over 4% on continued regulatory concerns related to liquor firms; Financials remain weaker as markets digest recent Huarong developments.
• HK TECH index also extends drop.
• Nikkei has moved modestly lower; Toyota extends drop amid production concerns.
• S&P ASX 200 has traded slightly higher [Financials rise; Resources index again lags].

Headlines/Economic Data

Australia/New Zealand

• ASX 200 opened flat.
• (AU) Sydney (Australia) Lockdown has been extended until end of Sept; Imposing curfew for certain areas of Sydney.
• (AU) Reserve Bank of Australia (RBA) Assist Gov Kent: Need for greater transparency in FX market.
• (AU) Australia sells A$700M v A$700M indicated in 3.25% Apr 2025 bonds, avg yield: 0.2696% , bid to cover 8.08x.
• (NZ) New Zealand PM Ardern: Extends countrywide lockdown through midnight Aug 24th, Outbreak not contained to Auckland.
• (NZ) Reserve Bank of New Zealand (RBNZ) Gov Orr: Have to focus on inflation and employment (in line); Oct meeting is a live meeting for OCR.
• (NZ) New Zealand confirms 2 coronavirus cases in the capital of Wellington.

China/Hong Kong

• Hang Seng opened -0.3%, Shanghai Composite -0.7%.
• (CN) PBOC Gov Yi: Reiterates the PBOC will guard gate of money supply.
• (CN) China said to have postponed a vote to add anti sanctions law to Hong Kong Law (unexpected)- SCMP.
• (CN) China Legislature passes the personal Information Protection Law - Press.
• (CN) China Cyberspace Admin: has issued draft rule on Auto Data Security Regulations to be effective Oct 1st.
• (CN) CHINA PBOC MONTHLY LOAN PRIME RATE (LPR) SETTING: LEAVES BOTH 1-YEAR AND 5-YEAR RATES UNCHANGED (16th straight month of steady rates).
• Hang Seng is due to hold next index review on Aug 20th (Fri).
• Evergrande Real Estate Group [3333.HK]: China PBOC and banking regulator CBIRC reportedly summons Evergrande Group to resolve debt risks – press.
• (CN) China Liquor Company Exec said to be attending a regulatory meeting - Press.
• (CN) China reiterates stance of releasing metal reserves to calm the markets.
• (CN) China PBOC Open Market Operation (OMO): Injects CNY10B in 7-day reverse repos v CNY10B in 7-day reverse repos prior; Net CNY0B v Net CNY0B prior.
• (CN) China PBOC sets Yuan reference rate: 6.4984 v 6.4853 prior.
• (CN) PBOC sells CNY25B in 3-month and 12-month bills in Hong Kong.

Japan

• Nikkei 225 opened -0.2%.
• (JP) JAPAN JULY NATIONAL CPI Y/Y: -0.3% V -0.4%E; CPI EX-FRESH FOOD (CORE) Y/Y: -0.2% V -0.4%E.
• (JP) Japan Govt requests establishment of a WTO panel regarding China’s measure imposing anti-dumping duties on stainless products originating from Japan.

Korea

• Kospi opened +0.4%.
• (KR) South Korea July PPI Y/Y: 7.1% v 6.4% prior.
• (KR) Said that South Korea will maintain the level 2 social distancing for an additional 2-weeks - Yonhap.

North America

• (US) AUG PHILADELPHIA FED BUSINESS OUTLOOK: 19.4 V 23.1E (lowest since Dec).
• (US) Fed Chair Powell to deliver a speech on the economic outlook at the Jackson Hole Symposium on Aug 27th at 10:00ET.
• Moderna [MRNA]: Officials in the US said to be reviewing whether co's vaccine is linked to higher risk of uncommon side effect than previously thought - Washington Post.
• Apple [AAPL]: Said will not require employees to return to offices until Jan at earliest citing coronavirus - Press.

Europe

• (UK) Aug GfK Consumer Confidence: -8 v -7 prior.
• (DE) Germany Finance Ministry: economy on track for stronger growth in Q3 after 1.5% q/q growth in Q2 - monthly report.

Levels as of 01:20 ET

• Nikkei 225, -1%, ASX 200 -0.1% , Hang Seng -2.6%; Shanghai Composite -2% ; Kospi -1%.
• Equity S&P500 Futures: -0.3%; Nasdaq100 -0.2%, Dax -0.5%; FTSE100 +0.1%.
• EUR 1.1687-1.1675 ; JPY 109.88-109.63 ; AUD 0.7157-0.7125 ;NZD 0.6853-0.6808.
• Gold +0.3% at $1,787/oz; Crude Oil +0.5% at $63.84/brl; Copper +1.1% at $4.0898/lb.

During the first half of Thursday's trading session, the EUR/USD currency pair surged by 30 pips or 0.26%. However, the exchange rate erased the earlier gains by the end of the trading session.

Technical indicators suggest buying signals on the 4H and daily time-frame charts. Most likely, the European single currency could edge lower against the US Dollar within this session.

But, the currency exchange rate might find support near the weekly S2 at 1.1670 during the following trading session.

The British Pound plummeted by 110 pips or 0.80% against the US Dollar on Thursday. A breakout occurred through the lower boundary of a descending channel pattern during Thursday's trading session.

Given that a breakout has occurred, sellers are likely to continue to drive the price lower during the following trading session. The potential target for bearish traders will be near the 1.3500 level.

However, the GBP/USD currency exchange rate could reverse from a psychological support level at 1.3600 within this session.

On Thursday, the US Dollar declined by 62 pips or 0.56% against the Japanese Yen. The decline was stopped by the 100– hour simple moving average at 109.58 during yesterday's trading session.

Currently, the exchange rate is trading near the lower boundary of an ascending channel pattern and could be set for a breakout. If the breakout occurs, a decline towards the weekly S1 at 109.19 could be expected today.

However, if the channel pattern holds, buyers could drive the currency exchange rate higher within this session.

On Thursday, the yellow metal's price declined by 100 pips or 0.55%. A breakout occurred through the lower boundary of an ascending channel pattern during Thursday's trading session.

Technical indicators suggest that the commodity is likely to continue to edge lower. Bearish traders could target the 200– hour simple moving average at 1763.9 within this session.

On the other hand, the XAU/USD exchange rate could bounce from a support line at 1775.0 before the end of Friday's trading session.

Daily Pivots: (S1) 109.43; (P) 109.83; (R1) 110.17; More...

Intraday bias in USD/JPY remains neutral and outlook is unchanged. On the upside, break of 110.79 will resume the rebound from 108.71 to retest 111.65 high. On the downside, break of 109.10 will target 108.71 support first. Firm break there will resume the decline from 111.65 and target 38.2% retracement of 102.58 to 111.65 at 108.18 next.

In the bigger picture, medium term outlook is staying neutral with 111.71 resistance intact. The pattern from 101.18 could still extend with another falling leg. Sustained trading below 55 day EMA will bring deeper fall to 107.47 support and below. Nevertheless, strong break of 111.71 resistance will confirm completion of the corrective decline from 118.65 (2016 high). Further rise should then be seen to 114.54 and then 118.65 resistance.