Daily Market Outlook, August 14, 2023

Munnelly’s Market Commentary…

Asian equity markets encountered downward pressure driven by ongoing economic concerns in China and apprehensions over developer defaults. This backdrop of risk aversion loomed over the region, especially with significant upcoming events such as key global data releases and the imminent release of the latest Federal Open Market Committee (FOMC) minutes.

The Nikkei 225 index (-1.3%) in Japan experienced initial fluctuations between gains and losses. Early advances, attributed to a weaker currency, were eventually nullified as the index succumbed to the prevailing risk-off sentiment. In contrast, the Hang Seng index (-2.5%) and the Shanghai Composite index (-1.0%) recorded declines. Among these, the Hang Seng index took the hardest hit, largely due to substantial losses in the technology and property sectors. These losses were amplified by concerns surrounding defaults, as evidenced by Country Garden Holdings' suspension of trading for 11 onshore bonds and Sino-Ocean Group's announcement regarding the suspension of trading for 6% guaranteed notes due in 2024. Adding to the concerns, China's recent lending data revealed a significant drop of nearly 90% in New Yuan Loans, marking the lowest figure since 2009. Participants are also bracing themselves for the release of Chinese activity data scheduled for the following day, as well as the upcoming earnings reports from major tech giants Tencent and JD.com later in the week.

The start of the week is expected to be relatively quiet, with a data docket devoid of any significant data releases. However, the data calendar for the rest of the week is quite active, particularly in the UK. The labour market report on Tuesday will be followed by inflation data on Wednesday and retail sales data on Friday. Anticipated mixed outcomes in these reports may underscore the Bank of England's delicate position as it contemplates the possibility of another interest rate hike. Forecasts suggest that the labour market report will reignite domestic inflationary concerns. Despite the BoE acknowledging tentative signs of easing labour market pressures in its August Monetary Policy Report, a further decline in reported unfilled job vacancies might be seen as another indication of this trend. Nevertheless, employment is projected to have risen by 155,000 in the three months leading to June, with the unemployment rate likely remaining stable at 4.0%. Furthermore, annual average earnings growth is expected to accelerate, reaching a new multi-year high of 7.4%. These forecasts are expected to intensify the challenges faced by the Bank of England.

CFTC Data As Of 11-08-23

USD net spec short cut significantly in Aug 2-8 period; $IDX +0.52%
EUR$ -0.31% in period; specs -22,251 contracts now +149,811
$JPY +0.1% in period; specs -3,964 contracts as pair rises to key 145 lvl
GBP$ -0.22% in period; specs -2,542 contracts, long cut to +47,020
AUD$ -1.13% in period; specs +8,600 contracts, specs bottom-fish
$CAD +1.05%; specs -6,988, position flips to -623
BTC +2.64% specs -610 contracts into strength, now short 1,149 (Source: Reuters)

FX Options Expiries For 10am New York Cut

(1BLN+ represent larger expiries, more magnetic when trading within daily ATR)

EUR/USD: 1.0975-80 (865M), 1.1000 (1.9B), 1.1050 (535M), 1.1065 (555M)
USD/JPY: 142.00 (1.8B). GBP/USD: 1.2510 (310M), 1.2885 (305M)
AUD/JPY: 0.9000 (915M). AUD/USD: 0.6505 (950M). USD/CAD: 1.3350 (580M)
USD/ZAR: 19.3800 (540M)

FX Options Positioning

Implied volatility for near-term contracts in the G10 foreign exchange market continues to decline and has further decreased following the release of the CPI data, as was anticipated. The 1-month benchmark contracts are now approaching the possibility of revisiting their lows from June, indicating a resurgence of the typical FX market conditions during the traditional quieter period of August.