Daily Market Outlook, August 23, 2023

Munnelly’s Market Commentary…

Asian equity markets displayed a mixed performance as a series of earnings reports and the latest PMI data influenced trading, all within a relatively narrow price range as the Jackson Hole Symposium drew nearer. The Nikkei 225 started with initial losses but managed to recover, trading flat as it approached the 32K handle. This came after the release of somewhat mixed PMI figures. However, the market's upward movement was limited due to ongoing concerns, including Japan facing criticism from China and Hong Kong over its plan to release water from the Fukushima nuclear plant. Meanwhile, the Hang Seng index saw a modest increase, while the Shanghai Composite declined under 1%. Hong Kong's trading exhibited indecision, while the mainland market remained subdued. This could be attributed to the release of several earnings reports and the anticipation surrounding the forthcoming results from major Chinese banks.

Overnight, US Treasury yields have retreated from recent highs. The key data point for the day is the August flash PMI surveys, especially in the UK and the Eurozone, which will offer valuable insights into economic activity during the middle of the third quarter. Survey results suggest that the economic momentum seen in earlier quarters has waned, with the manufacturing sector grappling with decreased demand. The services sector, while previously rebounding, is now showing signs of cooling, possibly influenced by higher interest rates and ongoing cost-of-living pressures. The manufacturing weakness is also contributing to declines in input and output prices. However, policymakers note that the services PMI price indices are still above their long-term averages. Looking ahead, further economic softening in August for both the UK and Eurozone is expected. Projections indicate that the UK manufacturing PMI will drop from 45.3 to 44.0, indicating a more pronounced contraction. The UK services PMI is also expected to decline from 51.5 to 50.8, remaining just above the 50-point threshold that distinguishes growth from contraction. The composite PMI, which encompasses both manufacturing and services output, is predicted to decrease from 50.8 to 49.8. As for the Eurozone, a slight dip is projected in the manufacturing PMI from 42.7 to 42.5, indicating an accelerated pace of contraction. The Eurozone services PMI is expected to marginally decrease from 50.9 to 50.8. Furthermore, the Eurozone's flash consumer confidence data for August is on the docket and might reveal an improvement in contrast to the recent decline in business sentiment.

Stateside, the flash PMI typically doesn't attract as much attention as its European counterparts. Additionally, US new home sales data is scheduled for release today. Market attention is also on the potential adjustments to historical monthly US nonfarm payrolls figures. The Bureau of Labor Statistics is preparing to release preliminary benchmark revisions to its establishment survey. While there is speculation that recent job growth might have been overstated, any revisions are unlikely to significantly alter the overall economic landscape or have a substantial impact on the markets.

FX Positioning & Sentiment

The recent strengthening of the USD and the weakening of CNH have contributed to supporting implied volatility in FX options. However, the absence of realised volatility in the FX markets suggests that current levels are favourable for selling. Selling short volatility trades would be advantageous if the current stable conditions in the G10 FX major currency pairs persist. Market participants might be awaiting the speech by the U.S. Federal Reserve Chairman at the Jackson Hole Symposium on Friday before making significant moves. The AUD/USD pair is experiencing challenges, particularly in conjunction with the decline of China's yuan. Traders taking bearish positions could benefit from holding long AUD puts, capitalising on the anticipated downward movement of the Australian dollar against the US dollar.

CFTC Data As Of 15-08-23

Friday's IMM data release showed USD short grew by 0.55bn in Aug 9-15 period
Current Aug 16-22 reporting period will not include Jackson Hole Symposium
Data released 25 Aug likely to be mooted by J-Hole comments by Powell, et al
EUR$ -0.45% in prior period; -0.7% in new may stall EUR buying
Slow glbl growth tempers hawkish ECB outlook after China cut, lwr German PPI
$JPY +0.33% in new period, expect USD buying amid widening US-JP rate view
GBP$ +0.43% since Aug 16; UK CPI well-above target to keep BoE in hike mode
AUD, CAD big sellers in prior period on China slowdown short likely to keep growing amid less-dovish Fed view (Source: Reuters)