Daily Market Outlook, September 5, 2023

Munnelly’s Market Commentary…

Asian equity markets remained relatively subdued following the recent lull in U.S. markets and amid contemplation of disappointing data releases. Among these, the Chinese Caixin Services PMI fell short of expectations, setting the tone for the day. The Nikkei 225, showing a modest gain but struggled to breach the 33k handle. It contended with headwinds stemming from discouraging household spending data, which experienced its most significant decline since February 2021.

In contrast, the Hang Seng and Shanghai Composite indices faced more substantial setbacks. The disappointing Chinese Caixin Services PMI data cast a shadow, and concerns about the property sector loomed large due to fears of defaults. It was reported that approximately a third of the 50 major private builders were on the precipice of having to make payments totaling around USD 1.5 billion this month. In a narrow escape, Country Garden averted default by making USD-denominated coupon payments just hours before the grace period's expiration.

Today, investors also await the final reading for the Eurozone Services PMI, which now includes August figures for regional economies beyond Germany and France. In line with the UK, the preliminary 'flash' estimate for the Eurozone Services PMI retreated to 48.3, signalling a contraction in activity for the first time since the previous December. Additionally, market attention is drawn to the ECB consumer expectations survey, with a particular focus on whether inflation expectations continue to moderate. Meanwhile, Eurozone producer price inflation data is scheduled for release, and German factory orders will be unveiled early tomorrow morning.

After nine consecutive policy meetings marked by rate hikes, the ECB faces a pivotal decision. Falling core CPI inflation, weak PMI figures, and declining inflation expectations might push the ECB toward a policy 'pause' in the upcoming week, although this remains a closely contested choice. Today's lineup of ECB speakers includes Schnabel and Guindos, who will address a legal conference on day two. It remains uncertain whether their speeches will provide significant new insights into the short-term monetary policy outlook.

Stateside,U.S. markets, having observed Labor Day, return to action. The data docket for the week is relatively light, with today featuring the July factory orders report, expected to show a 2.4% decline. Later in the week, investors can look forward to the ISM services report and the release of the Fed Beige Book.

FX Positioning & Sentiment

The U.S. jobs report has spurred an uptick in both the dollar and stock markets. Meanwhile, the Yuan and MSCI Emerging Markets/FX index have remained steady, and commodities like oil, copper, and iron ore are on the rise. These positive trends in both stocks and commodities are bolstering investor confidence, encouraging a greater appetite for risk-taking. It appears that the higher yields offered by the dollar are drawing in more investors. To fully rectify the losses incurred between September and July, the USD will need to appreciate further, at least by 1%.Traders have significantly increased their bearish positions against the USD when compared to the EUR, GBP, and MXN. Furthermore, they are taking short positions on the USD index and betting against the USD when paired with BTC and BRL. Forecasts suggest that U.S. interest rates are unlikely to change from their current level until around May or June of 2024. This extended timeline means that those traders who have taken short positions on the USD may have to wait quite a while before they see rates moving in their favour. To fully recover the losses incurred between September and July, the USD will need to strengthen further.

CFTC Data As Of 31-08-23

EUR net spec long 146,679 contracts by Tuesday vs 158,760 contracts previous week
JPY short grows to 98,473 contracts vs 95,323 previously
AUD short jumps to 70,185 contracts vs 63,786
GBP long 48,401 vs 59,107
CAD short 15,761 vs 12,070 (Source: Reuters)