International markets analysis and insights
Stocks have had a choppy session in Asia, with investors being tossed around between coronavirus resurgence, central bank stimulus, and the convincing economic rebound in China.
European markets look set for a higher opening after yesterday’s sell-off into month-end.
The 1% selloff into month-end camouflaged a relatively concrete performance in EU stocks, given its value bias and lack of retail involvement, and as the month-end was exacerbated by reweighting flows.
The move higher in FAANGs and semiconductors remains relentless and brutal to rationalise given the less encouraging news flow. Sentiment remains extremely bullish, and I am repeatedly told there are no alternatives, “semis are the only game in town,” and valuations do not matter.
August stock markets rise still feels a little insane to me, but clearly, it continues to work.
Europe sees some support post a media article reporting that Germany’s economic contraction will not be as deep as feared according to sources and has helped nudge the EURUSD higher in Asia.
RBA keeps rate on hold
The Reserve Bank of Australia (RBA) keeps the cash rate on hold at 0.25%, as widely expected, which leaves the 3-year yield target at 0.25%.
However, to provide additional support, the central bank expanded its term funding facility $A155 billion to $A200 billion. With the cash rate and the 3-year government bond yield both pegged at near-zero (25bp), the term funding facility’s role is to allow the banks also to get funding at a near-zero rate (25bp), thereby encouraging them to lower their lending mortgage and business rates to stimulate the local economy further.
One-way street in Asia Forex markets
As for the currency market, trade has been a one-way street in Asia as FX traders in the chorus appear to be chanting, ‘we believe the Fed, let us sell the dollar.” With gold’s glittering appeal framing the bearish US dollar backdrop.
Focus now moves to the September Federal Open Market Committee (FOMC) decision. Does this allow us to move on from monetary policy tools to fiscal focus?
Politics is holding back a US stimulus deal for now, but if this comes to fruition (and there is the potential for it to be larger than expected) can we see a higher back end rates move?
The market rally has not forced politicians to unite with a sense of urgency, unlike other crises. Who knows, maybe we need and unlikely massive sell-off to get politicians to expedite.
China’s strong economic data
The USDCNH pair traded down to 6.8176 on China’s strong Caixin PMI data and is now consolidating around 6.82 into the London session. CNH outperformed regional peers but likely influenced G-10 moves and particularly the EURUSD higher during the Asia session.
Output continued to expand due to a domestic recovery and a boost from external demand amid the global re-openings. At the same time, new export orders surged again, boding well for future activity.
Next week’s European Central Bank (ECB) meeting (Thursday, 10 September) will allow the Governing Council (GC) to take stock of economic performance over the summer and reassess the outlook, based on a new set of staff macroeconomic projections.
In this context, Eurozone Q2 GDP, the recent appreciation of the Euro, and the EU recovery package’s impact are likely to feature.