(MENAFN- Your Mind media ) 25th September 2024
Digest – Sentiment was again firm on Tuesday while the dollar continued to slide, and Treasuries pared intraday losses once more. A quiet data docket lies ahead today.
Where We Stand – ‘More of the same’ was the general theme of trade yesterday, with the same themes that dominated markets on Monday again running the show on Tuesday, as a heavy slate of news-flow, particularly in the geopolitical realm, failed to significantly move the needle in terms of price action.
As such, Treasuries saw another day where early losses – as much as 5bp in the 10y – pared as trade progressed, though the curve as a whole continued to bear steepen, with the 2s10s nudging ever-closer to the 20bp mark. Markets continue to fret that the Fed’s 50bp cut may be too much, too soon, running the risk of a resurgence in inflationary pressures. In any case, yesterday’s 2-year supply was well-digested, with the auction stopping on the screws.
Elsewhere, sentiment was relatively firm in the equity space, with the path of least resistance continuing to lead to the upside, and dips remaining shallow, still being seen as buying opportunities. It was interesting, however, that the spill-over impacts from China’s bazooka-esque stimulus measures was relatively minimal. This likely speaks to a degree of scepticism among participants over said stimulus’ ability to turn around the fortunes of the world’s second-largest economy, with the measures instead looking like a sticking plaster to support domestic assets, but not solve longer-running, deeper, structural issues within the economy.
In the FX space, the greenback continued to soften, with Monday’s downside momentum continuing. Selling USD rallies remains my preferred strategy for now, with the FOMC plotting a much faster return to neutral than G10 peers, even if the 78bp of easing that markets price by year-end still seems too aggressive. My base case is for 25bp cuts at every meeting, with the potential for another 50bp move if unemployment rises north of the 4.4% forecast outlined in the September SEP.
Most majors benefitted from the softer USD, with the GBP seeing strong demand once more, as cable rose north of the 1.34 figure, seeing spot rise to fresh highs since early-March 2022. Against the euro, the quid has broken north of the psychologically important €1.20 figure, also trading to more than 2-year highs.
My short EUR, in the crosses, view continues to bear fruit elsewhere, with EUR/NOK yesterday breaking below its 100-day moving average, to its lowest since July, while EUR/AUD tested the 1.62 figure to the downside, also the lowest level in a couple of months. Of course, yesterday brought further dismal eurozone economic data, with Germany’s IFO business climate index slumping to 85.4, its lowest level since January.
The EUR OIS curve now discounts just under a 60% chance of a 25bp ECB cut next month, which should move much closer to 75-80% were CPI to come in cool next week. Consequently, the common currency is unlikely to catch much of a break in the short-term, particularly against those G10s with central banks reluctantly moving to a less restrictive stance – e.g., the BoE, RBA, and Norges Bank.
Other data releases, yesterday, were a little thin on the ground, though the Conference Board’s consumer confidence index substantially missed expectations, at 98.7 from a prior 103.3, considerably below the bottom of the forecast range. The data was far from disastrous, though did cause a brief wobble in equities, while also seeing the USD OIS curve move to discount a greater than 60% probability of a 50bp cut in November.
This is a slightly farcical situation, where OIS pricing moves so much on a relatively minor data point, though this is where the FOMC have now left us. By kicking-off the easing cycle with a 50bp cut, when it wasn’t necessary, the market will naturally now ‘bet the house’ on another such jumbo move after even the slightest of soft data prints. It will be interesting both to see whether the ‘Mr Market’ is similarly eager to hawkishly reprice expectations on any data beats, and whether the FOMC allow them to be bullied into a ‘jumbo’ cut for a second straight meeting.
Finally, in the commodities space, gold continued to gain ground, with the yellow metal notching a fresh record high for the fourth straight day. Gold’s rally, in the face of the sell-off in Treasuries, is a bit of a head-scratcher though probably signals that once again the market is being driven by a combination of retail flows, EM central bank buying, and participants riding wave of upside momentum. This feels like the sort of move that could just keep grinding on, and not one that I’d be especially keen to fade, without some signs of consolidation emerging first.
Crude, meanwhile, climbed around 2% on the day, with front WTI rising back above the $72bbl mark, with geopolitical developments in focus, while traders also paid close attention to the potential for production interruptions in the Gulf of Mexico, as platforms shut-in and brace for the second hurricane in as many weeks. In keeping with recent trends, the market will likely adopt a ‘buy the rumour, sell the fact’ approach here, fading the recent upside move, with a more sustained continuing to need a concrete pick-up in global demand, which remains elusive.
Look Ahead – An incredibly quiet economic calendar awaits today.
The Riksbank should deliver a 25bp cut this morning, taking the policy rate to 3.25%, and should signal that a couple more cuts are set to be delivered before the year is out. Such an outlook, though, broadly aligns with market pricing, and shouldn’t cause too much vol in the SEK.
Elsewhere, US economic releases are lacking with only August’s new home sales figures of note, though today’s 5-year auction will attract some attention after solid demand for yesterday’s 2-year supply.
Central bank speakers, meanwhile, are also lacking, with only the Fed’s Kugler and BoE’s Greene on the slate, while earnings releases are also on the light side, though the after-market report from Micron (MU) might have some read-across to the chip sector more broadly.
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