Capital markets are again adjusting themselves to disappointing data from the world’s largest economy.
Friday’s July U.S retail sales data was not inspiring, with both the headline and core readings flat on an m/m basis, a big deceleration from the decent growth seen in the revised June report.
Uneven growth in the U.S. has some market participants doubting whether the economy is strong enough to bear an interest rate increase. Bets on federal-funds futures indicate that investors now see a +6% likelihood of the Fed raising rates by September, down from +18% earlier this month.
There is very little data out this week that could change current market opinion. Among the highlights of a relatively quiet mid-August week are the minute releases from the Federal Open Market Committee (FOMC) and the European Central Bank (ECB).
The markets main focus should be on the U.K. as key reports will be focusing on post-Brexit data for the first time – consumer and producer prices, the labor market and retail sales. Elsewhere, the Aussies report their labor force data.
1. Crude prices rally +11% and +7% in August
Overnight, oil prices printed fresh highs for the month, as speculation intensifies about potential producer action to support prices in an oversupplied market and this despite weaker global fundamental data.
Brent crude oil futures rose to a high for the month of +$47.40 a barrel, up +33 cents from their last settlement, and +11.3% above the last close in July. U.S. West Texas Intermediate (WTI) crude futures rose to a high of $44.95 a barrel before dipping to $44.85 a barrel, still up +36 cents from their last close. WTI has gained more than +7% in August.
Last week Saudi Arabia signaled that it is prepared to discuss stabilizing the markets at informal OPEC discussions next month.
However, there are a number of dangers for crude bulls; first, OPEC and its periphery members tend to be all talk and little action, second, higher prices attract a strong rise in drilling activity in the U.S. and third, weaker global fundamentals do not justify higher energy prices at the moment.
Gold prices remain better bid as investors bet that the Fed will be in no hurry to raise rates in coming months following a lackluster U.S retail sales print on Friday. Gold for December delivery was recently up +0.4% at $1,339.80.
Expectations of continued low rates tend to buoy gold, which pays its holders nothing and struggles to compete with yield bearing investments when borrowing costs rise.
2. Global stock indices straddle record highs
Overnight in Asia, the market belief that further stimulus from China is on the way is supporting regional bourses and have cancelled out disappointing preliminary Q2 GDP data from Japan.
In Europe, Euro equity indices are trading higher in light summer volumes as some European countries celebrate Assumption Day holiday.
Commodity and mining stocks, as well as oil stocks in the FTSE 100 are trading higher ahead of the open stateside.
Indices: Stoxx50 +0.4% at 3,058, FTSE +0.3% at 6,934, DAX +0.5% at 10,762, CAC-40 +0.4% at 4,517, IBEX-35 +0.3% at 8,739, FTSE MIB closed, SMI flat at 8,295, S&P 500 Futures +0.2%.
3. Sovereign yields eye record lows
The threat of further central bank easing continues to push rich-world bond yields dramatically lower and drive investors to seek higher returns in longer-term debt and in emerging markets.
In two-month, yields on U.K 10-year gilts have more than halved to all-time lows of +53bps, having been up at +1.39% just before the Brexit vote on June 23.
The Bank of England’s (BoE) aggressive monetary easing policy continues to pull down rates right across Europe. This morning, German Bunds trade well into sub-zero territory at -0.17%.
With the G7 product yields so low, the market is now looking to Euro periphery debt for returns. For instance, Spanish yields are now trading comfortably under +1% at +0.92% having falling over -60bps in the last couple of months.
Ahead of the U.S open, U.S 10-year’s is +1.505% compared with Friday’s +1.515% close.
4. Dollar slips against yen
With investors lengthening the odds on any Fed hike this year (September fed funds at +6% and December at +38%) is certainly weakening the bullish case for the mighty ‘buck.’
Currently, with a number of European countries honoring Assumption Day, both currency volume and volatility have taken a direct hit this Monday morning.
The USD is trading on the back foot ahead of the open stateside, down against the EUR (€1.1168), yen (¥101.04) and a range of emerging market currencies.
The one outlier amongst the major’s has been sterling (£1.2926), which continues to trade ever closer to its post-Brexit trough at £1.2797. The pounds next move with depend on this week’s host of post Brexit data.
5. China growth to disappoint
Last Friday, the IMF forecasted that China’s once-stellar economic growth would grind lower for the next five-years and will fall below +6% in 2020.
The IMF said China continues to struggle with slower private investment and weak external demand. Recent fundamental data certainly supports that scenario.
They believe that China’s economy is “advancing on many dimensions of rebalancing, particularly switching from industry to services and from investment to consumption. But other aspects are lagging, such as strengthening SOE (state-owned enterprise) and financial governance and containing rapid credit growth.”
The weakening does not take hold until next year as the IMF sees China’s economy growing by +6.6% in 2016 (official target is +6.5%), but slowing each year thereafter until 2021.