The big market themes last week were increased China risk and a resilient US economy with higher US ‘real’ yields.
The result was broad USD strength and global equity weakness. GBP longs also saw tailwinds from the UK data flow, with GBPNOK the best performing major currency pair on the week. Services PMI could test GBP longs this week, although pullbacks should be shallow.
US equity and index options expiry may have played a part in the equity drawdown, with dealer’s net short gamma and delta hedging through shorting S&P500 futures and single stock names. Let’s see how options dealers/market makers deal with this inventory of short positioning/hedges this week. It may be unwanted, and there’s a risk that they buy back short S&P500 futures hedges (to close), which could cause an early relief rally in equity.
Positioning will play a huge part this week, and it wouldn’t take much to see US real rates a touch lower, with the USD following in its wake.
China newsflow
As the new trading week cranks up, news flow on China will drive sentiment and should the HK50 and CNH find further selling interest, then I’d align with a bias to look at short DAX40 trades. The China property sector remains the elephant in the room, with the market finding little tangible fiscal support to reprice risk higher. The price action in the HK50 reflects that, with rallies quickly sold into.
Weekend news that the People’s Bank of China (PBoC) and financial regulator are leaning on banks to increase lending is a positive step, but we question whether there is the demand to increase volume.
Jackson Hole in focus
We get PMI data out throughout the week, but as the week rolls on the attention should turn to Jackson Hole, where Jay Powell takes centre stage. While this forum has been the setting for some bold changes to monetary policy in years gone by, it doesn’t feel like this time around we’ll be treated to such action. The USD remains front and centre this week, biased long, I acknowledge positioning is rich and could easily be vulnerable to profit taking into Powell’s speech.
The marquee data to navigate:
China loan prime rate decision (21 August): After the PBoC surprised the market and eased the Medium-Lending Facility last week, we should see the PBoC ease the 1- and 5-year Prime lending rate by 15bp respectively. Unless we see the Prime Rate left unchanged, Chinese equity markets will likely overlook any policy easing here and funds should continue to shy away from HK50, CHINAH, and CN50 longs. USDCNH finds support below 7.3000, but few are buying yuan with conviction other than to cover yuan shorts.
Eurozone manufacturing and services PMI (23 August): The market eyes the manufacturing index at 42.6 (from 42.7) and services at 50.5 (50.9). A weaker services PMI, especially if the data prints below 50 (the expansion/contraction line) and we could see better EUR sellers, with the DAX40 eyeing a break of the July lows of 15,500. Tactically warming to EURCAD shorts.
UK manufacturing and services PMI (23 August): the market looks for manufacturing to come in at 45 (45.3) and services at 50.8 (51.5). GBP, the best performing major currency last week, could be sensitive to the services print.
US S&P Global manufacturing and services PMI (23 August): With much focus on China’s markets, US real rates and Jackson Hole, there is less concern about US growth metrics. As a result, the outcome of this may have a limited impact on the USD. It is still a risk to have on the radar.
Jackson Hole Symposium – Fed chair Jay Powell takes centre stage (speaks Saturday 26 August): Again, it’s still premature for Powell to declare victory in the Fed’s inflation fight and will likely emphasise there is still more work to be done. He may also spend time exploring a higher for longer mantra (for interest rates), with a focus on where they are modelling the neutral fed funds rate; possibly one for the PhDs and academics. Powell should re-affirm his view that rate cuts are not in their immediate thinking.
From a risk management perspective, I am sensing Jackson Hole/Powell’s speech to be tilted on the hawkish side, and therefore modestly USD positive. Although given the bull run in the USD one could argue a hawkish Powell is largely priced.
BRICS Summit in South Africa (Tuesday and Wednesday): It’s hard to see this as market moving and a risk event for broad markets. However, with BRICS countries (Brazil, Russia, India, China, and South Africa) accounting for 32% of global GDP and some 23 countries wanting to join the union, there will be increased focus on their expansion plans. Some have linked the BRICS to an acceleration of global de-dollarization, and while a global reliance on the USD will likely fall over time, the movement is glacial. A common currency for this union, while possibly getting headlines at this summit, is not something that seems viable anytime soon.
