August 2, 2022

“The dollar hit its lowest level since mid-June against the Japanese yen, as investors weighed-in increased likelihood that the Federal Reserve will not raise interest rates as aggressively as some had expected.”

Tim Hallinan – Trading Director

Main Headlines

Nancy Pelosi, Speaker of the US House of Representatives, plans to meet Taiwan’s president Tsai Ing-wen on Wednesday in a controversial visit that has triggered concern about a possible military response from China. Three people familiar with the situation said Pelosi would meet Tsai in Taipei as part of a wider visit to Asia that began in Singapore on Sunday. China has issued strong warnings to the Biden administration, including suggestions that the People’s Liberation Army could take action if the 82-year-old Democrat went ahead with her planned visit. President Joe Biden dispatched senior officials, including national security adviser Jake Sullivan, to lay out the risks to Pelosi, but people familiar with the situation said she had decided to press ahead with the landmark trip. On Monday, China intensified its threats, after the PLA conducted live-fire drills on Pingtan, an island in the Taiwan Strait, and other drills in the South China Sea last week.

Former chancellor Rishi Sunak on Monday rejected claims that he represented “stale economic orthodoxy” in the Tory leadership contest, claiming his rival Liz Truss was instead wedded to old-school thinking on business taxation. Truss, foreign secretary, has claimed that Sunak represents the continuity of failed policies and that his adherence to Treasury orthodoxy led him to put up taxes, leading the UK towards a recession. But at the start of a big week in the race to become Britain’s next prime minister, Sunak claimed he represented fresh thinking and that he had “ripped up the rule book” on fiscal policy during the Covid-19 pandemic. Senior Conservatives have urged the party’s two leadership candidates to commit to implementing the “levelling up” agenda that helped secure UK prime minister Boris Johnson a landslide election win in 2019, as new polling finds it more popular with prospective Tory voters than Brexit.

GBP

Sterling is weaker than most major currencies in the early morning trade. Conservative leadership contender Liz Truss has opened a new front in her fight with the Whitehall “establishment”, vowing to cut civil service pay and holidays and refusing to rule out breaking up the Treasury. The foreign secretary has presented herself as a radical insurgent in her fight to become Britain’s next prime minister. The frontrunner in the Tory leadership race declared a “war on waste in Whitehall”, vowing to cut civil service holidays and axe 326 diversity officers working across bloated government departments. Truss has also said she would scrap plans to restrict multi-buy deals on food and drink high in fat, salt, or sugar and would not impose any new levies on unhealthy food. Britain’s Met Office said on Monday that last month was the driest July in England since 1935, with some regions marking their driest July on record. The Met office’s provisional statistics come after a record-breaking heatwave last month which sparked fires across London and stressed the country’s infrastructure.

EUR

The euro is stronger against sterling and weaker against the dollar this morning. Manufacturing activity across the euro zone contracted last month with factories forced to stockpile unsold goods due to weak demand, adding to concerns the bloc could fall into a recession. An index measuring output, which feeds into a composite PMI due on Wednesday and seen as a good gauge of economic health, sank to a more than two-year low of 46.3. In June it was 49.3. The United States has accused Russia of using Ukraine’s biggest nuclear power plant as a “nuclear shield” by stationing troops there, preventing Ukrainian forces from returning fire and risking a terrible nuclear accident. There is little Russia can do to help with urgent repairs required to malfunctioning Nord Stream 1 gas pipeline equipment, Kremlin spokesman Dmitry Peskov said on Monday, following further falls in Gazprom production and exports. Germany’s Siemens Energy (ENR1n.DE), the manufacturer, has said it had no access to the turbines on site and had not received any damage reports from Gazprom, and so had to assume the turbines were operating normally.

USD

The dollar is well bid against most major currencies overnight. The Securities and Exchange Commission has charged 11 people in an alleged $300mn cryptocurrency pyramid scheme, highlighting how authorities are increasing enforcement in digital asset markets. The Wall Street watchdog said the scheme, known as Forsage, raised funds by using promoters to convince millions of investors worldwide to recruit others into the programme. The civil charges came just weeks after the regulator charged a former employee of crypto exchange Coinbase with insider trading related to coin listings. The US killed al-Qaeda leader Ayman al-Zawahiri in a drone strike in Afghanistan over the weekend, in the first known counter-terrorism operation in the country since it fell to the Taliban last year. Zawahiri was Osama bin Laden’s second-in-command and took contrl of al-Qaeda after US Navy Seals killed bin Laden in a raid in 2011.

Markets

US equities snapped a three-day rally as investors digested hawkish comments from Federal Reserve officials and data showing slower growth in the manufacturing sector. The S&P 500 fell on Monday after notching its best month since 2020. The tech-heavy Nasdaq 100 was little changed after rising as much as 1.1%. Both indexes struggled for direction throughout the session. US Treasuries rallied, with the 10-year yield declining to around 2.59%, the lowest since April. After hinting at a possible pivot last week, Fed officials suggested that the central bank will need to raise rates further to bring inflation under control. A purchasing managers index of manufacturing was the latest data point to show that aggressive Fed tightening is starting to slow economic growth. Stocks had roared in July on speculation the central bank was close to the end of its rate-hiking cycle on signs that runaway inflation may have peaked. Investors are now scrutinizing data, where any above-expectation reading could upend bets on a Fed pivot.

Main Economic Data/Central Banks/Government (All Times CET)

8:00 a.m.: UK July Nationwide house prices
9:00 a.m.: Spain July unemployment change
9:30 a.m.: Switzerland July PMI manufacturing
11:15 a.m.: Switzerland sells bills
11:30 a.m.: Belgium sells bills
OPEC+ Joint Technical Committee meeting

Corporate Events

Earnings include BP, Ferrari, Assicurazioni Generali, Symrise, Fresenius, Siemens Gamesa Renewable

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