September 04, 2024

“There is a sour mood in global financial markets this morning, and that has put equities, commodities, and risk-sensitive G10 on a downward trajectory as nerves grow about the economic outlook in the world’s two largest economies. This heightened volatility should persist today, with some key US labour data and a Bank of Canada decision.”

Tim Hallinan – Trading Director

USD

Risk aversion took hold in global markets yesterday, and that led to some predictable moves in FX that benefitted the safe-havens (mainly CHF and JPY) and put the risk-sensitive G10 (NOK, SEK, AUD, NZD) under some strong pressure. There were plenty of reasons to be nervy about the global demand picture, with Chinese manufacturing data printing relatively weak on Monday, the US ISM manufacturing PMI disappointing yesterday, and a selloff in tech stocks and industrial commodities. The ISM manufacturing PMI was dragged to a lower-than-expected figure of 47.2 by a weak new orders figure, but the prices paid and employment subindexes both inched higher. US yields took a hit but the dollar held steady on a net basis, shedding some gains against the franc and the yen while rising against the pro-cyclical currencies, as a flare up in recessionary fears and subdued risk appetite outweighed moves in rate spreads. JOLTS job openings are next up for the US today, and the consensus is for a slight cooling from 8.18M to 8.10M. The loosening signal from the JOLTs report this year has been unmistakable, with important measures of slack like the quits rate and unemployment-to-vacancy ratio having returned to pre-pandemic levels.

In Canada, the Bank of Canada is almost certain to deliver its third consecutive rate cut later today. The BoC has become somewhat predictable lately, and policymakers have their heads down in easing mode now that all the core inflation measures sit within the 1-3% target range and the extent of economic weakness is well known. The focus will be on any forward guidance into next year, with Governor Macklem last time signalling further easing and shifting his focus to preventing inflation from falling too far.

GBP

The global risk off mood weighed on sterling yesterday and there was some choppy trading in GBP/EUR as European currencies tracked global risk dynamics. The only piece of data on the domestic calendar is the final services PMI this morning, which printed at a four-month high of 53.3 on the first release and handed some renewed support for sterling through the growth channel. The US data and the global risk backdrop should continue to dominate today, with the pound likely to move inversely to recessionary fears.

EUR

The euro appears to have settled into a new range this week, and 1.10 looks like a near-term floor provided that markets do not get too concerned about the trajectory of the US economy. Over the past couple of days the EUR:USD two-year yield spreads have moved close to the highest levels of the year so far, but the euro has been unable to benefit amid a more subdued risk mood and some retracement of what appeared to be a slightly stretched rally to 1.12. We are quiet on the data side today, with only the final services PMI and a PPI print to come this morning. That puts the focus for EUR/USD again on the US labour market.

Markets

Risk assets have come under pressure since the return from the Labour Day weekend. Investors wiped 10% of Nvidia’s colossal market cap, meaning that it shed over $250bn in a single day. This dragged chipmakers and technology stocks more generally, pulling the S&P 500 down over 2%. Commodities are suffering from demand worries, meanwhile, with oil slumping to a nine-month low and the likes of copper sinking on a sluggish manufacturing sector.

Main Economic Events (All Times CET)

3:30am: Australian GDP q/q
10:00am: Eurozone Final Services PMI
10:30am: UK Final Services PMI
3:45pm: Bank of Canada Rate Decision
4:00pm: US JOLTS Job Openings

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