Calmer Markets but Sense of Foreboding still Strong

The capital markets are quieter today.  Equities remain heavy, but losses are comparatively mild.  Core bond yields are slightly softer.  The US dollar is firmer against the major and most emerging market currencies.  

The news stream is light and the main focus before the ECB meeting tomorrow is the US ADP employment estimate.  A 200k increase is expected after 185k in July.  The Bloomberg consensus is for a 218k increase in nonfarm payrolls when reported on Friday.  

The EIA energy report also will draw attention.  The crude stockpile is expected to rise by 900k barrels.  Even if US production is not what it was estimated under the previous methodology, output is still trending higher than consumption.    Last week's run-up to almost $50 a barrel for the Oct light sweet crude contract is a distant memory.  The nearly $1 loss today brings the contract to nearly $43.50, which is a 50% retracement of the rally off of the spike low on August 24.  The next retracement level is near $42.15.

Australia reported Q2 growth was half of what the consensus expected at 02% on the quarter.  The Australian dollar was pushed below $.7000 for the first time in six years.   It recovered to $0.7050 were it was sold again.  A break of $0.6980 targets $0.6950.  On Thursday, Australia reports retail sales and trade figures.  The derivatives markets are pricing in about a 50% chance of a November rat cut.  

The UK reported a less than expected improvement in construction PMI.  The August reading stands at 57.3, up from 57.1 in July, but shy of the 57.5 consensus forecast.  Sterling has under-performed this week, despite BOE's Carney signaling higher rates in the UK at Jackson Hole last weekend. After the Aussie and Kiwi's 2% loss over the past three sessions, sterling is the weakest of the majors, shedding about 0.75%.  It has been pushed through $1.53 for the first time since early June.  The initial approach of support near $1.5250 has spurred some buying.  It that level goes, stronger support is seen near $1.5200.  

Chinese markets, which ostensibly have been the source of the increased volatility, are now closed until next Monday. President Xi has put much importance in the end of WWII celebration in China. Production was slowed or halted around Beijing to reduce the pollution.  Even though some reports had suggested large scale intervention in the equity market would cease, the guiding hand of officials was still thought to be present in order to provide some element of stability ahead of the celebration. The key then is what happens next week.  

We have argued that the seemingly policy confusion is a reflection of a political struggle in China. We suggested that the concentration of power by Xi means the curbing of the Premier Li.  Li is being associated with the large-scale intervention in the stock market, that has failed to stem to the tide.  Xi has upped the ante by rebuking the Youth League, which is a main political faction.  Li's roots are with the League.  Xi criticized them for being out of touch and apparently trying to block Xi's reforms.  

Separately, yesterday Hong Kong Monetary Authority intervened yesterday to prevent the Hong Kong dollar from appreciated through the top of its peg.  The intervention was the first since April  Officials confirmed selling about HKD15.5 bln (~$2 bln) to defend the HKD7.75 level. The US dollar remained pinned there today, suggesting the possibility of more intervention.  Official confirmation has not yet been provided.  

Reports suggest that since 2009, there have been eight times in which the S&P 500 has lost more than 2% on the first trading day of a new month.  The market finished the month higher each time.  Twice the gain was less than 1%, and twice the gain was more than 10%.  Three times the monthly gain was between 5.9% and 6.7%.  The remaining time, the market finished up 2.35%.  

The euro is finding support near $1.1240.  On the topside, initial resistance is seen near $1.1320. Yesterday's high was near $1.1330.  The 38.2% retracement of the move from $1.1715 on August 24 to $1.1155 on August 28 is found near $1.1370.  

The dollar recorded a low near JPY119.20 late in North America yesterday and has since recovered toward JPY120.50.  While the euro has retraced almost a third of its losses, the yen has retraced 50% at JPY119.15.  A move above JPY120.50 today likely requires gains in the S&P 500 and firmer US yields. 

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