MARKET WRAPS
Watch For:
Germany GfK consumer climate survey; France consumer confidence survey, housing starts; trading updates from Sberbank, TCS Group Holding, NN Group, Bunzl, Sibanye-Stillwater, Givaudan
Opening Call:
Shares appear set to open higher in Europe on Tuesday on a slight risk-on mood. In Asia, stock benchmarks were higher; Treasury yields were lower; the dollar weakened; while oil fell and gold advanced.
Equities:
European stocks futures are tracking higher on Tuesday as investors ramp up bets that the domestic economy will keep humming along, despite higher interest rates following Friday's cautious take from Federal Reserve Chair Jerome Powell's Jackson Hole speech.
Stock investors are focusing on the more dovish aspects of Powell's speech --looking past his additional comments that inflation remains too high and policy makers are ready to further hike rates if necessary.
Powell's speech provided the stock market a "very short-term" green light to press higher, Kent Engelke, chief economic strategist and managing director at Capitol Securities Management said.
The central bank will be paying close attention to the data set to be released this week. Its preferred inflation measure, the July personal-consumption expenditures price index, is due on Thursday, followed by August nonfarm payrolls data on Friday.
If figures aren't far out of line with estimates, markets may remain calm in what's likely to be a lightly traded week.
Some investors said they expected stocks to continue their climb in the coming weeks.
Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, said corporate earnings and data on the economy have impressed him.
Now, he is positioning for the market to continue its ascent and is particularly optimistic about corners of the market such as industrials and financials.
"There's no reason the stock market can't go higher," Zaccarelli said.
Traders were recently assigning a 57% probability to the central bank lifting rates again by the end of the year, up from 54% on Friday and 32% a week earlier, according to CME Group's FedWatch tool.
And they are betting rates will stay high for some time. By June 2024, traders see a 58% chance the Fed will have cut rates from current levels, down from 62% on Friday and 83% a week before that.
"We think the Fed is going to preserve their optionality as much as possible," said Steve Brown, senior managing director at Guggenheim Investments.
Forex:
The dollar weakened early Tuesday amid a risk-on mood spurred by gains across most regional equity markets.
Markets have taken on a slightly more risk-on tone, MUFG Bank said.
There's been a relief rally after markets digested the relatively neutral messages from the Jackson Hole Economic Symposium, including from Fed Chair Powell, it added.
But Bank of America analysts said they "remain modestly positive for USD near-term," forecasting year-end EUR/USD declining to 1.05.
BofA said the U.S. neutral policy rate, at which the economy can grow without sparking inflation, could be higher than previously thought.
"This should be USD supportive," BofA said.
Meanwhile, UBS Global Wealth Management favors the euro over the U.S. dollar on the view that the U.S. Fed is closer to ending interest-rate increases than the European Central Bank.
"We still believe the Fed is most likely closer to the end of its tightening cycle than the European Central Bank, contributing to our preference for the euro over the U.S. dollar," it said.
UBS GWM's base view is that the Fed has already reached the peak in interest rates, though views on the Fed could shift in response to data over the coming weeks.
Bonds:
Treasury yields were lower as markets juggle different interpretations of how much higher U.S. interest rates could go.
"The Jackson Hole Economic Symposium wrapped up over the weekend underscoring regional divergence and challenges facing the four major central banks. Fed Chair Powell unequivocally retained optionality given major upcoming economic data points and the lagged effect of 525bps in hikes," said Patricia Medina, a market strategy analyst for the New York Stock Exchange.
In the CME's FedWatch tool, odds increase of one more hike followed by a pause, with cuts starting by mid-2024.
But some investors think the Fed is done and, instead of raising rates again, it "will be waiting for inflation to meander lower to the Fed's 2% inflation target before cutting key interest rates," Navellier and Associates' Louis Navellier said.
Inflation and labor data later this week are expected to bring more clarity.
Energy:
Oil prices extended losses in Asia as investors assessed China's latest efforts to bolster its lagging economy and monitored the potential threat posed by Tropical Storm Idalia to crude and product output and demand in the Gulf of Mexico region.
Oil futures got a boost after China's finance ministry and the country's stock-market regulator introduced measures aimed at sparking buying interest in stocks, including halving a tax on stock trades and limiting sales by big shareholders in companies that haven't handed out enough dividends.
Worries about China's economy and its demand for energy had been pressuring prices for oil, but the latest news helped to brighten the outlook for oil demand from one of the world's largest consumers.
ANZ analysts said that signs of strength in China's jet-fuel market may boost investor sentiment and prop up prices in the short term.
China's weekly flights surged 13% above pre-Covid levels in the week ended Aug. 20. As international travel picks up, bookings for overseas group tours during China's upcoming National Day holiday in October have more than tripled from a month ago.
Increasing tightness in the aviation fuel market will likely further lift oil prices.
Meanwhile, Tropical Storm Idalia is expected to make landfall Wednesday as a dangerous major hurricane and lash the Gulf Coast, according to the National Hurricane Center.
For the crude oil market, while the storm may disrupt some operations in the Gulf of Mexico, "the track so far looks like it will be more of a threat to demand than it will be supply," Phil Flynn, a senior market analyst at the Price Futures Group said.
"The potential short-term demand destruction and the fact that we're going into shoulder season [for demand] could overshadow the wildly bullish fundamentals that underpin the oil and products markets," he said.
"We continue to believe that there's a significant upside risk for prices going into winter and try to take advantage of any short-term weakness to put-on long-term hedges."
Metals:
Gold prices edged higher early Tuesday finding support as the U.S. dollar and Treasury yields steadied, easing some of the recent pressure on prices for the precious metal.
Gold prices "delinking from a rising bond yield and U.S. dollar is a positive bullish sign," said Chintan Karnani, an independent consultant who has tracked the gold market for the last 20 years.
However, he said, "gold needs to continue to trade with a rising price line next week for a confirmation of a sustained bullish trend."
Demand for the safe-haven asset has strengthened after the U.S. released weak August manufacturing PMI data last week, Ping An Securities analysts said.
However, the precious metal may be pressured as the number of U.S. initial jobless claims fell more than expected for the week ended Aug. 19, indicating that the U.S. job market may continue to be tight.
Ping An expects gold prices to fluctuate in the near term.
"On the charts, gold has held support at the $1,900 area, but more dollar strength or rising yields would jeopardize the [year to date]," analysts at Sevens Report Research said.
Gold's price trend after the release of U.S. August nonfarm-payroll data on Friday will be key, Karnani said.
"The current bullish trend in gold and silver can change if the overall jobs growth is very high for the month of August," he added.
---
Copper rose early Tuesday, buoyed by positive market sentiment spurred by China's recent stimulus measures.
Also, China's power-grid spending has risen 10.5% on year during the first seven months of this year, and this grid spending is usually higher in 2H from a seasonal perspective, Citi Research analysts said.
Copper and aluminum are the largest beneficiaries of any pick-up in grid spending, the analysts added.
---
Iron-ore futures were lower as the fundamentals of the commodity remain weak.
Profits at steel mills continue to shrink, boding poorly for demand for the steelmaking material, while China's crude-steel production caps are also weighing, Baocheng Futures analysts said.
With supply also rebounding, the analysts expect iron-ore demand to decrease in the medium term, constraining prices.
TODAY'S TOP HEADLINES
Chinese Stocks Are in a Slump-and Value Investors Are Excited
Investors in Chinese stocks used to bet on growth. Now, they are hunting for bargains.
Portfolio managers say that investors who are still eager to get exposure to China are increasingly turning to value investing. That is a style of stock picking that focuses on finding shares trading below what they are really worth-based on several different measures-rather than looking for companies with big growth potential.
Germany Is Losing Its Mojo. Finding It Again Won't Be Easy.
BERLIN-Two decades ago, Germany revived its moribund economy and became a manufacturing powerhouse of an era of globalization.
Times changed. Germany didn't keep up. Now Europe's biggest economy has to reinvent itself again. But its fractured political class is struggling to find answers to a dizzying conjunction of long-term headaches and short-term crises, leading to a growing sense of malaise.
U.S. dollar defies China, Russia and Wall Street skeptics as 2023 rebound continues
The U.S. dollar is proving its haters wrong.
(MORE TO FOLLOW) Dow Jones Newswires
08-29-23 0015ET
