Market Update – Safe Havens in demand; Eyes on CPI

Investors remain cautious about the gloomy outlook for China’s economy & worry that the Fed has delayed easing monetary policy. Traders are anticipating at least 1 significant rate cut this year, ahead of the CPI report, which is expected to show modest inflation growth.

Asia & European Sessions:

• Asian equities dropped for a 3rd consecutive session, with Japan and Hong Kong leading the downturn.
• US stock futures slid overnight by 0.6%, as renewed fears of slowing growth in major economies coincided with oil prices stabilizing below $70 and global bond yields hitting a 2-year low.
• Harris-Trump’s debate over the state of the economy and US-China relations had an insignificant impact on the markets. Harris saw her odds of winning the election rise on PredictIt from 53% to 56% following the debate.
• BOJ policy member Junko Nakagawa hinted at the possibility of further interest rate hikes, boosting Yen to December’s highs. While many economists predict the BOJ will wait until later this year or early next year to raise rates, the next decision is scheduled for next week.
• The CHF is at decades highs against USD, supporting speculation for an aggressive  interest rate cut on September 26. Markets expect a 25bps cut, while the likelihood of a 50 bps cut has been increasing.
• The UK economy unexpectedly stagnated in July. GDP has stagnated for two months now, suggesting that despite the robust survey numbers, Q3 GDP growth is likely to disappoint. With interest rates down and wage growth still robust, construction and consumption should get a boost, although this side of the budget there is still a lot of uncertainty that is likely to hold consumers and companies back. For the BoE it won’t be enough to prompt back to back cuts, but it will justify the controversial decision to lower rates last month.
• CPI preview: The August CPI report will be the highlight, just in case there are any surprises that could tip the policy outlook. We expect gains of 0.2% for both headline and core after 0.2% increases for both in July. As-expected results would see the y/y headline sliding to 2.6% from 2.9% in July. Also, the core y/y gain should hold steady at 3.2% in July. Such results should not deter the FOMC from cutting rates.

A higher inflation reading today could lead to increased volatility ,while a softer number might give the Fed more room to cut, but could also signal faster-than-expected economic slowdown.

Financial Markets Performance:

• The Yen surged to its strongest level against the US Dollar since December, recovering its yearly losses. It is currently at 141.40 after retesting the 140.696 level.
• The USDCHF drifted further to a 13 year bottom, with CHF and JPY buoyed by faltering carry trades funded through low-interest currencies and increased demand for safe-haven assets. EURCHF remains below its 2015 bottom.
• Bitcoin dipped to $56k again due to Trump’s support for the cryptocurrency sector.
• Oil extended the month’s downleg to 65.34, dropping by nearly 20% this quarter, as worries about slowing growth in the US and China dampen demand.

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Andria Pichidi

Market Analyst

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