Written by Convera’s Market Insights team
Risk aversion ahead of job data
Boris Kovacevic – Global Macro Strategist
Global risk aversion has taken over market sentiment as the US dollar attempts to recover its recent losses and Nvidia extends its two-week decline to 15%. The US equity benchmark S&P 500 fell by more than 2% in yesterday’s session, recording its worst day since the August 5th meltdown. Investors have been shifting capital to safe havens since early last week in anticipation of the upcoming US macro data, that could turn out as directional for the Federal Reserve.
Weaker than expected Chinese PMI’s already set the negative tone going into the week on Monday. The following purchasing manager index for the US manufacturing sector did little to nothing to dispel the risk aversion. While the barometer improved for the first time in five months, the reading of 47.2 remains well below the 50-mark dividing expansion from contraction. The employment sub-index ticked higher from 41.7 to 43.6 but extended its contraction streak to three months. A pessimistic outlook over the next 3-4 months is warranted, given that the most prominent leading indicator for the headline index – the ratio between new orders and inventories – continued its descent.
On a more positive note, the Economic Optimism Index reached the highest level since April 2023 as households revised up their personal financial outlook. While not market moving in the literal sense, the continued ambiguity of the incoming data is working to the Greenbacks advantage. Investors could remain anxious throughout the week as we gear up to the big highlight in the form of the US job report on Friday.
It seems that little stands in the way of the US dollar remaining bid this week as expectations are building for a rebound in job growth. However, it will be a close call on how markets react to the figures as the unemployment rate comes into focus. A slight 10 basis point increase could rattle markets and increase the bets of a 50-basis point cut from the Fed in September. In the interim, markets will get new impetus from the US job openings (JOLTS) for July published tomorrow and the ISM services report on Thursday.
Pound weaker on global flows
Boris Kovacevic – Global Macro Strategist
The British pound continued to trend lower in yesterday’s session but remains in the upper short-term trading range. August has seen the realized volatility of GBP/USD spike to 4.7% as the currency pair moved from $1.2660 to $1.3260 in a span of 13 trading days. Since peaking last month, the pound has fallen about 1%. Despite August being the worst month for the pound from a historic perspective, seasonal patterns didn’t materialize this time around. However, the weak backdrop for equity markets going into the end of Q3 could weigh on the pound.
As domestic catalysts are missing this week, global sentiment will decide the fate of cable. Yesterday’s bond sale of the new Labour government didn’t spook markets, at least. The British government pulled in more than £110 billion of orders for the bond auction with the orderbook matching a record set in June for the most demand relative to the size of the auction. For the first time in some time, politics is not seen as a net-negative factor for the pound.
Euro more fairly priced now
Boris Kovacevic – Global Macro Strategist
The euro was hit particularly hard by the rebounding dollar and weaker equity market as the currency had gained around 4.5% since the beginning of July alone. The initial leg higher was mainly a function of rising Fed easing bets and the expectation of the US economy slowing. The latter has come into question a bit as the economy outperformed in the second quarter of 2024.
At the other side of the Atlantic, optimism has faltered. German sentiment indicators turned south in July and August and inflation in Europe’s largest economy has fallen below the 2% target. This has settled the debate around whether the European Central Bank will ease policy at the September meeting. Our cautiousness on the euro at around the $1.12 level has turned out correct as most leading indicators, including the real rate differential, continue to place the currency pair around the current spot rate of $1.1050. This is still well above the 2-year average of $1.07 and this year’s mean of $1.08. EUR/USD is trading in the upper half of its 3-, 6-, and 12- month trading range.
The European macro news flow will likely remain in the background, meaning that another increase in the exchange rate would need to be induced by rising recession risks in the US as not much more Fed easing can be priced in for 2024 or early 2025.
Dollar remains bid this week
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: September 2-6
All times are in BST
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
