The risk-off positioning theme tightened its grip today, pushing the dollar, yen, and Swiss franc higher on haven demand while negatively impacting the dollar bloc and other commodity-correlating currencies the most, alongside a variety of developing-economy currencies. The pound has been trading mixed, but nearer the underperforming end of the spectrum than the outperforming end, losing ground to the safe-haven currencies, and euro, while faring better than the worst hit group.
Industrial metals have dropped sharply, with bellwether copper futures diving by nearly 3% to two-month lows. Oil prices plunged by 3.5% in what is now a sixth consecutive day of declines into the three-month low territory. Stock markets have been a sea of red. The MSCI Asia-Pacific index racked up losses of over 1.5% in posting eight-month lows. The main indices in the U.S. and European have also sharpening declines, putting in some more distance from recent record highs. Liquid triple-A sovereign bonds have lifted, being a destination in the flight-to-safety dynamic.
The 10-year U.S. Treasury yield fell nearly 3 bp to levels near 1.230%. In currencies, EUR-USD printed a nine-month low at 1.1666 and Cable a one-month low at 1.3665. AUD-USD dropped 1% in pegging a nine-month low at 0.7154. The Aussie is currently down by 2.3% versus the greenback from week-ago levels, and by over 3% in the case against the yen. AUD-JPY, a forex market barometer of global investor risk appetite, is trading at eight-month lows and is down by nearly 9% from the three-and-a-half-year highs the cross saw in May. USD-CAD rallied by over 0.7% in printing a one-month peak at 1.2773. Market commentaries continue to blame the prevailing market perturbations on the impact of the delta variant phase of the pandemic, which has been manifest in incoming data out of major economies, and China’s regulatory clampdown.
The worry that the FOMC is looking to move up its QE exit strategy was exacerbated after the minutes said “most” officials wanted to start reducing the pace of asset purchases starting this year. That ended up weighing on Wall Street and leaving the S&P 500 and Dow with losses of just over -1%, and the NASDAQ -0.89% lower by the close. Treasury rates slipped from pre-minutes highs and ended little changed with the longer-dated maturities fractionally richer with the 10-year at 1.258% and the front end marginally lower with the 2-year at 0.215%. We believe the current circumstance will leave the FOMC more risk-averse and there will be no indication at next week’s Jackson Hole of QE tapering.
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Today’s weekly jobless claims will be of interest, especially since the survey date corresponds with the BLS survey period. We expect initial claims to decline -10k to 365k, while continuing claims should inch up 34k to 2.900 mln. The August Philly Fed index is forecast at 25.0 from 21.9. July leading indicators are expected to rise 0.9% versus the previous 0.7% increase. The Treasury auctions $8 bln in reopened 30-year TIPS, and announces 2-, 5-, and 7-year notes, along with reopened 2-year FRNs. Today’s earnings calendar has reports from Applied Materials, Estee Lauder, Ross Stores, Bilibili, and Kohl’s.