As the new trading week kicks off in London, markets are showing subdued activity with a marginal risk-off bias during APAC trade. The week begins with thinner than usual liquidity and light volumes, as the US is closed for Labor Day. Despite the quiet start, the week ahead is set to be busy with a significant economic docket, highlighted by Friday’s US jobs report.
Where We Stand
The start of the new trading week sees US participants away for Labor Day, leading to thinner market conditions and marking the end of ‘summer markets’. Despite not feeling like a traditional summer this year, with heightened cross-asset volatility and adverse weather in the UK, markets are relatively calm this morning. However, this calmness may be the calm before the storm as equities face challenges in China and Hong Kong.
Equity bears have found some success in China and Hong Kong, with the Hang Seng index experiencing a nearly 2% decline in reaction to disappointing weekend manufacturing PMI figures. The data revealed a fourth consecutive month of contraction in the sector, impacting market sentiment. Nevertheless, the spill-over effect from this softness has been limited as markets brace for a packed week ahead.
A Busy Week Ahead
Despite the holiday in the US, a busy week awaits with a jam-packed data docket. Key economic indicators to watch include the latest ISM manufacturing and services PMIs, July’s JOLTS job openings report, and the highly anticipated employment report on Friday. These data points are expected to fuel the ongoing debate in market pricing between a 25 basis point or 50 basis point Fed rate cut in the coming weeks, leading to potential volatility across asset classes.
Equities enter the week on a positive note, having navigated through Nvidia’s earnings last Wednesday. The S&P index recorded a third consecutive weekly gain last week, inching closer to a new record high. The prevailing trend of upward momentum for equities is expected to continue, with buying opportunities on dips supported by strong earnings and economic growth, alongside the Federal Reserve’s accommodative stance.
Market Dynamics
Recent trends in the Treasury market have seen a notable curve steepening, with the 2s10s yield curve nearing positive territory by the end of last week. The market’s anticipation of near-term policy easing has led to overdone expectations, likely prompting a correction in the front-end of the yield curve. This adjustment could signal the end of a bear steepening phase, potentially benefiting the US dollar.
The dollar’s performance has been robust, starting the day following its best week since mid-April, as indicated by the DXY index. The decline in Cable below 1.32 and the Euro surrendering the 1.11 handle suggest a potential shift in momentum, with the dollar retracing losses post-Jackson Hole. While a 25 basis point September Fed rate cut remains the base case scenario, market reactions to this week’s data releases are expected to influence the dollar’s performance.
Looking ahead, the balance of risks for the USD favors upside potential, given the current market pricing of approximately 100 basis points of cuts by year-end. Market expectations of 200 basis points of cuts by the end of next year reflect a pessimistic outlook, implying a potential US recession. However, recent economic data, such as the upward revision to Q2 GDP, contradict these projections, indicating healthy growth and stability in the US economy.
Market Analysis
The FX market remains quiet with minimal movements across the G10 currencies, lacking significant catalysts for change. Similarly, the precious metals market shows a lack of volatility, although spot gold has dipped below the $2,500 per ounce mark. This downward trend could favor bearish sentiment if the break holds on a closing basis, potentially impacting market dynamics.
Looking Ahead
As US and Canadian markets remain closed for Labor Day, London markets are expected to experience lighter volumes and thinner liquidity than usual. The economic calendar offers little of particular interest, with final eurozone and UK manufacturing PMI figures unlikely to have a significant impact. With no central bank speakers scheduled, markets are likely to remain in a holding pattern, barring any unexpected news-flow, especially in the geopolitical realm.
Conclusion
The new trading week in London begins with lower activity and a marginal risk-off bias, as markets navigate through thinner liquidity and light volumes. Despite the quiet start, a busy economic docket lies ahead, with key data releases expected to drive market sentiment. As equities continue their upward trajectory, supported by strong fundamentals and accommodative central bank policies, investors will closely monitor developments to gauge market direction. Stay tuned for updates as the week unfolds.
