Financial markets have a ‘quiet-ish start to the week’ – London Business News | Londonlovesbusiness.com

A quiet-ish start to the week with data- and news-flow relatively light, contributing to rather tepid trading conditions, as participants continue to monitor geopolitical goings-on in the Middle East, and await earnings from Nvidia AMC on Wednesday.

Where we stand

Markets giving back some of Friday’s moves as the new trading week gets underway, as the dust continues to settle on the Jackson Hole Symposium, and Fed Chair Powell having given the green light to a cut at the September meeting.

The debate remains whether said cut will be 25bp or 50bp in magnitude; the August jobs report, due 6^th September, will be the key determinant, though I lean toward a 25bp move at the moment, with a larger cut likely smacking of panic, barring a further deterioration in labour market conditions.

Confirmation that the first cut will be delivered in four weeks’ time has kept the bulls in control of the equity space, with the S&P inches away from a fresh record high. The path of least resistance continues to lead higher, with dips remaining buying opportunities.

Signs continue to emerge that the equity rally is broadening out, perhaps providing a short-term window in which small caps can outperform. For instance:

• 16% of the S&P notched fresh 52wk highs on Fri, the most since mid-July
• Approx 80% of S&P constituents now trade above their 50-day MAs, the most since early-April
• 434 daily advancing stocks on Fri was the most in 2wks

Away from the equity space, Treasuries have given back some of Friday’s gains, after a front-end led rally on Powell’s remarks took 2s back below the 4%, and 3.9%, handles, while benchmark 10s continue to hover around 3.8%. Sizeable supply in 2s, 5s, and 7s is due throughout the week which may, temporarily, divert attention of Treasury traders away from the monetary policy outlook, particularly with top-tier data catalysts lacking until Friday’s PCE figures.

The FX space is relatively calm, albeit with the greenback rebounding modestly from the YTD lows printed on Friday, as the DXY works its way back towards the 101 figure. The G10 board has a distinctly risk-averse feel to it, with the Aussie and Kiwi dollars leading declines, and the JPY the only currency trading in the green against the buck, as Middle East tensions persist. The EUR trades broadly softer after a 4th straight monthly fall in the IFO business climate index.

A further rebound in the USD, over the medium-term, appears likely in my view, with the ‘buying growth’ strategy remaining my favoured one in the G10 universe, and with the OIS curve discounting an overly-aggressive >100bp of Fed cuts by year-end, and a fanciful >200bp of cuts by next July.

Aforementioned Middle East tensions also continue to underpin crude, which is the biggest mover on the day, as both front Brent and WTI rise 3% apiece. The ongoing situation in Libya has also been a key driver here, through the morning session, amid reports that production, and export, in the east of the country will cease.

Look ahead

A light data docket awaits for the remainder of the day, though Fed voter Daly’s comments may be of some interest into the European evening. July durable goods orders were mixed – rising 9.9% MoM at the headline level, albeit falling 0.2% MoM ex-transport – and passed without event.

Tuesday’s docket is also on the light side, with Nvidia’s earnings after the close on Wednesday, before eurozone flash CPI & US PCE on Friday, the next major event risks for participants to navigate.