Shaping up to be a quiet morning thus far, with the APAC session having been largely uneventful, lacking impactful news- or data-flow, albeit most major indices did trade a touch softer after a modestly negative handover from Wall Street at Monday’s close.
The tech sector bore the brunt of the aforementioned softness on Wall Street, with the Nasdaq ending the day around 1% lower, likely a result of positioning and de-risking ahead of NVDA’s earnings after market close tomorrow, where options price a move of as much as +/- 10% in the 24 hours following the report.
Naturally, NVDA’s guidance, as well as the figures themselves, will be a key driver of not just the tech sector, but broader market sentiment, and stand as the next key event risk for participants to navigate.
Despite the tech softness, signs of a rotation did emerge under the hood of the US equity market, with the Dow (despite it’s archaic nature) ending at a record high, and the Russell adding around 0.2%.
A short-term window of small cap outperformance does appear to have opened here, after Powell’s more dovish-than-expected remarks at Jackson Hole on Friday, as the Fed Chair strengthened the ‘Fed put’, making policy shifts almost solely contingent on developments in the labour market.
The August jobs report, due 6th September, is the next major macro catalyst on the horizon, with further softness here likely to cement the case for a 50bp cut at the September FOMC meeting, though my base case remains for a more modest 25bp move at the time of writing.
Outside of equities, crude remains underpinned by heightened geopolitical risk in the Middle East though, as we have seen many times since last October, the impact of said tensions tends to be relatively short-lived, with the bulls likely requiring a sustained pick-up in demand in order to build a sustainable rally. The spectre of OPEC+ increasing output in Q4, as production cuts come to an end, also continues to hang over the market.
The FX space, meanwhile, is subdued, with the dollar holding close to yesterday’s highs, albeit with the DXY having been unable to reclaim the 101 handle just yet.
Some profit taking continues in the EUR, pulling back from 1.12, and in cable, dipping beneath the 1.32 handle, with both likely having further room to retrace as last week’s aggressive USD selling seems somewhat overdone. The AUD & NZD trade firm, sitting as the best G10 performers this morning, despite the somewhat soggy APAC risk tone, and ahead of Aussie CPI figures due for release in the early hours (London time) of Wednesday morning.
Risks to the CPI print are likely to the downside of the 3.4% YoY consensus, given the early-quarter nature of the data leading to a heavily goods-biased composition of the inflation basket used to calculate the figure.
Treasuries also continue to retrace, led by the front-end, with 2s having now pared around half of last Friday’s advance, as the market continues to modestly hawkishly reprice Fed expectations. The USD OIS curve now discounts around 96bp of cuts by year-end, compared to over 100bp on Friday.
There appears further room for this retracement to continue, with such an aggressive pace of easing likely not warranted barring an exogenous economic shock. Hence, risks remain tilted to the downside at the front end of the curve, with markets also having to navigate sizeable 2y, 5y, and 7y supply this week.
Further selling pressure in Treasuries should help the greenback to continue its modest rebound from YTD lows seen Friday, while also likely posing a modest headwind to gold, which sits around 1% shy of fresh record highs, with spot having seem some slight downside through Asia trade.
Another day lacking in major macro releases looms, with the August US consumer confidence and Richmond Fed manufacturing figures unlikely to inspire, potentially leading participants to sit on their hands ahead of the aforementioned NVDA earnings risk.
Some further position squaring through the session, into earnings, seems likely. Remarks from the ECB’s Nagel and Knot should pass without event, as the Governing Council look nailed on for another rate cut at the September meeting, and with E/Z flash CPI figures due Friday morning. 2y US supply due later is also on the radar, after the last auction for the tenor saw a 2.3bp stop through, the largest such stop through the WI yield in over five years.
