InvestMacro

At Thursday’s close, the Dow Jones (US30) Index was down 0.44%, while the S&P 500 (US500) Index decreased by 0.17%. The NASDAQ Technology Index (US100) closed negative 0.04%. On Thursday, all three major US indices ended trading in the red as investors fear escalating tensions in the Middle East ahead of the release of the September payrolls report. Sentiment on Wall Street worsened after President Biden voiced support for an Israeli strike on Iran’s oil facilities, raising fears of energy supply disruptions around the world.

Meanwhile, the US service sector data showed growth in September, which briefly lifted markets. The labor market showed signs of cooling, with a slight increase in jobless claims and a drop in planned layoffs. Today, the US will release Non-Farm Payrolls labor market data for September. Economists expect the US economy to expand by 144,000 jobs in September after 142,000 in the previous month. The US Federal Reserve began its rate-cutting cycle in September with a large 50 basis point rate cut. However, the labor market continues to be the focus of investors assessing how quickly the Central Bank will have to cut rates in the coming months. A weak report scenario would put pressure on the dollar index, which would give strength to stock indices and precious metals (gold and silver). The probability of a double rate cut at the November meeting is currently at 50%. On the other hand, unexpectedly strong employment growth could raise concerns that the Fed will not cut rates as much, which would support the US dollar and put pressure on risk assets, especially equities.

Equity markets in Europe were mostly down yesterday. Germany’s DAX (DE40) was down 0.78%, France’s CAC 40 (FR40) closed negative 1.32%, Spain’s IBEX 35 (ES35) was up 0.07%, and the UK’s FTSE 100 (UK100) closed down 0.10%.

The Eurozone PMI for September from S&P was revised upward by 0.7 to 49.6 from the previously released reading of 48.9. Swaps discount the odds of a 25 bp ECB rate cut at the October 17 meeting at 95% and a 25 bp rate cut at the December 12 meeting at 100%.

WTI crude oil prices rose 5% to $73.7 per barrel on Thursday, extending the week’s gains to a one-month high after US President Biden refrained from directly condemning the likelihood that Israel could attack Iran’s oil facilities. In addition to the subsequent shock to short-term supplies that such an attack would lead to, oil prices also rose thanks to the risk premium in futures amid the growing escalation of geopolitical tensions in the Middle East. Tel Aviv has vowed to retaliate against Iran with a series of ballistic missiles this week, as well as increase its activity in Beirut as it battles Hezbollah. Meanwhile, signs of resilience in the US economy also supported the outlook for fuel demand in the world’s top oil consumer.

Asian markets traded flat yesterday. Japan’s Nikkei 225 (JP225) was up 1.97%, China’s FTSE China A50 (CHA50) was not trading due to holidays, Hong Kong’s Hang Seng (HK50) was down 1.47%, and Australia’s ASX 200 (AU200) was positive 0.09%. The weakening yen has improved the outlook for Japan’s export-oriented industry and is supporting local equities. Earlier this week, newly inaugurated Prime Minister Shigeru Ishiba and his Economy Minister Ryosei Akazawa urged caution before proceeding with further interest rate hikes.

The New Zealand dollar (NZD/USD) fell to a 2-week low. Traders expect a significant interest rate cut by the Reserve Bank of New Zealand (RBNZ) amid concerns over the country’s economic growth prospects. The RBNZ began its monetary easing cycle in August with a 25 basis point rate cut and is expected to make further reductions. Markets are now fully pricing in the possibility of a half-point rate cut at next week’s Central Bank meeting.

At the end of Wednesday, the Dow Jones Index (US30) gained 0.09%, while the S&P 500 Index (US500) added 0.01%. NASDAQ Technology Index (US100) closed positive 0.08%. Increasing geopolitical risks dampened optimism over a possible interest rate cut in the US. Meanwhile, economic data showed stronger-than-expected employment growth, with 143,000 private sector jobs created in September. Investors await Friday’s employment report to gain further insight into the economy and the Fed’s interest rate decisions.

Corporate news pressured the market, with Nike (NKE) shares falling 6.8% after withdrawing its full-year guidance and Tesla (TSLA) down 3.5% after weaker-than-expected deliveries, though Nvidia (NVDA) rose by 1.6% and helped support technology stocks higher. Meanwhile, defense and energy stocks rose as investors weighed the impact of heightened geopolitical risks.

The Mexican peso strengthened to 19.4 per US dollar (USD/MXN), rebounding from a two-week low, following President Claudia Sheinbaum’s inauguration speech and hawkish comments from Banxico’s deputy governor. Investor sentiment improved as Sheinbaum reassured markets of the safety of foreign investment, signaling policy continuity. Meanwhile, Jonathan Heath, deputy governor of Banxico, said that while core inflation is roughly in line with the monetary authority’s target, persistent services inflation warrants a pause in the current easing cycle.

Equity markets in Europe traded flat yesterday. The German DAX (DE40) declined by 0.25%, the French CAC 40 (FR40) closed higher by 0.05%, the Spanish IBEX 35 (ES35) fell by 0.55%, and the British FTSE 100 (UK100) closed positive by 0.17% on Wednesday.

Noticeably deteriorating business survey data in the Eurozone, the first inflation reading below 2% in more than three years, and encouraging statements from the Federal Reserve about a shift to policy easing have led to the ECB likely to cut rates at its October 17 meeting. Economists, previously unanimous in predicting only a December move, have changed their views, with forecasters at Morgan Stanley and Barclays among those who did so earlier this week.

Key drivers of the UK Financial Policy Committee’s (FPC) Q3 2024 report:

• The UK is seeing further signs of easing credit conditions, reflecting an improving macroeconomic outlook;
• UK households and corporate borrowers remain resilient to rising interest rates, although some highly leveraged businesses, including small businesses and private equity firms, remain under pressure;
• The UK banking system remains in a strong position to support households and businesses, even if economic and financial conditions have been significantly worse than expected;
• Global vulnerabilities remain significant, as do uncertainties in the geopolitical environment and global outlook.

Oil prices declined slightly and consolidated around $70-71 per barrel as rising US crude oil inventories indicated the market would be well supplied despite escalating tensions in the Middle East. EIA data showed a 3.89 million barrel increase in crude inventories, while gasoline demand fell to its lowest level in six months, easing fears of a supply shortage. In addition, OPEC+ maintained its plan to gradually increase production, suggesting no immediate threat to the global oil supply.

Asian markets traded yesterday without any unified dynamics. Japan’s Nikkei 225 (JP225) fell by 2.18%, China’s FTSE China A50 (CHA50) was not traded due to holidays, Hong Kong’s Hang Seng (HK50) rose by 6.20%, and Australia’s ASX 200 (AU200) was negative 0.13% for yesterday. Hong Kong stocks were down 3.2% in early trading on Thursday after some profit-taking after Wednesday’s Hang Seng hit its highest since early February 2023 on the back of Beijing’s bold stimulus measures last week. Many traders were also reluctant to open new positions as Chinese markets remain closed until next week due to the Golden Week break.

The Australian dollar continues to be supported by expectations that the Reserve Bank of Australia will start cutting interest rates much later than its peers. Markets are currently pricing in a 72% chance of the RBA cutting rates in December, but if core inflation remains elevated, it is likely to keep policy steady until early 2025.

At Tuesday’s close, the Dow Jones Index (US30) was down 0.41%, while the S&P 500 Index (US500) lost 0.93%. The NASDAQ Technology Index (US100) closed negative 1.53%. Escalating tensions in the Middle East caused long liquidation pressure in equities on Tuesday. Israel launched a limited ground operation in Lebanon, and Iran launched a ballistic missile strike on Israel.

Economic data came out mixed yesterday. August job openings rose by 329,000 to 8.04 million, indicating a stronger labor market than expectations of 7.693 million. The ISM Manufacturing Index for September was unchanged from August at 47.2, weaker than expectations of a rise to 47.5.

The Canadian dollar strengthened above 1.35 per US dollar, rebounding from a one-week low of 1.352 hit on September 30, as positive economic data and an improving outlook for the foreign currency outweighed US dollar strength. Canada’s manufacturing PMI rose to 50.4 in September 2024 from 49.5 in August, marking the first improvement in working conditions since April 2023. This coincided with the start of the Bank of Canada’s rate-cutting cycle, easing pressure for further monetary easing. In addition, rising geopolitical tensions in the Middle East drove oil prices higher, raising the outlook for foreign exchange inflows from Canada’s main export.

Equity markets in Europe fell steadily yesterday. Germany’s DAX (DE40) fell 0.58%, France’s CAC 40 (FR40) closed down 0.81%, Spain’s IBEX 35 (ES35) lost 1.72%, and the UK’s FTSE 100 (UK100) closed plus 0.48%.

Eurozone Consumer Price Index for September rose 1.8% y/y, the slowest pace in nearly 3 years and below the ECB’s 2% target, reinforcing expectations that the ECB will cut interest rates at its October 17 policy meeting.

WTI crude prices rose 3% on Tuesday to above the $70 a barrel mark after Iran fired a barrage of missiles at Israel, heightening fears of a wider regional conflict in the Middle East. The Israel Defense Forces intercepted numerous rockets. Tensions in the Middle East rose sharply as Israel stepped up airstrikes against the Iranian-backed Hezbollah militia, killing its leader, Hassan Nasrallah. On Tuesday, Israel sent ground troops into southern Lebanon. The extent of the oil market reaction will depend on the scale and damage of the Iranian attack, which could dictate an Israeli response and further destabilize the region.

Asian markets traded flat yesterday. Japan’s Nikkei 225 (JP225) was up 1.93%, China’s FTSE China A50 (CHA50) and Hong Kong’s Hang Seng (HK50) were not trading due to holidays, and Australia’s ASX 200 (AU200) was negative 0.74%.

Japan’s newly appointed economy minister said that the Central Bank should be cautious about raising rates again as it takes time to fully recover from deflation. He added that incoming Prime Minister Shigeru Ishiba would not necessarily favor further rate hikes without a number of conditions being met. On Tuesday, Ishiba pledged to support households amid rising prices and a sluggish economy. The Bank of Japan, which has been planning to raise rates, may face the interests of the new government in the near future.

On Monday, the Dow Jones Index (US30) gained 0.04%, and the S&P 500 Index (US500) rose 0.42%. The NASDAQ Technology Index (US100) closed positive 0.38%. The US stocks ended Monday in the green as investors digested Powell’s comments. During a speech at the National Association for Business Economics, Fed Chairman Powell emphasized that the Fed is not following a set path but suggested that two quarter-point rate cuts could still occur this year if the economy performs as expected. The odds of a 50 bps rate cut in November currently stand at 35%, down significantly from above 50% the previous week.

Equity markets in Europe fell steadily yesterday. Germany’s DAX (DE40) fell 0.76%, France’s CAC 40 (FR40) closed down 2.00%, Spain’s IBEX 35 (ES35) lost 0.76%, and the UK’s FTSE 100 (UK100) closed negative 1.01% on Monday. The CAC 40 is falling amid weakness in the automotive sector. Leading the decline was Stellantis NV, whose shares fell 14.7% to their lowest level since October 2022. The automaker cut its operating profit margin in 2024 to 5.5-7% from previous double-digit forecasts, citing worsening global industry conditions and increased competition from China. Renault, Vinci, and Kering were also among the top fallers, losing 5.6%, 5.1%, and 3.8%, respectively.

Germany’s inflation rate fell more than expected to 1.8% in September, the lowest since February 2021, while Italy’s fell to 0.8%. Inflation in France and Spain also fell more than expected last week, and markets now expect Eurozone inflation, due for release this week, to fall to the ECB’s 2% target. This will increase the likelihood of a further rate cut from the ECB.

WTI crude oil prices settled at $68.17 per barrel on Monday, finishing down 7% for the month as escalating tensions in the Middle East slightly outweighed rising supplies and weak demand. The market received little support from geopolitical risks, even after an Israeli airstrike killed Hezbollah leader Hassan Nasrallah in Beirut and bombed Houthi targets in Yemen. On the other hand, China’s ongoing economic problems, where manufacturing output contracted for the fifth consecutive month and service sector growth slowed, put additional pressure on prices. Traders remain doubtful that Beijing will take stimulus measures to boost demand.

Asian markets traded flat yesterday. Japan’s Nikkei 225 (JP225) was down 4.80%, China’s FTSE China A50 (CHA50) and Hong Kong’s Hang Seng (HK50) were not traded due to holidays, while Australia’s ASX 200 (AU200) was positive 0.70%.

Indonesia’s inflation hit a near three-year low. Indonesia’s annual inflation rate fell to 1.84% in September 2024, the lowest since November 2021, and remained within the central bank’s target range of 1.5% to 3.5%. Core inflation hit a 13-month high of 2.09% from August’s 2.02%. The CPI fell 0.12% monthly, maintaining its downward trend for the fifth month.

Judo Bank’s Australian Manufacturing PMI fell to 46.7 in September 2024 from 48.5 in August, indicating an eighth consecutive month of contraction in manufacturing activity at the fastest pace since May 2020. Retail sales in Australia rose 0.7% m/m in August 2024, up from an upwardly revised 0.1% increase in the previous month and above market forecasts of 0.4%. This was the fifth consecutive month of growth and the fastest pace since January.  Stronger-than-expected retail sales data for August boosted market sentiment and reduced the risk of an early rate cut by the Reserve Bank of Australia. Markets have ruled out the likelihood of an RBA rate cut in November, while the probability of such a move in December is currently around 71%.

S&P Global’s Vietnam Manufacturing PMI fell to 47.3 in September 2024, entering contractionary territory for the first time since March, down from 52.4 in August. The decline is mainly attributed to Typhoon Yagi, which caused temporary plant closures and production delays due to heavy rains and flooding. The S&P Global Malaysia Manufacturing PMI for September 2024 fell to 49.5 from 49.7 in the previous two months, the lowest reading since April. This is also the fourth month of contraction in the manufacturing sector, with output falling for four months, although the pace of contraction was modest.