Equity sell-off continues, USD broadly lower

Market Brief

China’s Caixin flash manufacturing PMI surprised markets to the downside with a reading of 47.1 versus 48.2 consensus and 47.8 in July. Despite China’s monetary easing, the manufacturing sector is contracting since March and it seems that we have not reach the bottom yet. Therefore, be ready for further policy support. Chinese shares tumble with the Shanghai Composite down almost 3% while the tech-heavy Shenzhen dropped 3.56%. However, the sell-off is not contained to Chinese mainland shares: Hong Kong’s Hang Seng dropped 2.20%, the Nikkei fell 2.72%, the Topix retreated 3.13%, Australian shares dropped 1.40% while in South Korea the Kospi index fell 2.01%.

In the FX market, the dollar is feeling the pressure as traders are losing faith in a September rate hike from the Federal Reserves and adjust their positioning for a delayed lift-off. Since the beginning of the week the greenback lost 2.4% against the Swiss franc, 1.87% against the DKK, 1.85% versus the euro and 1.20% against the yen. Only the Canadian and Australian dollar are losing ground against the US dollar, down 0.20% and 0.94% respectively.

In Europe, Alexis Tsipras, Greece Prime Minister, resigned yesterday and called snap election for September 20. According to Tsipras, he wants to put everything he has done (mostly regarding the bailout deal) to the judgment of Greek people. Greece is therefore back into short-term political uncertainty. This morning, the single currency is trading higher against most G10. EUR/USD is taking off and has jumped 2.30% since Wednesday. The single currency validated a break of the 1.12 threshold and is heading toward 1.13 with the next key resistance lying at 1.14.

Safen haven assets such as the Swiss franc and gold are back under the spotlight, showing strong performances over the week. The Swiss franc is appreciating against all G10 currencies since the beginning of the week while gold is up 3.50% over the same period due to mounting uncertainties about global growth.

On the equity front, all signs point toward a negative opening in Europe. Futures on the German DAX are down -2.40% while ones on the CAC 40 are down -2.09%. UK shares are down 0.53%, SMI falls -1.73% while the Euro Stoxx 50 is down -2.24%. GBP/USD is having a hard time taking off and is stuck below the 1.57 threshold. On the other hand, EUR/GBP is set to break its second resistance in 2 days. On the upside, the closest resistance stands at 0.7215 (Fib 61.8% on June-July debasement) while on the downside the pair is trying to turn the previous resistance, lying at 0.7162 (Fib 50%), into a support.

Today traders will be watching German and Euro zone Markit PMIs; retail sales and CPI from Canada and consumer confidence from Euro zone.