Week ahead 

As investors continue to follow the path of the coronavirus pandemic while awaiting news on a possible vaccine, the spotlight shines on central banks as they explore policy options amidst one of the most uncertain outlooks in decades.

This week's main highlight will come from the ECB's latest monetary policy decision and President Lagarde's subsequent press conference, which are taking place on Thursday. Since the ECB's last meeting in July, consumer prices in the 19-nation Euro area fell for the first time in four years, highlighting that a recent rebound in economic activity has not managed to offset the pandemic's profound impact on demand. That’s triggered a chorus of Council Member concerns that the stronger EUR is amplifying deflationary pressures and signaling to the markets that Legarde may try to talk down the Euro.

Markets 

US equities fell further on Friday, the S&P closing down another 0.8%, albeit after recovering from steeper losses earlier in the session, and once again concentrated in tech stocks. There were similar declines through Europe and Asia. US10Y yields rose 8bps to 0.72%, oil was down 3.9% to close below USD40 per barrel for the first time since early July amid wavering demand, while gold settled higher off intraday lows. 

Stocks looked headed for a nervy start to trading on Monday after the massive two-day slide for global equities since June left investors on edge. Currencies began the week with little fanfare, while crude oil declined.

US stocks ended lower despite a late-day rally, sending the market to its worst weekly loss since June and technology to its most significant weekly decline since March. The S&P 500 Index closed at its lowest in two weeks on Friday ahead of the three-day Labor Day holiday weekend.

In the short-term – especially with US markets closed today – it should remain an extremely choppy affair, with bounces likely being sold by design. That said, it will be interesting to see whether value can hold up on a relative basis, with the nature of any further tech sell-off, albeit orderly vs. disorderly, likely deciding the playing field.

The market, especially equities, will not like the virus headlines nor the vaccine news (see oil update below) with Moderna saying it’s slowing the newest trial to ensure diversity. 

On Friday, the stock market flow was relatively muted but the technology was still showing the most considerable selling skew. It was the same story as Thursday, with value holding up a bit better on the way down while the momentum/growth pullback was extremely broad. But the relatively well-behaved nature of the macro markets next to what is going on in stocks is fascinating. It’s not that there hasn’t been movement, just extraordinarily little shift in the DXY.

As we suggested on Friday, it would appear this is an equity-specific move, and within that one or two suspects. If could even be a single-name shift that led to a global procession of stock indices micro tops that started to chime lower then reverberating through the S&P 500, CSI300 and DAX. Much of the sell-off is concentrated in tech names which, as well as rising a lot in recent weeks, have been popular among retail investors on platforms like Robinhood. 

A lot of that investment occurs via short-dated calls, which creates enormous gamma exposure for the dealers, and that, as volatility picks up, creates a significant level of market angst and usually something gives. So, with the stocks at the top and VIX not, it made more sense to reduce tech exposure. 

You can pick up any weekend story that sees the analysts in force talking about what the trading desk told them on September 2. But, man, can the derivatives crowd whip up a version of "Stephen King’s Amazing Stories" on short notice! So, take the bears with a grain of salt. Indeed, this shift lower is not that big of a surprise (see points below from the September 2 Axi Blog) and, outside of oil which has its idiosyncratic problems, cross-asset barely blinked. 

  • Fed does not sound as dovish as I thought they would.

  • Vol rising along with stocks can be a sign of danger.

  • Breadth in the equity market is bordering on worrying.

  • Real interest rates are not making new lows.

  • Gold not making new highs. It is making lower highs.

Forex

Currency markets are viewing the latest stock market carnage as endogenous NASDAQ repricing, not a global macro event. There has been limited follow-through to FX from Thursday's US equity market beat down. Most of the Forex action took place earlier in the week, in the context of EURUSD selling off after ECB Chief Economist Lane's apparent push back against EUR strength.

As such, over the short term, especially with Wall Street returning from the Hamptons, today's currency could be range-bound even more ahead of the ECB. 

With oil prices in the tank and global risk sentiment wobbly, USDMYR could drift higher. But despite the USD being more generally bought last week, there has been minimal USDEM buying. With the Fed unambiguously in a lower for longer stance, traders are still interested in re-engaging in carrying and "risk-on" trades with links to China's performance. 

As we suggested two weeks ago, ASEAN currency laggards with more robust beta and enduring trade ties into China, like the MYR, should continue to trade well on a catchup basis. The latest Reuters positioning survey confirms this EM bullishness. So perhaps the ringgit will tether itself the CNH today?

Gold 

Gold recovered from early jobs data-inspired losses as the USD rally faded at EURUSD 1.1800. 

Higher back end US yields and a stronger US dollar pose the most significant near-term threat to the bullish view. Gold was reasonably steady after a volatile day on Thursday as that sticky demand I often refer to, between $1,875-$1,925, remains firm. 

All eyes were focused on the US employment release. US nonfarm payrolls for August rose 1.37m vs. a consensus forecast of 1.35m. This was good enough to trigger a USD rally and higher yields, both of which are gold negative. The yellow metal did not stay down for the count.  

Friday's rally back in line with the equity recovery is always a challenge to explain. Both naturally do not move in sync, but this usually inverse relationship has broken down this year. Yields are back up above .70 in UST 10s, and that should weigh on gold. Despite Friday's post-payroll recovery, I still think the upside for gold is limited and the market will not challenge USD2,000/oz anytime soon. 

There’s way too much scarring left from last month's massive sell-off and, with vaccine discussions moving forward, that too tarnishes gold appeal.

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