Gold: NFP’s Biggest Casualty

Monday August 8: Five things the markets are talking about

Friday’s non-farm payroll (NFP) report again points to a solid U.S labor market, potentially providing the Fed more room to raise rates later this year.

Yield differentials are giving the USD its Monday morning lift across the G10 currency board ahead at the start of a light economic data week. In particular, USD/JPY, a popular immediate proxy for renewed Fed tightening expectations, has rallied to ¥102.30, and that weakness in the yen is helping Nikkei225 outperform the other markets in Asia.

Economic releases this week is on the light front. On Wednesday, the Reserve Bank of New Zealand (RBNZ) will announce its policy decision. Tomorrow, June data (pre-Brexit) for U.K industrial production and merchandise trade will be released. Germany will release its industrial production and merchandise trade as well. Also on Wednesday, ahead of their summer break, Japan will release machine orders data, which is considered a proxy for capital spending. The U.S will close out the week with its highly volatile retail sales headline.

1. Commodities mixed results

Gold is one of the bigger casualties from the strong U.S jobs data.

In overnight trading, the ‘yellow metal’ prices have slipped to a new one-week low, falling another -0.2% to $1,331.34 and this after Friday’s -1.9% plummet. The growing prospect of a Fed rate hike dims the appeal of the precious metal versus yield-paying assets.

Other precious metals are performing reasonably well on growth prospects – copper has gained +0.6%, aluminum climbed to a three-week high and nickel was headed for its strongest close in a year in the European session.

In energy, crude oil prices are higher, mostly supported by rumored reports of renewed talks among some OPEC state to rein in output. WTI has rallied +1.1% to +$42.26 a barrel, while Brent is trading at +$44.42 per barrel, up +0.34%.

Yet in the absence of an agreement, the crude and refined product glut is still weighing on markets and reason why speculators continue to positioned themselves in expectation of lower prices, raising the amount of short positions in WTI futures.

2. Asian stocks jump to one-year highs as yield hunt spreads

Asian bourses ended the session higher across the board, tracking the U.S’s large gains on Friday after the stellar jobs number. U.S indices hit record high as investors flocked to stocks from bonds, sending yields higher and lifting the probability of a Fed rate hike before the end of the year to +43% from +32%.

The Nikkei jumped +2.4% while Australia’s S&P/ASX 200 was up +0.7%. Hong Kong’s Hang Seng Index rose +1.6%, and South Korea’s Kospi rose +0.7%. (The Nikkei remains well supported by the BoJ’s continuing purchases of ETF’s, again boosting summers trading volumes).

In China, the Shanghai Composite Index added +0.9% and this despite weaker economic news – China’s July exports fell -4.4%, while July imports fell a bigger-than-expected -12.5% from a year earlier.

In Europe, equity indices are trading higher ahead of the open stateside, heading for their biggest three-day increase in more than three weeks, amid investor optimism about global growth. Banking and financial stocks are making up the bulk of the gains in the Eurostoxx; while commodity and mining stocks are leading the gains in the FTSE 100. Last week’s fresh stimulus measures from the BoE is also helping the U.K cope with the repercussions of the Brexit vote.

Indices: Stoxx50 +0.9% at 2,999, FTSE +0.3% at 6,815, DAX +1.0% at 10,471, CAC-40 +0.6% at 4,439, IBEX-35 +0.9% at 8,618, FTSE MIB +0.9% at 16,783, SMI +0.2% at 8,209, S&P 500 Futures +0.2%

3. Is NFP a bust for Bond Bulls?

Friday’s NFP suggests the U.S is entering Q3 in good shape. However, investors are yet to be fully convinced that the Fed is about to begin their rate normalization policy sooner rather than later.

Prior to Friday’s report, recent U.S data was painting a mixed picture of the U.S. economy. Hence, the market remains sceptical that the Fed will raise interest rates next month, which falls just seven-weeks before the presidential election in November.

The market will expect to gain greater insight into the Fed’s outlook when Janet Yellen speaks at the central bank’s annual conference later this month (August 26).

Fed-funds futures show that fixed income dealers see a +18% likelihood of a rate increase at the Fed’s September meeting, compared with +12% before the jobs report. The odds of a rate increase by December climbed to +46% from 32%.

4. Disappointing China July imports suggest cooling domestic demand

The overnight China trade data is considered mixed. Despite both USD and CNY terms of trade topping consensus and reaching six-month highs (+$52.3B vs. +$47.3BE), it’s the bigger than expected decline in imports that is causing a concern.

Analysts seem to differ whether the imports drops (-12.5%) is the function of internal demand or similar result of weaker exchange rate. Nevertheless, the mixed report will be interpreted by some as pointing to further weakness in global demand in the aftermath of Britain’s decision to leave the EU.

Expect this number to be more highly scrutinized going forward now that China’s government’s effort to cut “overcapacity” could produce an even bigger hit to demand in the next few quarters.

Other data showed that China’s FX reserves declined to +$3.20T from $3.21T – the smallest drop in 19 months. Currently, the softer USD helps explain reduced volatility in reserves, which may begin to improve on expectations of currency stability.

5. Dollar index starts the week in the ‘black’

The dollar has rallied against the yen (¥102.30) and sterling (£1.3053), staying firm after Friday’s strong U.S. jobs data. It’s steady against the EUR (€1.1084), but under small pressure against the AUD (A$0.7634) and CAD (C$1.3170) which are being supported by higher commodity and oil prices.

Moves remain limited as the market remains unconvinced the firm U.S. jobs data will be enough to prompt a U.S. rate hike. With most other central banks still in easing mode, why should the Fed be in any hurry to hike?

The market is keeping a close eye on the pounds strong support level at £1.3000. U.K data this week may be insufficient to penetrate it, which would be a concern for the record short sterling positions. U.K. industrial output and trade data for June on Tuesday still covers the period prior to the country’s vote to leave the EU.

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