Daily Market Outlook, August 9, 2024

Munnelly’s Macro Minute…

“Risk Sentiment Soothed By Jobs Data, Closing Out A Whipsaw Week”

Following Wall Street's robust rally overnight, Asian stock markets are mostly up on Friday. This is because data released yesterday showed a larger than expected decline in first-time claims for U.S. unemployment benefits, allaying fears that the world's largest economy may be heading into a recession. This increased the likelihood of several interest rate reductions in the months to come. The Japanese stock market was trading higher on Friday, reversing its losses from the previous session, although the momentum has started to fade. Index heavyweights and financial stocks are leading the advances across all sectors, as the benchmark Nikkei 225 is above the 35,200 mark.

As things stand, the yen is expected to end the week down roughly 0.5% against the dollar. On Monday, it surged to a seven-month high, which sparked the unraveling of yen carry positions, which in turn caused the recent collapse in global markets. But the carry trade is still very much alive; according to JPMorgan, it may have surpassed $4 trillion. Even the much-dreaded downturn narrative in China is starting to improve. Following trade statistics on Wednesday that revealed an unexpected acceleration in import growth, consumer inflation data released on Friday revealed prices increased more than anticipated in July. This implies that there is less chance of the second-biggest economy in the world completely deflationary.

What about the Fed's expectations? The market predicted a 23% possibility of a 50bp drop, as opposed to a 25bp shift, for the September FOMC the day before last week's jobs report. There is now a 50% likelihood of a 50bp decrease. The statement made by Kansas City Fed President Schmid overnight that "we are still not quite there" in terms of inflation declining reinforces the idea that market players have been overly sensitive to recent labour market statistics. At this point, the inflation data is likely more important than the employment market developments, as Powell stated at the July FOMC. The markets appear more susceptible to an upward surprise in the CPI data next week than to a miss, based on the starting point of nearly four 25bp cuts being priced for the remaining three meetings this year.

Overnight Newswire Updates of Note

China’s CPI Higher Than Expected In July, Up By 0.5%
Canadian Dollar Extends Recovery Ahead Of Jobs Report
Biden Sketches Out A New Blueprint For Next Six Months
Fed’s Barkin: We Have ‘Time’ To Assess Economy
Trump Says Presidents Have The Right To Influence Fed Policy
Market Gyrations Reflect Fears About The Unwinding Of QE
US Wants Japan To Co-Produce 100-Plus Patriot Missiles
RBNZ Preview: Hold Now, Bigger Cuts Later?
Oil Poised For Weekly Gain With Eyes On Middle East
Kyiv Advances In War’s Largest Counter-incursion
China’s Supply Chain Woes, HP Shifts Production Overseas
Seoul, Washington Discuss Clean Energy Ties
Cryptocurrencies Resume Their Rebound

(Sourced from reliable financial news outlets)

FX Options Expiries For 10am New York Cut

(1BLN+ represents larger expiries, more magnetic when trading within daily ATR)

EUR/USD: 1.0865-75 (1BLN), 1.0895-1.0905 (4.1BLN), 1.0920 (626M)
1.0950 (404M), 1.0980 (524M), 1.1000 (616M)
USD/CHF: 0.8700 (539M). EUR/CHF: 0.9450 (331M)
GBP/USD: 1.2700 (339M). EUR/GBP: 0.8530 (266M)
AUD/USD: 0.6600 (3.2BLN)
AUD/NZD: 1.0900 (509M), 1.0930 (701M), 1.0955 (220M)
USD/CAD: 1.3700 (519M), 1.3730-35 (608M), 1.3750 (955M), 1.3850 (1.1BLN)
USD/JPY: 146.00 (862M), 147.00-05 (755M)
Implied volatility for FX options increased significantly at the start of the week, with the JPY leading the way. Though anxieties have subsided, it is still far above earlier levels even though it has peaked. Benchmark expiration of one month Pre-NPP implied volatility for the USD/JPY was 11.35. Monday saw it hit 16.0, the highest level since January 2023, and it is now 13.6 AUD/USD one month. Implied volatility for FX options changed from 9.1 to 11.1 to 9.65. 1-month EUR/USD: 5.1 to 7.1, currently 5.7. GBP/USD 1-month range: 6.2, 7.8, and 7.1. Large option expirations on Friday could reduce the volatility of the EUR and AUD FX.Since the release of the NFP report, carry trade unwinding and a decline in risk sentiment have been caused by fears of a US recession. The demand for FX options has surged due to the notable increase in FX volatility. As long as worries continue, implied volatility linked to the JPY has increased significantly, but it has now peaked and is still much higher than previous levels. AUD/USD 1-month implied vol increased from 9.1 to 11.1, now at 9.65; EUR/USD 1-month moved from 5.1 to 7.1, now at 5.7; and GBP/USD 1-month went from 6.2 to 7.8, presently at 7.1. Benchmark 1-month USD/JPY implied vol touched 16.0 on Monday, the most since January 2023, currently at 13.6. Future significant option expirations could restrict Friday's FX volatility in EUR and AUD.

CFTC Data As Of 30/7/24

Equity fund managers CUT S&P 500 CME net long position by 55,687 contracts to 938,842
Equity fund speculators trim S&P 500 CME net short position by 32,188 contracts to 248,167
Euro net long position is 17,799 contracts
Japanese yen net short position is -73,460 contracts
Swiss franc posts net short position of -34,520
British pound net long position is 111,471 contracts
Bitcoin net short position is -1,002 contracts