Delta variant spread raises recovery risks

• Markets are beset by fears the spread of the Delta variant of Covid-19 could seriously derail growth for the remainder of the year. China is now contending with outbreaks of the Delta variant in economically significant provinces and cities and authorities have advised against travel and enforced restrictions on social activity. In the US, the CDC has extended a recently expired moratorium on evictions, noting that evictions could lead to “spikes” in infection rates in the US where still only around 50% of the population has been fully vaccinated.
• The Caixin PMI survey of services firms in China rose strongly for July, moving up to 54.9 from 50.3 a month earlier. Employment also moved back above the 50 threshold for growth while output prices rose to their highest level since December 2020. After a lacklustre manufacturing PMI, the strong performance from services helped to take the composite index up to 53.1 from 50.6 a month earlier. 
• Turkish CPI inflation came in at 18.95% y/y in July, just five basis points below the benchmark one-week repo rate of 19.00%, essentially leaving real interest rates near zero. This exceeded consensus projections of 18.6% and was up from 17.5% in June. Indeed, the July rate was the fastest pace of price growth since April 2019. On a m/m basis inflation was 1.8%, down modestly from the 1.9% recorded in June. Given that PPI inflation rose from 42.9% y/y in June to 44.9% in July, and the substantial rise in input costs recorded in the PMI survey released earlier this week, inflationary pressures will likely remain to the fore over the next several months. This would put further pressure on real interest rates with the risk of these turning negative and could push back any move to loosen monetary policy given TCMB governor Sahap Kavcioglu’s pledge to keep policy tight until inflation has taken a marked move lower.

Today’s Economic Data and Events

09:00 IN PMI composite (July)

12:00 EC PMI composite (July)

16:15 US ADP employment change (July): forecast 683k

18:00 US ISM services index: forecast 60.5

Fixed income

• US Treasuries ended the day with little apparent change although that masked some wider intraday moves. The 10yr UST yield moved down to as low as 1.15% during the early US session before recovering some of that move later in the day as equities rallied. Michelle Bowman, a Fed governor, provided a dovish voice on labour market activity in the US, saying that there had been an “encouraging pace” in job growth but that employment is still nearly 7m jobs lower than it was in February 2020.
• Primary markets in the region are quiet at the moment with no pipeline of major issuances.

FX

• Currency markets showed some two-way movement overnight as early dollar weakness was reversed later in the session. The dollar index managed to crawl higher, rising by 0.04% to 92.081. After an early surge in the day, EURUSD closed with a lower bias while both USDJPY and CHF moved lower as some risk-off anxiety remains in play.
• Both the AUD and NZD rallied sharply overnight, hitting 0.7396 (up 0.48%) and 0.7017 (up 0.67%) respectively as central banks moved to tighten policy. The RBA maintained its plan to pull back on asset purchases even as much of Australia is enduring lockdown measures again while the RBNZ is going to target house price growth more specifically.

Equities

• US equities ended the day up yesterday after some volatility during the session. Ultimately, a slew of positive earnings reports, along with stronger-than-anticipated factory orders, saw risk-on sentiment return leading the NASDAQ to close up 0.5% and both the Dow Jones and the S&P 500 gain 0.8%.
• The day had started mixed in Asia, where there was some respite for the Shanghai Composite which gained 0.2%, while the Nikkei continued to decline in the face of mounting Covid-19 cases in Japan, losing -0.5%. There is a similar story playing out in morning trading today, with the Shanghai Composite up a further 0.3% at the time of writing while the Nikkei has lost a further -0.1%.
• There were modest gains in European equity indices yesterday, as the composite STOXX 600 added 0.2%. The CAC was the major gainer with 0.7%, while the DAX lost -0.1%.
• Within the region, the DFM gained 0.2%, the ADX 0.4% and the Tadawul 0.5%. The EGX 30 lost -0.9%.

Commodities

• The spread of the Delta variant across major cities in China shook oil markets for a second day with prices sliding. Brent futures fell 0.66% to USD 72.41/b while WTI was off by nearly 1% to USD 70.56/b. Data from the API showed a modest drop in crude stocks last week while gasoline stockpiles fell 5.8m bbl.
• There has been no apparent reaction in oil markets to an escalation in geopolitical tensions in the Gulf region after a products tanker was attacked last weekend. While it is an isolated incident, we doubt that it will incentivize much movement towards a renewal of the JCPOA.

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