Fed pushes back against summer equity rally

• It was relatively quiet on the data front yesterday, with the UK closed for the summer bank holiday.  Equity markets continued their post-Powell selloff yesterday, but US futures are a touch positive in Asian trade this morning.
• Minneapolis Fed president Neel Kashkari told Bloomberg yesterday that he was “happy” with the market reaction to Powell’s comments on Friday, as expectations of a Fed pivot to cutting rates early next year were misplaced. Fed officials have continued to push back against any loosening in financial conditions, including higher equity prices, in recent weeks.  Kashkari reiterated Powell’s views that the Fed would rather err on the side of too much tightening in order to ensure that inflation is well contained, rather than ease policy too early and see inflation rebound.    

Today’s Economic Data and Events

• 16:00 Germany CPI (Aug) forecast 0.4% m/m and 7.8% y/y
• 18:00 US Conference Board consumer confidence (Aug) forecast 98.0

Fixed Income

• US Treasuries extended their losses overnight, carrying on the trend in the wake of Fed Chair Jerome Powell’s comments at the Jackson Hole summit. The 2yr UST yield added about 3bps to 3.4232% while the 10yr yield added 6bps to 3.1024%. President of the Minneapolis Fed Neel Kashkari added to the volatility in markets by saying he was “happy to see” how Powell’s speech was received by markets as an understanding that the Fed is committed to fighting against inflation.
• European bonds also closed sharply lower even as some of the energy crisis issues faded slightly. Yields on 10yr bunds added 11bps to close just shy of 1.5%, their highest level since June. French yields added 11bps to 2.118% while UK markets were closed thanks to a public holiday.
• Emerging markets generally moved lower as markets spurned risk once again. Yields on 10yr South African bonds added 3bps to 10.675% while emerging Europe was generally weaker.  

FX

• After an initial sharp move toward the dollar, currency markets adjusted over the course of the day to more modest gains for the greenback. EURUSD pulled higher after a weak start, closing at 0.9997, up 0.31% while GBPUSD pared some of its deeper losses, easing by 0.3% to 1.1709. USDJPY is showing more upside risk, putting 140 back in play after a 0.8% gain overnight to 138.72.

• In commodity currencies USDCAD moved lower by 0.17% to 1.3011 while AUDUSD was flat at 0.6903 and NZDUSD added 0.28% to 0.6154.

Equities

• Equity markets continued to fall on Monday, still feeling the after effects of Fed Chair Jerome Powell’s hawkish messaging on Friday. In the words of Neel Kashkari, president of the Minneapolis Fed, equity markets have ‘got the message’ after the rally seen just a few weeks ago. In the US, the NASDAQ was once again the biggest loser as it fell -1.0%, taking it down to -23.2% yyd. The Dow Jones lost -0.6% and the S&P 500 -0.7%, leaving them down -11.7% and -15.4% ytd respectively.
• European equity markets were under similar pressure, where sentiment is also being hit by a severe cost of living crisis as energy costs spiral. The DAX, the FTSE 100 and the CAC dropped -0.5%, -0.7% and -0.8% respectively.
• Locally, the DFM lost -0.8% and the ADX -1.1%. In Saudi Arabia, the Tadawul eked out a gain of less than 0.1%.

Commodities

• Oil prices rallied strongly to start the week, up 4% in both Brent and WTI to USD 105.09/b and USD 97.01/b respectively. Supply issues are driving the market at the moment with markets likely expecting some kind of downward adjustment to Saudi supply when OPEC+ meets next week.

• European natural gas futures fell sharply, down almost 20% overnight as some profit taking took hold of the market and also signs of moderate weather, allowing reserves to be built up ahead of the critical cooling season later in the year. From August 31 the Nord Stream Pipeline linking Russia and Germany will again be shut, however, raising the risk of even further curtailed supply.

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