Headlines

*Dollar off recent highs as risk sentiment perks up

*Europe nears gas storage target early despite Russian supply cut

*UK services sector downbeat in face of record costs

*Confidence in eurozone economy slides on gloomy outlook

US equities weakened for a second day after Friday’s sharp sell-off. The benchmark fell 0.7% and the tech-heavy Nasdaq shed 0.96%. All US major indices closed below their 100-day SMAs. The Vix volatility index, Wall Street’s “fear gauge” rose as high as 27.7, its highest point since mid-July. Asian stocks are mixed with tech names weak in China. European markets and US equity futures are seeing a bit of respite and are recovering this morning.

USD posted a new cycle high at 109.47 on Monday before paring gains. Today the mild sell-off has continued on the more positive risk mood. EUR is choppy but is holding above parity on hawkish ECB rhetoric. GBP slipped below 1.17 in tentative trading during the UK bank holiday. Sterling trades above that level with better equities today. AUD and NZD have also found a bid with the latter still below 0.70.

Event Takeaway – Jackson Hole reverberates

Markets are still wrapping their heads around Friday’s speeches at last week’s Jackson Hole meeting. Policymakers from both the Fed and the ECB reiterated their commitment to fighting inflation. That is despite the risk of pushing the economy into recession.

It’s in short-term Treasury yields where the biggest moves have been seen. The two-year note is especially sensitive to short-term interest rate expectations. It hit 3.43%, its highest level since 2007. We note the average of the futures contracts across the two years is close to 3.4% while the current 10-year yield is around 3.10%. This suggests some potential upside to that yield. This would potentially underpin more support for the dollar and downside in (tech) stocks.

Chart of the Day – S&P500 sits on support

US equity futures are enjoying a bounce as equities rediscover some allure. Markets are still fixated on central bank policy action. The pricing for FOMC September meeting has moved heavily towards a 75bps hike. Fed fund futures now give this around a 70% chance. Easing expected for the second half of next year is also being scaled back.

This Friday’s non-farm payrolls data will move the risk dial. The blue-chip S&P500 fell sharply on Friday below support, now turned resistance at 4114. The 100-day SMA sits at 4068. The 50-day SMA is below the current futures price at 4003 which will act as strong support. 3910 is the next level below here.