Headlines

* Global stock markets fall sharply, major brokers like Schwab report outages

* US interest rate futures price in an inter-meeting Fed cut, analysts say unlikely to happen

* RBA set for hawkish hold, trailing peers in easing cycle

* USDY/JPY remains heavy, euro jumps to $1.10 on bets Fed may go beyond ECB on rate cuts

FX: USD dipped to 102.16 before buying some buying into and during the US session. Friday’s disappointing NFP data kicked off intense recession fears and sharp repricing in Fed rate cut bets. Two full 50bps rate reductions are virtually priced in for the next FOMC meetings in September and November. There is above an even chanced of an emergency 25bps rate cut. ISM PMI services figures came in above expectations. Summer thinner liquidity is definitely exacerbating volatile price action.  

EUR found a bid as US-Europe yield differentials narrowed dramatically, having been boosted by Friday’s soft NFP data. It’s only one report and there could be weather related distortions. Of course, softer global growth doesn’t typically help the pro-cyclical euro. But the Fed is being seen as behind the curve and it is assumed the Fed needs to cut rates aggressively. EUR/USD bumped up into resistance just 1.10.

GBP had another relatively quiet day with cable falling to 1.2709 before paring losses. Most of the action was in EUR/GBP, aside from the safe haven JPY and CHF sterling crosses. Prices spiked up above 0.86 and above the 200-day SMA, having broken back above the key 0.8492 level.

USD/JPY tumbled once again to a low of 141.68 before bouncing. Prices printed at 161.95 on July 3.  The halfway point of the March 2023 low to recent high is 144.58. CHF is the other safe haven currency which outperformed. It fell to a low of 0.8433 before rebounding to the low end of the 0.85 mark.

AUD printed a huge wick after spiking lower to 0.6347. Focus turns to the RBA meeting today. USD/CAD popped up to 1.3946 before pulling back closer to 1.38. The major cycle high from October 2022 is 1.3977.

US Stocks: US markets opened on their lows before bouncing back slightly through the session. The benchmark S&P 500 closed 3% lower at 5,186. The benchmark is now 8.5% down from its all-time top last posted month. The tech-heavy Nasdaq 100 finished down by 2.96% at 17,895. That means the index is down over 13% from its record July high. The Dow Jones settled 2.6% down at 38.703. The VIX, Wall street’s fear gauge, at one point yesterday morning spiked above 65, its highest level since March 2020’s pandemic panic. It retreated back in to the high 30s. Tech, communication services and consumer discretionary sectors led the sell-off with losses over 3%. Apple was in the weekend news after Warren Buffett’s Berkshire Hathaway cut its stake by 38% from the previous quarter. Nvidia was initially down over 10% before closing just over 6% lower on reports that its upcoming AI chip will be delayed due to design flaws. Berkshire Hathaway missed on revenues but posted strong earnings. It revealed it sold more stocks than it bought for a seventh straight quarter.

Asian stock futures are green. Asian stocks plunged with circuit breakers being activated in some market. Weak NFP and escalating Middel east tensions didn’t help. News that Warren Buffet’s Berkshire Hathaway sold off part of its apple stake added to risk-off vibes. The ASX 200 dropped with tech and financials driving losses. The Nikkei 225 settled 12.4% lower, a record daily points loss and its worst day in 37 years. The Hang Seng and Shanghai Composite initially held up after better-than-expected Caixin Services PMI.

Gold oscillated as classic risk-off moves also entailed bullion getting hit. Margin calls across a range of trades where the yen has been a cheap source of funding like gold reflect the broad impact of the ongoing carry trade unwind. Prices dipped to the 50-day SMA $2365 and the 50% mark of the current range at $2380.

Day Ahead – RBA Meeting

The RBA is likely to keep the cash rate at the current level of 4.35%. The bank stuck to a hawkish tone at the June meeting where it reiterated that the Board remains resolute in its determination to return persistent inflation to target. It didn’t rule anything in or out and remains vigilant to upside risks. We got that with May CPI firmer-than-expected at 4% versus 3.8% expected and prior 3.6%.

However, the more recent monthly CPI data for June softened back to 3.8% and the quarterly CPI for June was also mostly lower-than-expected including the RBA’s preferred Trimmed Mean measure. The latest jobs data was mixed and supports the case for a continued pause with the headline topping forecasts, but the jobless rate unexpectedly rose one-tenth to 4.1%. AUD is getting hit as risk gets taken off the table. Key support at 0.6362 was touched early on Monday.

Chart of the Day – Nikkei plunges in “Black Monday”

A perfect storm seems to have hit the Nikkei 225. The unwind of the carry trade has excerbated moves with worsening funding conditions, as exporters were hit by yen strength brought on by last week’s hawkish BoJ pivot and a move dovish tilt by the FOMC. JPY has appreciated over 13% since mid-July. Increasing geopolitical tensions amid thinner summer volumes and a poor NFP report has boosted risk-off moves with broad-based Japan liquidation by global funds.

Techincally, prices crashed to a long-term Fib retracement level (61.8%) of the March 2022 low and recent July high at 31,460. The midpoint of this move sits above at 33,554. The index is heavily oversold over numerous measures.