Market WRAPS

Watch For:

EU retail trade; U.K. monthly car registrations figures, Bank of England Chief Economist Huw Pill speaks at Monetary Policy Report National Agency briefing, S&P Global/CIPS Construction PMI; Germany Manufacturing orders; France Industrial production data for France and Italy; trading updates from Credit Agricole, Sika, Capita, WPP, AngloGold Ashanti, Norwegian Air Shuttle, Bollore

Opening Call:

Shares are poised to head Higher in Europe on Friday ahead of the U.S. jobs data. In Asia, stock benchmarks were mixed; Treasury yields were little changed; the dollar weakened; oil and gold gained.

Equities:

European shares could open higher on Friday even as the rise in bond yields, which accelerated after the Bank of England delivered another quarter-point interest rate, could continue to weigh on investor sentiment.

“I think everyone is watching interest rates after the Fitch downgrade,” said Robert Pavlik, a senior portfolio manager at Dakota Wealth Management, of climbing long-term rates.

“That’s troubling for the equity market because it makes it more expensive to borrow.”

“The question is how high will the rates go and what is going to be the impact on equities and on the economy?” said Olivier Sarfati, head of equities at GenTrust.

The decision late Tuesday by Fitch Ratings to downgrade the U.S. credit rating has continued to impact both Treasurys and, by extension, U.S. stocks.

When investors can get high yields from Treasurys, they are less inclined to take the risk that comes with owning stocks.

Investors are looking ahead to Friday’s jobs report to assess the strength of the labor market and look for clues about the Federal Reserve’s next moves in its campaign against high inflation.

“A lot of market participants are watching the payrolls data very, very closely,” said Sinead Colton Grant, head of investor solutions at BNY Mellon.

Forex:

USD index was slightly weaker early Friday ahead of the U.S jobs data.

Data Thursday showed initial jobless claims rose slightly but remained at historically low levels.

Carol Kong, currency strategist at CBA, said the low levels of claims point to another strong outcome for U.S. non-farm payrolls growth data at 0830 GMT today.

The consensus suggests payrolls grew by 200,000 in July, but the true outcome may be higher because of the much stronger-than-expected ADP employment data released earlier in the week, Kong said.

The implication is the USD may pull back sharply if payrolls print below or even in line with the reported consensus, she added.

DBS said that if there were no shocks in today’s job numbers, DXY should be looking to consolidate in a 102-103 range.

Meanwhile, BofA analysts said that sticky inflation and markets pricing Fed easing “too early” bode well for the dollar.

“We still see upside risks for rest of 2023 on pricing of premature cuts, ” they said, adding that for 2024 the greenback is expected to weaken “towards long-term equilibrium.”

Markets mostly bet that inflation will slow fast enough for interest rates to be cut starting early next year, but BofA said that stretched labor markets and loose fiscal policies could keep inflation sticky.

Bonds:

Treasury yields were little changed ahead of July’s official jobs report after tracking higher Thursday as worries about persistent U.S. inflation re-emerged.

The rout in Treasurys that lifted the 10-year yield further above 4% on Thursday “is being attributed by some to Fitch’s downgrade of U.S. debt, but yesterday’s ADP employment forecast and Treasury’s refunding announcement likely has more to do with it,” said Chris Low, chief economist for FHN Financial in New York.

“The bond market sold off on the ADP numbers last month, too. ADP is nowhere near perfectly predictive of nonfarm payrolls, but the company does handle payroll for 10 million people, giving it real-time insight no other forecaster has,” Low said.

Recent Treasury yield trends indicate markets are walking back from bets on a fast easing cycle by the Fed, Simplify’s Harley Bassman said.

The yield curve, he calculates, “is basically saying the Fed could take rates down by 125 basis points 12 months from now.”

Bassman said such fast monetary easing would require core PCE inflation much closer to the Fed’s 2% target than its latest 4.1% reading.

The curve inversion remains “massive,” but markets are starting to realize the discrepancy and the inversion is narrowing, as the 10-year Treasury yield rises faster than the two-year.

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Investors are better off investing in U.K. short-dated bonds than long-dated bonds as short-maturity bonds currently offer higher yields, AXA Investment said.

“If you’re getting more yield from short-dated bonds than long-dated bonds with less sensitivity to interest rate rises, why lengthen duration? It is too early to make that trade,” it said.

“We understand that investors don’t want to miss the boat with the longer duration trade, but we believe that short-dated bonds remain the best place to be in fixed income for now.”

Energy:

Oil prices advanced in Asia, building on gains overnight after Saudi Arabia and Russia said they will extend efforts to keep crude supplies tight.

The extent of these output cuts will be a “key driver of the size of deficits in coming months,” Goldman Sachs said. It expects Russia’s total production to edge lower gradually to 10.6 million barrels a day in October before picking up in December to reach 10.8 million bbl/d from January.

Saudi Arabia’s state news agency said Thursday that a voluntary production cut of 1 million barrels a day, which was implemented in July and set to run through the end of this month, would be extended to include September. The cut “can be extended, or extended and deepened,” according to the report.

According to news reports, Russian Deputy Prime Minister Alexander Novak said the country would cut exports by 300,000 barrels a day in September, news reports said. Russia had previously pledged to cut production by 500,000 barrels a day from March through year-end.

A Friday meeting of an OPEC+ panel isn’t expected to recommend any changes to the output policies of the group, made up of the Organization of the Petroleum Exporting Countries and its allies, including Russia.

Metals:

Gold edged higher ahead of U.S. monthly jobs data.

“The market awaits a key jobs report and how it will impact the Federal Reserve’s next move on rates,” ANZ analysts said.

The government’s jobs report for July is expected to show the U.S. economy added 200,000 jobs last month, down from 209,000 in June, economists polled by the Wall Street Journal estimate.

Gold prices have seen their shine dim slightly this week. While the yellow metal is still trading well above its late-June lows of around $1,910 per ounce, a stronger U.S. dollar and rising Treasury yields threaten to push it even lower.

“The Fitch downgrade has breathed new life into the dollar rally. As a first step, investors are getting rid of the weakest assets in their portfolios by buying more liquid Treasuries and the dollar,” said Alex Kuptsikevich, senior market analyst at FxPro.

Rising Treasury yields and a stronger U.S. dollar tend to weigh on gold, since higher yields allow investors to reap higher returns elsewhere, and a stronger dollar makes gold more expensive for buyers in other currencies.

Longer term, some analysts expect gold’s price will see solid gains, as potential U.S. debt issues emerge.

“The U.S. might have some debt issues over the coming years, and that should keep gold supported,” Oanda said.

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Copper prices were flat, showing some signs of improvement from previous losses that followed weak Chinese factory activity data.

Analysts at Galaxy Futures reckoned the metal could bottom out soon and begin to rebound in the coming months, as Beijing officials unveiled a slew of policy stimulus measures and repeatedly vowed more government support to shore up the economy.

Copper supply was also tight in the domestic physical market, which signals better buying sentiment after the recent price correction, they added.

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Iron-ore futures edged higher in early Asian trade.

However, analysts still see a downward trend for iron ore prices due to high arrival volumes at ports and China’s likely policies to control crude steel output.

After growing chatter about capping crude steel output, the policies are likely to be implemented gradually this year, Huatai analysts said.

The rebound in arrival volumes in the next few months, together with the steel output controls, will create a supply surplus for iron ore and weigh on its prices, they added.

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08-04-23 0016ET