18th August - A Quiet Start To The Week
After the tumultuousness of the markets over previous months, yesterday was comparatively a very quiet start to the week. We did not have any major news releases outside of the CAD CPI, and there were no real updates from the situation in the Middle East.
Oil continued to rise even without developments in the Middle East, as the supply squeeze continues to push prices up. Brent is now up to $92.75, while US Oil is at $84.00, both at their highest point this month.
Forex
The USD was weaker on the day, but with some interesting price action to go with it. At one point, the DXY was down to 99.200 on the day after opening at 99.650, but ended the day at 99.580. The DXY moved down a not insignificant amount during the day, before recovering almost all of its losses on the day before the close. The fundamentals are all pointing to a lower USD at the moment, but it cannot be ruled out that after the USD's sharp fall since the start of the month, it may be due a little bit of stabilization. This week could easily be a slightly positive week for the USD before a continued fall next week, so it is important not to be fooled by any USD strength we may see in the short term.
The CHF gained back some of its losses over the course of the month, outperforming against all other major currencies. There were no news events as catalysts, so this was either a sign of some capital moving to risk-off assets or simply a case of the positioning in the currency becoming too one-sided - everyone had already sold so there was no one left to sell.
Potentially pushing against the risk-on narrative for CHF is the fact that the AUD and NZD both had positive days yesterday, with both currencies gaining on the day against everything except the CHF. Both currencies will be buoyed by rising precious metal prices, which could be pushing back against any loss of risk-on demand that may have leaked away.
The CAD saw its CPI results come in yesterday hotter than expected, with CPI m/m reported at 0.5% against an expected 0.4%. CAD had been struggling on the day up to the point of the release, but even with the data being good for the CAD as it may encourage the BoC to hike rates, the CAD overall was slightly down on the day. CAD has been performing very well over the past week or two thanks to the higher oil price expectations. It may be that we were seeing some profit-taking or evidence of an overextension before the news event, so I would be hesitant to back CAD in the short term as there may be some more profit-taking to take place before the currency continues its move north.
Indices
Yesterday was a negative session across the board, with the Dow falling 0.55%, the S&P 500 down 0.54% and the Nasdaq down 0.38%. The interesting part is that this happened on a day when the AI trade had a genuinely positive catalyst behind it, which tells us something about how much the macro backdrop is weighing on markets at the moment.
That catalyst came from Anthropic, which posted $11.5 billion in revenue for the second quarter and is reportedly now meeting with banks about a potential IPO that would likely be the largest on record. This was taken as evidence that AI model development and the enormous capital expenditure on data centres both have a genuine end customer behind them, and the memory names responded accordingly, with SanDisk rising 5% and Micron 6%. It is worth noting how directly this contradicts the message we got from Cisco only last week, when its AI demand outlook disappointed and the stock fell over 8%. One is a supplier telling us the demand is not there, the other is a private model developer telling us it very much is. Both cannot be right, and working out which one is closer to the truth is probably the most important question in the sector right now.
What concerns me more, though, is that even with that news, none of the indices could finish in the green. The Nasdaq fell the least of the three, so the AI strength clearly cushioned it, but a positive story of that size failing to lift the index tells you the headwinds are winning. Yields rose again, the VIX rose alongside them, and the traditional economy names took the brunt of it, with McDonald's down 1.8% and UnitedHealth down 1.6% as examples. That is now several sessions in a row where yields have ground higher despite the soft data we have been getting, and it is starting to look like the bond market is telling a different story to the equity market.
The rest of this week gives us the chance to find out which one is right. We have Home Depot reporting today, followed by Lowe's, Target, and TJX tomorrow and Walmart on Thursday, which collectively should tell us whether Friday's 0.6% drop in retail sales was a genuine sign of consumer weakness or simply a blip. Both Walmart and Home Depot were muted yesterday ahead of their results. Add in the FOMC minutes tomorrow evening, and there is plenty this week that could break the market out of the low-volatility drift it has been stuck in.
Precious Metals
Metals continued to show strength yesterday, as Gold rallied 1% to $4,415 & Silver rallied 1.58% to $65.80. The fundamentals continue to be strong for metals, and the rising US yields situation (for the wrong reasons from a USD perspective) continues to help metals push on. We had a small pullback last week, but we are back at the recent highs already, so this may have just been a temporary blip. With no blockbuster news events to dampen demand for metals, outside of the FOMC minutes release that tends to have less of an impact than the meeting itself, it will be very interesting to see whether they continue to be fuelled by positive market sentiment, or whether they will take a more pronounced step back this week before continuing on next week.
At the moment, both the fundamentals and technicals are only pointing one way in the long term. The question is whether there will be a time when the markets take a breath before carrying on north.
Today's Market Drivers
GBP Claimant Count Change, 7am UK time - Likely release by the time you read this, this will have am impact on GBP and the market's view of the UK labour market.
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