Nasdaq dips, Oil hits new highs

Tech stocks gave up recent gains on disappointing news from Oracle, with Nasdaq ending a 3-day recovery. Many commentators point to the high valuation of many tech leaders. Oil prices were today’s stand out, approaching a 12-month high. The dollar continued to strengthen, notably against the Japanese yen and Chinses yuan. Data from service sector reported strong growth and higher prices – bad news for inflation.

Bottom-line: risk-off.

TODAY’S MAJOR NEWS

Inflation risks from wages and the oil price

Inflation will be the primary focus this week, leading up to next week’s Federal Reserve meeting. Wage inflation, and its impact on the service sector, remains the primary focus. Today’s August ISM services survey data was much stronger than expected. Rising energy costs also present challenges with the oil price close to hitting a 12-month high. Wall Street continues to hold out hopes for a soft- or no-landing for the economy, but that could be challenged if the Fed continues to push interest rates higher. Keep in mind that those interest rates could also face upward pressure from the rapidly growing federal debt as well.

Service sector still strong in Institute for Supply Management (ISM) survey

• The August ISM services index was 54.5, above the expected 52.5, and 52.7 in July, showing strength in an inflation-sensitive sector
• Component indices also showed reason for concern: the employment index rose to 54.7 versus 50.7 last month, and the prices paid index rose to 58.9 versus 56.8 last month

Chinese yuan hits new lows, People’s bank warns "speculators"

The Chinese yuan/dollar exchange rate has risen to 15 year highs at 7.30. The People’s Bank of China (PBOC) said it would take action to correct what it called “one-sided moves”, for which read weakness, and added that they are confident in keeping the yuan stable. “Participants of the foreign-exchange market should voluntarily maintain a stable market,” a PBOC official said. “Traders should “resolutely avoid behaviors that disturb market orders such as conducting speculative trades.” Berating markets seldom works.

Will China manage or arrest this decline? In August 2019, the US Treasury Department labeled China a currency manipulator. Today, exchange rate policy is more liberal and aligned to free-market counterparts, but there are still serious curbs. There is likely some political design behind at least the ‘allowing’ managed yuan’s depreciation. Unfortunately, foreign exchange markets don’t always follow the script and devaluations have a tendency to accelerate.

If the yuan continues to slide it could impact global markets: Chinese goods will become much cheaper and more competitive abroad, but anything purchased abroad (including US Treasuries) will be more expensive. This would introduce unwanted volatility into equity and bond markets.

TODAY’S MAJOR MARKETS

Nasdaq leads equity sell off

• Equity markets resumed their sell-off after a few days respite, with a 1.0% fall in Nasdaq, a 0.5% fall in the S&P 500, and a 0.2% rise the Russell 2000
• European markets were mixed overnight, with the FTSE 100 up 0.4% and the Dax off 0.5%, while the Nikkei 225 rallied 1.0%
• The VIX, Wall Street’s fear index, was unchanged at 13.8

Bond yields rise modestly

• 2-year and 10-year bonds edged up to 5.02% and 4.27% respectively
• The dollar index was up 0.2% at 104.7
• Versus the dollar, the Yen, Euro and Sterling were down 0.4%, 0.2% and 0.2% respectively

Oil rallies, Gold sells off

• Crude oil prices rose 2.2% to 89.2 per barrel, closing on the 12-month high of $92.6
• Spot gold prices were off 0.6% at $1,936 per ounce, while silver was unchanged at $23.4 per ounce
• Grain and oilseed markets reacted positively to this morning's USDA WASDE crop report

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com 

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com