Markets eye US CPI after choppy few sessions

Headlines

* China slides into deflation as consumer, factory prices drop

* US inflation set to test Fed’s September plans

* Dollar firmer on safe-haven demand as markets fret over China, banks

* Asian stocks are mixed on data and deluge of earnings

FX: USD closed above its 100-day SMA at 102.30. The DXY has been tracking sideways more or less between 102 and 103 over the past week. Risk-off sentiment has helped. The greenback was unfazed by comments from Fed’s Harker who hinted the potential for the Fed to begin cutting rates next year. The 2-year yield edged lower in a narrow range day.  The 10-year yield is clinging onto the key psychological 4% mark.

EUR closed lower at 1.0956. The 50-day and 100-day SMA are converging around 1.0924/51. It’s a very quiet data calendar this week. August is also a quiet month for ECB speakers.

GBP closed off its lows but lower at 1.2748 having slipped below 1.27. Sterling losses reflect the broader risk mood and USD gains.

USD/JPY settled at 143.36 near to its highs for the day.

AUD plunged to a fresh low at 0.6496 before settling at 0.6543. The aussie is in the green this morning underpinned by CNH strength after a firmer-than-expected reference rate setting. USD/CAD spiked up to 1.3501. It is currently trading above the 100-day SMA at 1.3391.  

Stocks: US equities fell after softer China macro data and the downgrade of US banks.  The benchmark S&P 500 fell 0.42% to 4499. This was dragged down by bank stocks after Moody’s cut the credit rating of several midsized lenders. It warned that higher costs could cut into their profitability. The tech-laden Nasdaq lost 0.87% closing at 15,273. The Dow dropped 0.45% settling at 35,314. The indices were buoyed by healthcare outperformance. This came after heavyweight, Eli Lily jumped 15% and hit record highs. The drug giant raised full-year guidance on highly encouraging weight-loss drug sales.

 Asian stocks traded mixed after China price data and a slew of earnings releases.  Chinese stocks were muted on the mixed inflation figures. The Nikkei 225 fell and initially trading indecisively. Softbank fell after it published narrowing losses for the fiscal Q1.

US equity futures are modestly in the green. European equity futures are pointing to a firmer open this morning (+0.8%). The Euro Stoxx 50 closed down 1.1% yesterday.

Gold dropped to a near four-week lows as the dollar and yields retreated. Safe haven demand is helping this morning too. But the 50-day SMA sits above at $1943 as near-term resistance. Prices are trading on a long-term rising trendline from February.

Day Ahead – Banks in the spotlight

The banking sector has grabbed the headlines on both sides of the Atlantic. Moody’s cut the credit rating of 10 midsized US lenders reflecting the ongoing strain in the US banking sector. They cited several factors including a slowdown in deposits and increased funding costs. The commercial real estate sector was also highlighted. This is a potential canary in a coal mine for the economy. These headlines highlight again the wider issues for a weak banking sector. It has been hit by tightening lending conditions and increased regulatory pressure after the banking crisis in March.

In Europe, the Italian government’s windfall tax on bank “extra profits” from higher interest rates caught markets by surprise. It added to the broader sense of caution although officials tried to pull back later in the day on the significance of its move. There could be some longer run negative spillover impact on the euro if this affects the strong appetite for European stocks evident recently among US investors.

Chart of the Day – Nasdaq 100 falters

The Nasdaq has had an incredible run this year. The tech-dominated index was up close to 50% from its lows in early January to the highs in mid-July at 15,771. Since dipping below its 200-day SMA under 12,000, prices have held in a bullish ascending channel for several months. But the recent correction has pulled the index through the lower part of the channel. The 50-day SMA should act as some support too at 15,103. The March 2022 top is at 15,265. Lose this and the first Fib level (23.6%) of this year’s rally is at 14,696.