Beware the divergence

Wall Street stocks snapped their multi-day losing streak overnight, with tech stocks lifted by Amazon, and the greater universe raised by an impressive rise of the Richmond Fed Manufacturing Index. Federal Reserve Chairman Powell, testifying on Capitol Hill, helped things along by reiterating his easy policy mantra and calling for more stimulus.

In all likelihood, after a multi-day losing streak, the FOMO crowd were itching to click the buy button again, with Mr Powell and the Richmond Fed giving them the right excuse on an otherwise quiet news day. Notably, other asset markets have not followed suit. The US dollar diverged by continuing to gain strength, and precious metals and oil markets eased lower once again. The weakness in gold and the power of the US dollar are a warning sign that buying the dip on equity markets this week isn’t going to be a sure-fire winner.

Japan has returned from holiday today and released its Jibun Bank Manufacturing and Services PMI’s, which printed at 47.3 and 45.5 respectively. Both were ever so slight improvements over July, but still contractionary, highlighting the uneven nature of Asia’s recovery when China is stripped out.

By contrast, China-centric Australia’s PMI told an opposite story. Commonwealth Bank Manufacturing and Services Flash PMI’s for September rose to 55.5 and 50.0 respectively, well above expectations. The Victorian lockdown has not holed Australian recovery expectations below the waterline at all, with the lucky country expecting to remain lucky. Australian equities are likely to be also boosted by Westpac forecasting the Reserve Bank of Australia will cut rates once again in October.

Central banks in focus

The Reserve Bank of New Zealand releases its latest interest rate decision this morning as well, with rates expected to remain unchanged at 0.25%. Despite data indicating that a strong rebound of the domestic economy is in progress, like its Australian counterpart and a plethora of central banks around the world, it will look under the bonnet and decide the valve timing is out and may need a new fan belt. We expect some noise about the level of the New Zealand dollar and more importantly, more clarity on whether it still considers a move to negative interest rates is on the cards after the election. The New Zealand dollar is likely to come under short-term selling pressure if so.

Thailand also releases its latest interest rate decision today. The Bank of Thailand is likely to remain unchanged at 0.50% but reiterate its call for the government to do much more on the fiscal stimulus front. With Thailand’s critical tourism sector still in a deep freeze, monetary policy can only do so much in such circumstances, with fiscal responses, the more useful tool.

The United Kingdom, German, France and Eurozone Flash PMI’s for September will be more closely watched than usual today. Manufacturing should remain broadly unchanged in expansionary territory, but some nervousness will surround services as Covid-19’s European comeback, and worries about new movement restrictions, threaten to undermine domestic consumption sentiment. With the euro and British pound retreating to critical support overnight versus the US dollar, weak services numbers could be the catalyst for the downward correction to pick up steam.

US PMI’s will remain firmly in an expansionary territory as well this evening. However, with the fiscal support money running out, with no follow-on package in sight, weaker services numbers may cause a few nerves. With oil back on the retreat, tonight’s US crude inventory data could add more woes if inventories unexpectedly rise.