by Marc Chandler
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The US and Canada may have been on holiday on September 5, but the world waits for no one and there were several significant developments.
First, Gazprom’s decision to indefinitely suspend gas shipments through the Nord Stream 1 pipeline announced before the weekend saw the European natgas benchmark soar 23.7. Recall that in the week ending September 2, this benchmark plummeted 32%. The euro briefly traded to be 20-year lows, slipping below $0.9900 to a little through $0.9880 before stabilizing. since the low was recorded in Asia, the euro did not trade above $0.9945. The EU energy summit will be held Friday.
Second, China’s Caixin composite PMI eased to 53.0 from 54.0. However, it was overshadowed by two other developments. First, the lockdown in Chengdu was extended to the middle of the week (at least). Lockdowns related to Covid now cover areas that account for a little more than 1/3 of GDP. It is possible that Q3 GDP is weaker than Q2 (0.4%) and could see economists shave this year’s GDP forecasts toward 3%.
The other important development in China was the announcement that the reserve requirement for foreign currency deposits would be cut as of the middle of September to 6% from 8%. These requirements were last cut in April, when the yuan was last falling sharply. Chinese financial institutions held about $954 bln in foreign currencies in July, down from a record $1.1 trillion in February. The two-percentage-point reduction frees up around $19 bln. Separately, the PBOC continued, as it did all last week, to set the dollar’s reference rate weaker than expected (CNY6.8917 vs. CNY6.9162). We continue to see these actions as attempt to moderate but not necessarily reverse the yuan’s weakness. As it did for the past two Monday’s, the dollar gapped higher. Monday’s low was about CNY6.9190 and the pre-weekend high was a little below CNY6.9100.
Third, as widely expected, Truss won the Conservative Party’s leadership contest and is the new UK Prime Minister. Her victory was a bit narrower than expected, drawing 57.3% of the party member’s votes. She will formally take office Tuesday, deliver a speech, and appoint her cabinet. Tax cuts, and measures to address the energy crisis are on the top of a large to-do list. Sterling was sold to new 2.5-year lows near $1.1445 in Asia before rebounding to almost $1.1520 in the European morning. Separately, the final composite PMI reading eased to 49.6 from the 50.9 flash reading and 52.1 seen in July.
Fourth, OPEC+ reversed last month’s decision to boost output by 100k barrels a day. The cut was not completely unexpected as the Saudis had threaten to reduce output. However, before the weekend, Russia seemed to oppose the move. The 100k barrels a day cut in output is to take effect next month. October WTI fell nearly 6.7% last week and was down nearly a quarter from the early June high, ostensibly from weaker demand. It jumped by 3.2% in response to the OPEC+ decision. November Brent tumbled a little more than 6% last week and bounced 3.5% on Monday.
Fifth, owing to the downward revision in the German services and composite PMI, the aggregate eurozone August composite PMI fell to 48.9 from the 49.2 flash reading and 49.9 in July. Yet, the market is not dissuaded from expecting the ECB to hike 75 bp later this week. The market has about a 67% chance discounted compared with closer to 63% before the weekend. The German government announced its third and largest support package to help households and businesses cope with the energy shock. A 65 bln euro initiative was announced, include a one-off payment to households, a tax break for energy intensive sectors, low price public transportation (though well above the famous 9-euro tickets announced in a previous package) and a windfall tax on power companies.
Sixth, Australia’s final services and composite PMI were revised higher and back above the 50 boom/bust level. The composite is at 50.2. The preliminary reading put it 49.8 and in July it stood at 51.1. It is still the fourth consecutive decline. The RBA meets first thing on Tuesday. The futures market has almost a 69% chance of 50 bp hike. It is the highest probability in a week. The Australian dollar tested and held last week’s low, slightly above $0.6770. After the low was recorded, the Aussie recovered to about $0.6805. Separately, after setting new two-year lows ahead of the weekend (~$0.6050), the New Zealand dollar consolidated on Monday.
Seventh, the dollar traded in a narrow range against the Japanese yen, holding a little below the 24-year high set before the weekend near JPY140.80. The dollar did not trade below JPY140. Japan’s final services and composite PMI were slightly better than the preliminary estimate, but both remain below the 50-level. Japan reports July household spending and labor earnings figures on Tuesday. However, what drives the yen is the divergence of policy and this does not look likely to change anytime soon.
Eighth, Chile easily rejected the constitutional reforms in a referendum on Sunday. This was not that surprising as the polls has suggested as much, though the margin of defeat was more than expected. The dollar fell 2.15% against the peso before the weekend and fell by a net of about 1.5% on Monday (though at it opened about 3% lower). Chilean stocks rallied and the S&P country index rose 3.6%, led by information technology and energy. Plan B maybe to try amending the existing constitution.
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