Risk sentiment subdued on soft China data.

Headlines

* RBA extends rate pause, China services PMI grows at slowest since December

* Goldman cuts US recession chances to 15% on cooling inflation

* Oil holds advance as traders wait for next OPEC+ moves on supply

* Asian shares muted as weak China PMIs hurt sentiment

FX:

USD consolidated its recent gains in quiet trade due to the US Labor Day holiday. The DXY hovered just below its June/July highs. The August top is at 104.44. The 10-year yield found support around 4.10% and bounced strongly yesterday.  The 2-year yield dropped sharply intraday to 4.76% before settling near its high at 4.88% and the 50-day SMA.

EUR traded just above its recent lows below 1.08 in subdued price action. President Lagarde avoided giving an indication of whether the ECB will raise or hold rates next week in a speech. She focused on challenges in communicating at an uncertain time. There is currently a roughly 25% chance of a rate hike next week.

GBP remains below its 100-day SMA, currently at 1.2654. Economists are warning that rates will have to stay higher for longer as inflation becomes embedded. UK consumer spending growth slowed in figures released overnight despite the “Barbenheimer” boosts.

USD/JPY is enjoying a third day of gains this morning as yields advance higher again. The major is nearing 147 with last week’s high at 147.37. The yen is not being helped by weak household spending data.

AUD is tanking today amid risk aversion and disappointing Chinese PMI data. Price action was choppy in reaction to the RBA decision. There were no major surprises and the bank reiterated it was prepared to raise rates in future if the data warranted. USD/CAD is closing in on last week’s top at 1.3640. The April high at 1.3667.

Stocks: US equities were closed for Labor Day.

Asian stocks were mostly subdued with no direction from Wall Street. The region also digested the weak data. The Hang Seng was pressured by the property sector dampened by default fears. The Nikkei 225 stalled as it neared 33,000. Household spending data suffered its worst drop since February 2021.

US equity futures are modestly in the red. European equity futures are pointing to a marginally lower open. The Euro Stoxx 50 closed down -0.1% yesterday.

Gold tapped a long-term trendline from the March low. Prices could be rolling over. The 50-day SMA sits below at $1932.

Day Ahead – PMIs in post-US holiday trading

Markets will first digest the China Caixin PMI data. This fell to the lowest levels of the year at 51.8 in August from 54.1 in July. This is fuelling further fears that the economy is in for a prolonged slowdown. We get more China data out later in the week including trade data. Further weakness in exports and imports would see more selling in the Aussie.

We also get the final PMIs out of Europe. Markets will be watching the service PMIs in Spain and Italy to see if they follow the euro area figures and fall below 50 in August. Services have been the bright spot so it will be worrying if they track manufacturing into contraction territory. There is not much near-term support if EUR/USD loses support at 1.0765/71.

Chart of the Day – Brent hovers near y-t-d top

Cured oil has surged more than 20% since July. Last week saw a break to the upside and a 4.82% gain. Brent is now trading close to its year-to-date peak at $89. Support has come from growing expectations that the Fed is done with its hiking cycle. Fundamentals also remain constructive due to OPEC+ keeping supply tight. Russia and OPEC+ partners are said to have agreed on further export cuts. The demand outlook has also received a boost from China’s latest support measures.

Focus this week is on whether Brent’s current momentum can carry it above $90. The price surge may find its way into the m/m inflation readings. It might also dampen the current favourable base effects on the annual prints.

(Sources: vantagemarkets.com)