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US dollar pulls back after weak US data

an array of US dollar bank notes

It’s been another day of poor economic data for European markets with the latest flash manufacturing PMI numbers falling into contraction territory for Germany, France, and the UK.

Europe

While the economic data has been poor the reaction of markets has been slightly more ambivalent and a little mixed, with the DAX and CAC40 treading water, having opened just above three-week lows. 

The FTSE100 is underperforming, and looks set to close lower, though today’s weakness may be more to do with the fact that it has managed to perform better than its peers over the past week and is playing catch-down so to speak.

The rebound in the oil price is helping to underpin the energy sector with Shell and BP edging higher, while copper prices at six-week highs are giving a lift to Antofagasta and Anglo American.

BT Group shares are higher after the UK government said it wouldn’t take any action over the 18% shareholding of Altice Group in the business. This move by the government has been taken as a positive move by investors, thus removing remove some of the uncertainty about future government intervention. What it doesn’t do is stop the UK government from intervening again if Altice seeks to increase its stake further, and perhaps helps explain the relatively modest reaction of the share price.

Oilfield services provider John Wood Group shares slipped to their lowest levels since March 2020 after the company projected that H1 revenue was expected to come in at $2.56bn, below consensus estimates of $2.57bn. The company was more upbeat about the second half of the year saying they expected to see full year revenue of between $5.2bn and $5.5bn, and full year EBITDA of $370m to $400m. 

US

After the two days of declines and the biggest one-day decline since June US markets opened cautiously before edging modestly higher on the back of a couple of disappointing economic reports which showed that the US economy is struggling from the effects of higher prices.

A bigger than expected contraction on services PMI in July was followed by a big -12.6% slide in new home sales, which in turn prompted some US dollar weakness and a rebound in tech stocks.

When Zoom reported back in Q1 their estimates for Q2 were for revenues of $1.12bn and profits of $0.90c a share, while raising its full year revenue guidance to $4.55bn. Investors were therefore disappointed to see revenues fall short at $1.1bn, even as profits came in at $0.92c a share. The company also downgraded its outlook for Q3 as well as the rest of the year. For Q3 revenues are expected to remain steady at $1.1bn while profits are expected to fall to $0.82c a share. For the full fiscal year Zoom says it sees full year revenue back down to $4.39bn to $4.4bn and profits of $3.66 to $3.69, down from $3.7 to $3.77. Zoom blamed a slowdown in its online business as fewer people took advantage of its online service, and against a backdrop of increased competition from Microsoft and Cisco Systems. 

Twitter shares also opened sharply lower on reports that its head of security accused it of egregious deficiencies in its safeguarding measures when it came to its users. This allegation puts Twitter in a potential violation of its 2011 settlement with the FTC over previous safeguarding issues with respect to its user base. 

FX

The US dollar has taken a bit of a pause today, even as the euro slipped to a new 20 year low, pulling back from the 0.9900 level, in what could be the beginnings of a squeeze on US dollar longs. 

The pause in the move higher in the US dollar this afternoon has been prompted by a combination of a poor services PMI number which saw economic activity slip to 44.1 in August from 47.3 in July, and new home sales which slid 12.6% in July. The PMI readings were even weaker than the ones we saw out of Europe earlier in the day, and has prompted a little bit of US dollar selling, pulling the euro back above parity.

The pound has also continued to struggle slipping to 1.1718 before also rebounding after the weaker than expected US services PMI and new home sales numbers. On the plus side there was also increasing evidence that cost pressures were starting to subside, although uncertainty remains as to whether this is due to demand destruction, or just simply an easing of prices.  

Commodities

Crude oil prices recovered off a three-day low yesterday after comments from Saudi Arabia that they might look at cutting output because of concerns about the recent sharp drop in prices. Given concerns about weak demand and the inability of prices to rally, some OPEC members may have been starting to get nervous about further price weakness. These concerns seem overblown given currently low inventory levels, which should help to keep a floor under prices.

Today’s weaker than expected US economic data has helped pull gold prices higher, and off 3-week lows, as well as seeing US short term yields pull back from yesterday’s peaks.

Volatility

Those recession fears after a sharp jump in German Producer Prices have rocked European manufacturers, with the EU’s Auto makers being a clear stand out here. CMC’s proprietary basket of stocks in the sector came under pressure ahead of the weekend break and this was sustained on Monday, too. Daily vol for the basket advanced to 50.09% against 40.37% for the month, with the scope for instruments like this to continue showing clear reaction to any news impacting either supply or demand.

Following on from this, the underlying Palladium cash contract slumped amidst fears that demand for the metal could be impacted by any slowdown in car sales. Prices remain off the lows seen earlier in the year, but if consumer discretionary spend is going to be constrained then there’s a real risk demand could suffer further. Daily vol sat at 73.57%, up from 50.33% on the month.

The Swedish Krona continues to lose ground against the greenback with the Dollar posting another day of gains yesterday. Whilst part of this is about USD strength, there’s also concern over the state of the local housing market and a bleak domestic growth outlook is also taking a toll. Daily vol on USD/SEK came in at 14.67% against 12.7% on the month.

Finally, activity in cryptos has cooled somewhat at least for bitcoin but price action remained elevated on EOS. The coin continued its move higher, hitting levels not seen since early May. Daily vol printed 161% against 89% on the month.


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