We start the week with a clear focus on the energy markets, with the OPEC+ meeting holding the potential for solid two-way risk in crude. Russia’s response to the G7’s plan to apply price caps on Russian oil imports was to shut off the Nord Stream 1 (NS1) pipeline and we’re at the point where lots of questions are being asked by the market on how this escalates and right now there is minimal clarity.
We have crude futures opening first up, and amid a shortened session - due to US Labor Day - lower liquidity may exacerbate moves – EU Nat gas resumes trade at 4pm AEST and markets will be watching the open closely for a spike higher.
With European index futures tailing off 3% on Friday on the NS1 news and the NAS100 lower in sympathy, it feels like the probability of this negative price action resuming in Asia is high. The GER40 July lows beckon.
US payrolls modestly reduces the probability of a 75bp hike in Sept
The US payrolls report was solid enough but the rise in the participation rate (to 62.4%) made for a 20bp upside surprise in the unemployment rate. This saw a slight repricing of Fed rate expectations, and USD selling, where the FX move reversed once we saw equity markets being carved up on the NS1 news. Hard to bet too heavily against the USD and we’ll be watching for commentary from Powell and Brainard this week to guide. USDCNH could be central to the USD move, and a break above 6.93 suggests a real risk that we can talk 7.000 and this will likely impact EURUSD and AUDUSD.
The ECB meeting will get good attention and we could see some vol in the EUR, not that we need a central bank meeting to promote that when we have the energy markets to do that for us. The GBP gets attention as the trend is strongly lower and the pair has fallen for 6 straight days, losing 6.3% since 10 Aug. A spike in energy this week is really the last thing the UK needs when they are facing 20% inflation in Q123, so it seems we could be on for 1.1400 sooner.
Aside from the looming QT ramp-up, it’s another big week next ahead – global equities are in a tough spot right now and rallies are being sold in earnest – we’re going to need to see a far weaker US CPI print to promote some relief, but that is not out until next week – it feels like the path of least resistance is lower, with funds increasing portfolio hedging and buying volatility. A break of the 61.8% fibo of the June/Aug rally in the US500 will increase the talk of revisiting the June lows.
By way of known event risks, here are seven key focal points for the week ahead:
Rates Review – see what’s priced for the upcoming central bank meeting and the step up (in basis points) to the following meetings.
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