Risk-off flows extend at the start of the week this Monday, as investors remain cautious amid persisting fears over a probable recession worldwide. Traders prefer to stay on the defensive, as the Fed is set to hike rates by 75 bps on Wednesday, in its strong response to fighting inflation. US Treasury Secretary Janet Yellen warned of a slowdown in the US economy over the weekend but said that recession is not inevitable.
Worries over economic slowdown intensified after the S&P Global preliminary business PMIs from Eurozone and Germany recorded a contraction in July. The S&P Global US services PMI fell into contraction territory for the first time since June 2020.
China ramped up covid mass testing in Shanghai and Tianjin, which underscored the risk that fresh outbreaks could trigger new and economically costly lockdowns. Record number of covid-hit Australians in hospital as Omicron surged, sapping investors’ confidence.
Meanwhile, China issued stark private warnings to the Biden administration about a possible trip to Taiwan in August by US House of Representatives Speaker Nancy Pelosi, the Financial Times (FT) reported on Saturday. Citing sources, Reuters reported that Beijing plans to set up a real estate fund worth up to $44 billion despite the looming Evergrande restructuring concerns.
Amidst a slew of discouraging news flow in Asia, the regional stock indices drop, partly tracking Friday’s Wall Street sell-off. The US S&P 500 futures are down 0.22% on the day, reflecting the dour mood. Investors also remain wary ahead of earnings from American tech titans – Google’s Alphabet Inc. and technology titan Apple Inc.
Within the G10 currencies, the US dollar is staging a modest comeback from over two-week lows amid safe-haven flows.
EUR/USD is trading on the back foot near 1.0200, having stalled the rebound. ECB President Christine Lagarde said early Saturday that “we will keep raising rates for as long as necessary to bring inflation down to our target over the medium term.” Meanwhile, the ECB hawk Robert Holzmann noted, “we will see in the autumn what the economic situation is. Then we can probably decide if we do another 0.5% or less.” Monday’s German IFO survey will shed more light on the eurozone’s economic outlook.
GBP/USD is dropping towards 1.1950, unable to find acceptance above 1.2000 yet again. The UK political uncertainty offsets expectations of a 50 bps BOE rate hike in August. British PM candidate Liz Truss set out investment plans while another candidate Rishi Sunak said on Friday that he would put the government on a crisis footing from “day one” of taking office.
USD/JPY is recovering ground above 136.00, as the US Treasury yields stabilize, pausing their last week’s sell-off. The pair ignores the news that the Bank of Japan (BOJ) is reshuffling its board members to bring in two new hawkish members.
Gold has stalled its recovery, consolidating around $1,730, with all eyes on the US top-tier data and Fed event in the week ahead.
Bitcoin drops back below the $22,000 mark amid pre-Fed anxiety while Ethereum attacks $1,500, losing nearly 4.50% on the day.