Despite another sharp fall in Chinese equities overnight, developed market equities are showing some resilience this morning, possibly suggesting the worst is over. There isn’t a lot to go on datawise today, so the equity market direction is likely to dominate.
Friday’s US employment data was very solid, and provided a reasonable basis for equity optimism, as strong employment growth was not accompanied by strong wage growth. This both makes a Fed rate hike less likely and suggests profit margins are being maintained. US yields staying low should be supportive for equities, but less so for the USD against the EUR, as spreads with the bund are towards the bottom of the recent range. EUR/USD looks stuck in the 1.07-1.10 range for the moment, and yield spreads actually suggest a bias higher.
So from an FX perspective a more general risk positive stance makes sense if you believe in an equity recovery. The trouble is, it’s hard to find obvious FX candidates to like as risk positive vehicles. I still find it hard to like GBP, given the political backdrop, but as long as there is no real news there may be scope for GBP to recover in this scenario. The commodity currencies are still a struggle, with China concerns still likely to weigh on AUD and (to a lesser extent) NZD, and oil at its lows making CAD and NOK very hard to buy too. I’m left with liking a short CHF basket vs EUR, USD, SEK and maybe GBP.
Finally, RIP David Bowie.
I’m sinking in the quicksand of my thoughts
And I ain’t got the power, anymore.