Week of 3 AUGUST

A busy economic calendar was interrupted by geopolitics, as markets digested rate holds from the Fed and BOE, and softer GDP numbers amid a flare-up of the Middle East war. Brent opened the week over 6% lower and trended to under $85 per barrel after the US and Iran suspended attacks and tried restarting negotiations. But the price quickly rebounded as the war resumed midweek, with Brent trending towards $88 ahead of the weekend.

A much quieter economic calendar awaits in the week ahead, with highlights including US ISM manufacturing and the Non-Farm Payrolls.

Week in Review

The week started on a positive note amid easing tensions in the Middle East, but turned sour as tech rotation intensified and a re-escalation in the US-Iran war pushed up energy prices. Major themes include mixed tech earnings amid AI capex spending concerns and volatility in the wake of the Fed rate decision as traders worry that the central bank is having difficulty controlling inflation. Tech shares trended lower in the first half of the week, wiping out around $800 billion in market valuation, but attempted a rebound towards the end of the week with South Korean stocks posting a record 14% single-day gain. On a similar note, Microsoft's solid earnings led to a 15% price surge and the largest single-day market value increase in history. The results contrast with Meta's 12% drop after its earnings missed due to increased AI spend, highlighting the market's disparate views on tech.  

The Fed's "hawkish hold" on Wednesday induced market volatility, leaving the door open for future hikes, but the lack of clarity in guidance left traders uncertain. While Chair Kevin Warsh stuck to his rhetoric about controlling inflation, analysts questioned his credibility amid rising inflation pressure from energy. Then on Thursday, US Q2 GDP was softer than anticipated, and so was core PCE, weakening the dollar but supporting stocks despite a slight increase in the odds of a Fed rate hike.

The BOE also delivered a hawkish hold, keeping rates unchanged, but the number of policymakers supporting a hike increased to 3 from 2 in the vote split. The bank also increased its inflation outlook, saying it didn't see consumer prices returning to target until 2028.

The BOJ also kept rates unchanged, as was widely expected, keeping to its hawkish rhetoric. However, the occasion was overshadowed by a sudden surge in the yen as the government intervened to shore up the currency.

Overall, the market experienced higher volatility while reacting to central banks' moves and mega-cap earnings, with geopolitical risks forming a cautious backdrop. Tech shares were in focus, easing earlier in the week but rebounding after Microsoft's earnings, reflecting mixed signals that potentially indicate market exhaustion. European shares benefited from the rotation towards cyclicals, supporting the Stoxx 600's record high on Friday.

Biggest Market Movers

• The dollar dropped after the Fed meeting and softer-than-anticipated US inflation data.
• The yen was the biggest mover, rising precipitously in a clear sign of intervention from Japanese authorities.
• The FTSE 100 hit a new intraday record high, aided by cyclical rotation and earnings.
• The euro was one of the better-performing currencies, aided by a surge in flash GDP and stock prices.
• DAX was the top-performing index of the week and is set to end at a new record high on Friday with a 3% gain for the month amid easing oil prices.
• Crude prices ended the week lower despite the flare-up in Middle East tensions after China's imports dropped.

Top Events in the Week Ahead

The coming week has a much more relaxed economic calendar, which could give more room for geopolitics to intrude as investors eye concerns that a US-Iran war might spread in the region. On the other hand, it's become commonplace for pauses in the fighting or renewed negotiations to be announced over the weekend. OPEC+ will hold its meeting over the weekend and is expected to pause output increases. The main event will likely be US NFP on Friday, as investors look for further signs of economic weakness that could derail the Fed's hawkishness.

US July NFP: More Soft Jobs Data

The consensus among analysts is that the US added just 79K jobs in July, which would be an improvement over the 57K of June but add another month of sub-triple-digit results. The unemployment rate is anticipated to stay unchanged at 4.2%, but only because a large number of people are staying out of the workforce. After the softer US GDP figures last week, it could support speculation that the Fed won't push through a rate hike this year despite higher energy prices, and weaken the dollar further. The EURUSD bounced on dollar weakness this week, and softer US data could have it pushing towards resistance at the 50-day MA around 1.1560. A beat could support the greenback and reverse the pair towards the prior July high around 1.1460, which stands as new near-term support.

Trade Moderates But Remains Robust

Also on Friday is the release of China's July trade surplus, which is expected to fall back to $105 billion from $125 billion in June. Markets will be monitoring the movement of imports and exports after the country reported a 36% annual surge in imports last month, compared to just 27% growth in exports. Commodity currencies are likely to be in focus after China's growth slowed unexpectedly in the second quarter and traders worry about the Asian Giant's demand. On Tuesday, the US trade deficit is expected to ease to -$73 billion from -$77 billion, but both imports and exports are expected to decline. The Aussie is more vulnerable to trade fluctuations and potential stimulus expectations, with the AUDUSD pair rising on weakness in the greenback. The pair could push towards resistance at the 50-day MA around 0.7050, while a retracement exposes the support at the week's low around 0.6920.

PMIs to Give Health Check

US and China PMI figures come out on Monday, with the private Chinese RatingDog manufacturing measure projected to stay solidly in expansion at 51.5 compared to 51.7 a month ago. Markets will be closely scrutinising the data for signs of second-round effects from higher energy prices. The July US ISM Manufacturing PMI comes out a few hours later and is projected to also stay solidly in expansion at 53.0, moderating from 53.3 previously. Gold prices could react to inflation implications, with price action being squeezed into a triangle recently. A break upwards could head to the July high at $4,200 per ounce, while a break lower could find support at the psychological $4,000 handle.

Other Events and Earnings

On Monday, final German PMIs are published. US JOLTS figures come out on Tuesday. Wednesday includes the US Treasury Refunding announcement and BOJ minutes from two meetings prior. For Thursday, Australia's trade balance is expected. Friday has Canadian jobs data.

The earnings season will be past its peak this week, but still quite busy with updates from the likes of Palantir, SpaceX, AMD, Caterpillar, Eli Lilly, Walt Disney, Western Digital, Sandisk, Uber, ConocoPhillips, Parker-Hannifin, Cloudflare and Berkshire Hathaway.