No Big Thoughts, But Several Smaller Observations

August has begun off with clear price action. The US dollar is stronger against nearly all the major currencies. Bond yields are higher. Equities and commodities are most lower.  

However outside of the purchasing managers July manufacturing prints, these does not appear to be an overarching story today. Investors are still trying to make sense of last week’s developments, including the BOJ disappointment and the shockingly poor US GDP figures.   

The main events of the week including the Reserve Bank of Australia in early Sydney tomorrow. Indicative prices in the derivatives market put the odds at close to 70%. More details of Japan’s fiscal plans will be announced tomorrow. On Thursday, the Bank of England meets and the market regards a rate cut as much of a done deal as these things get. The week ends with the US and Canadian jobs data. 

Instead of a big story, there are several modest developments that are worth noting.  

First, oil prices have given back their pre-weekend gains. The month-end bounce did little to take the edge off the worst monthly performance (-13.9%) since July 2015 (-20.8%). Rising US inventory alongside an increase in US output and rig count weighs on sentiment. Slower growth in the US, EMU, and likely Japan in Q2 raises questions about demand.   

Second, commodity prices more broadly are weakening. Since July 15, the CRB Index has advanced only once,and that was before the weekend when it gained one percent. From its January low near 154.85, the CRB Index rose 26% to 195.88 on June 8. With its mounting losses, it met the 38.2% retracement objective near 180.20. The 50% retracment is near 175.35.  

Third, European banks stocks rallied before the weekend in anticipation of the stress test results and had sold off today on what seems to be largely “buy the rumor sell the fact” type of activity. The MSCI European bank index is off 1.75% today after rising 2.2% last Friday. Although Italy’s Monte Paschi, which has been the focus of so much attention, is holding on to the slightest of gains, Italy’s banking sector is losing ground.  The 4.4% decline offsets in full the pre-weekend gains.