US-China trade ties and jobless claims to drive market sentiment

Stronger-than-expected data prints have shifted expectations that the Fed could introduce another rate increase this year

Traders at the New York Stock Exchange. Risk sentiment was riled in global capital markets last week after China ordered government officials to stop using iPhones. Reuters

Since my previous column, some new themes have emerged while older ones have further solidified their influence on financial markets.

Risk sentiment was riled in global capital markets last week as fears of a bubbling US-China trade war emerged after Beijing directed government officials to stop using iPhones.

With China representing about 20 per cent of Apple’s revenue, this hit the technology company’s market capitalisation hard and its stock dropped more than 3.5 per cent to exacerbate its losses month to date at more than 5 per cent in September.

Analysts see the move as a retaliation to US-imposed restrictions on chip exports to China – introduced earlier in the year – and investors would be shrewd to keep tabs on this developing story.

Apple’s stock price decline led to a broader fall in US indexes. The S&P 500, of which Apple represents more than 7 per cent, closed below the psychological level of 4,500 – 1.29 per cent lower on the week.

Adding to the weakness in US equity markets has been a stronger-than-expected data docket.

Reverting to an older theme that has been driving sentiment – the US Federal Reserve and its expected coming actions – the host of stronger prints has shifted expectations it could introduce another rate increase during its meeting at the end of October.

ISM data, a measure of the US services sector, expanded for the eighth month in a row, while initial jobless claims – a weekly metric that highlights the number of workers who are unemployed – dropped to its lowest level in six months and represents the fourth consecutive week of lower jobless claims.

A lower initial jobless claims print suggests that the US labour market is still running hot and tight, which is a negative for the Fed and sparks the debate of further rate increases this year.

Markets are pricing in a “no-hike” scenario with 93 per cent probability at the next Federal Open Market Committee meeting on September 19 and 20, according to the CME Group’s FedWatch Tool.

But the probabilities look far more interesting when looking at the Fed's meeting on October 31 and November 1.

At the time of writing, markets were split 55.3 per cent to 41.9 per cent towards the Fed keeping rates unchanged at its second-last meeting of the year (versus a 41.9 per cent probability of a rate increase).

One month ago, this split was 63.1 per cent versus 33.9 per cent. The narrowing of this ratio stokes further uncertainty in markets and, once again, US data will be key here, starting with today’s US consumer price index report.

Due at 4.30pm Dubai time on Wednesday, US CPI data is expected to show inflation jumped to 3.6 per cent year on year, up from 3.2 per cent last month.

However, this may be misleading as it factors in energy prices, which the Fed tends to neglect when analysing inflationary trends.

Therefore, pay closer attention to the core CPI print, which excludes food and energy. Year on year, core prices are expected to fall to 4.3 per cent, versus the previous month’s reading of 4.7 per cent.

A print below the 4.3 per cent threshold will, no doubt, cause risk-on moods to drive asset classes higher against the US dollar and vice versa.

I expect the print to come in line with expectations and this will result in markets continuing to trade in their current range and we will be no closer to predicting Fed action at its penultimate meeting.

US jobless claims continue to assume more importance these days – and will, once again, drive short-term pricing action through the end of the week.

So, keep tabs on whether we will get a fifth consecutive week of lower claims – a scenario that will see risk sentiment erode across the US equity segment.

Producer prices data, a measure of the change of the price of goods sold by the US manufacturing sector, and US retail sales follow on Thursday before attention turns to this month's FOMC meeting.

Gaurav Kashyap is risk manager at Equiti Securities Currencies Brokers. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti Securities Currencies Brokers