The Daily Fix – Massaging exposures ahead of the weekend risk

• Asia equity opening calls
• Assessing positioning ahead of the weekend event risk
• Event risk for the trading session ahead
• Closing out Q2 and eyeing moves through July
• Markets on the day

We look ahead to another mixed open in Asia, with the ASX200 called +0.3% at 7782, the HK50 -0.5% and the NKY225 +0.6% - We did see buyer’s step in and support early weakness in the ASX200 at 7654 yesterday, with a melt-up into the close, so perhaps that is indicative of better demand going into the final session of the month and quarter. However, where these markets settle out today will be a strong focus, given there are a few landmines to unsettle and promote intraday movement. These risks play out through the session for traders to actively react too, but also over the weekend, so there is a need to consider the possibility of gapping risk for the Monday open.

As we roll through the day those running EUR and EU equity positions will consider their position sizing and risk, given we see the French 1st round election playing out on Sunday. We’ve seen increased hedging activity, with CAC40 cash closing -1.1%, and the France-German 10-year yield spread widening to 82bp. The initial results of the 1^st round vote are expected around 7 pm local time (3 am AEST), so this should give us some steer for the FX open four hours later – our FRA40 index opens in line with the CAC futures at 4 pm AEST / 7 am UK, with the CAC equity cash trade opening an hour later.

We also get China PMI data due on Sunday, although no change on the month is expected, with the manufacturing index eyed at 49.5 and the services index at 51.1. I wouldn’t be too concerned with gapping risk in China/HK equity or AUD exposures on Monday driven by this data release alone – that is, unless it’s a significant beat/miss. One consideration worth pointing out is we heard confirmation that the China Communist Party Third Plenum is to take place between 15-17 July, so this could be a big event for Chinese markets, with headlines on potentially hard-hitting policy initiatives likely to impact market sentiment. One could argue that Chinese/HK equity markets will be range-bound into the Plenum.

Throughout the session ahead there will be some focus on the 1st US presidential debate on CNN at 9pm EDT – as we opined yesterday, this is unlikely to be a volatility event for markets - however, it will be important in setting the stage, with Biden out to prove a point that he is fit and absolutely sound of mind to lead the US for another four years. One suspects Biden will be thoroughly prepared to put on a show which could lift his polling to a small extent, and we should get polls from FiveThirtyEight et al soon after. The focus for markets falls on the debate around trade policy/tariffs, regulation, and economics (the deficit).

On the data side, we see Japan's (Tokyo) CPI (consensus 2.3% vs 2.2% prior), UK Q1 GDP and ECB 1 & 3-year CPI expectations. The more impactful data points will be seen in the US though, with personal income and spending, the University of Michigan survey, and core PCE inflation (consensus 2.6% y/y / 0.1% m/m). Should we get a surprise decline in US core PCE inflation month-on-month, and we could see some sizeable relief flow through equity markets, with USD sellers stating a case, and gold higher. Conversely a read above 0.3% m/m, and more so any number that rounds up to 0.4% and the USD should rip higher, and equity could close out the last session of the quarter in the red.

Back to markets and we close out Q2 and look towards Q3 and the possibility for volatility, trends, and renewed opportunity. In equity land, the NAS100 has been the notable performer in Q3 (+9% QTD), followed by the HK50 (+7.1%), while notable underperformances have been seen in the CAC40 (-8.2%) and EU Stoxx 50 (-3.6%). In FX markets, it’s the antipodean currencies which have led the way in G10 (both +3.1%) – of course past performance does not project future returns, but if we do consider past performance, much has been made of the returns seen in the NAS100 in the month of July - where the last time the NAS100 closed lower in July was in 2007, and even then, the net change was -0.1% - could this time be different? Absolutely, but for whatever reason the NAS100 loves July.

By way of leads for Asia, the S&P500 closed +0.1% and the NAS100 +0.2%. The intraday tape was a chop fest, and lacked any real directional trend, so Asia has little to work with by way of absorbing sentiment. 57% of S&P500 stocks were higher, with REITS and discretionary names working well, with Amazon once again finding the love. US Treasuries found buyers (US 2yr closed -4bp) with US weekly continued claims (the highest since 2021), and Q1 consumption being revised to 1.5% (from 2%) impacting. The USD had a mixed close on the day, finding buyers vs the ZAR, MXN, and SEK but lower vs the BRL, NOK, and EUR. Gold holds its range lows, with tailwinds from lower US Treasury yields resulting in price closing +1%, while the crude bulls win back control with US crude +1%.

Good luck to all.