Bargain hunting provides boost to risk assets

Global equity markets have found support early Monday as bargain hunters considered the latest selloff in risk assets as an opportunity to deploy some cash. Asian stocks posted their biggest daily gains so far this month, with Chinese tech firms bouncing strongly off their year-to-date lows. US and European equity futures are also indicating a positive start to the day. Meanwhile, the dollar declined against most major currencies providing some additional support to commodities.

There was no major news event leading to the shift in sentiment and today’s rally should be seen as dip buying rather than a shift in fundamentals. China has not ended the regulatory clampdown on several sectors and the Delta variant continues to spread across the globe.

The outbreak in coronavirus is becoming a serious concern to growth, with the latest wave being seen in deteriorating hard and soft economic figures across advanced and emerging economies. Preliminary data from IHS Markit showed today that Australia’s manufacturing purchasing managers’ index fell to a 14-month low in August while services contracted for a second month to record the lowest reading since May 2020.

Similarly in Japan, manufacturing and services PMI surveys fell sharply, as the country continued to grapple with a worsening outbreak of coronavirus. PMIs from Europe will be closely watched by investors this morning as businesses last month recorded their fastest expansion in more than 20 years.

Data released from the US and other advanced economies over the past several weeks have been missing economists’ forecasts at an accelerating pace. Citi’s economic surprise index, which measures the extent data is beating or missing economists' forecasts, currently stands at its lowest point since mid-2020.

The deceleration in economic growth comes at a critical time, as the Fed has already signaled a willingness to begin tapering its bond buying program later this year. That’s what makes the Jackson Hole summit later this week a critical event for investors, with comments from Federal Reserve Chair Jerome Powell being the highlight. Is he going to offer any timeline as to when the Fed will begin tapering its monthly purchases of $120 billion or will recent events lead to a postponement of the plan? The answer to this question will dictate the next move in Treasury yields, the dollar and other asset classes.