Global Markets Review: Oil Plummets on Sluggish US Employment

Overview

Crude oil plummeted on global demand concerns, and U.S. indices were enveloped in a bout of late-week volatility brought on by stretched valuations and growing concerns about the state of global recovery. Congress is slated to resume deliberations on another tranche of coronavirus stimulus, while the European Central Bank (ECB) is scheduled to announce the results of its monetary policy meeting.

Economic Events (last week)

• (China) Caixin Manufacturing Purchasing Managers Index (PMI) – An August survey of about 500 purchasing managers in China posted a reading of 53.1, which was higher than the 52.6 forecast and the fifth consecutive monthly increase of this index.
• (Australia) Reserve Bank of Australia (RBA) Monetary Policy – The RBA left interest rates unchanged at 0.25% as it reiterated that economic recovery is underway, but it did raise the Term Funding Facility (TFF) to 200 billion Australian dollars (AUD) at a fixed rate of 0.25% for three years to ensure that there is ample liquidity.
• (Canada) Manufacturing PMI – A survey of 400 Canadian purchasing managers showed that business conditions rose to 55.1 in August, beating both consensus forecasts of 53 and last month's reading of 52.9. The headline figure was the steepest rise since August 2018 and highlights a strong expansion in manufacturing activity.
• (U.S.) ISM Manufacturing PMI – The August survey of U.S. purchasing managers in the manufacturing industry posted a reading of 56, exceeding market expectations of 54.6. This was the third consecutive month over 50, reflecting an economy that is expanding.
• (Australia) gross domestic product (GDP) (quarterly) – Australia's gross domestic product (GDP) cratered to -7.0% in the second quarter, which was lower than forecasts of -6.0% and, along with the -0.3% reported in the first quarter, confirmed that the nation had officially entered into its first recession in 30 years. 
• (U.S.) ADP Non-farm Employment change – Employment data from Automatic Data Processing, Inc. (ADP), which analyzes payroll data, showed that 428,000 private sector jobs were created in August, which was much lower than the 1.25 million expected. According to this data series, net job losses in the private sector since mid-March stand at 11.687 million.
• (U.S.) Unemployment Claims (weekly) – U.S. jobless claims were 881,000, better than expectations of 955,000 and the lowest reported figure since the lockdowns were imposed. According to the latest U.S. Department of Labor data, there are 29.2 million-plus Americans claiming unemployment insurance benefits, which is an increase of 2.1 million over the prior release.
• (U.S.) Institute for Supply Management (ISM) Service PMI – A survey of purchasing managers in industries other than manufacturing posted a reading of 56.9, which was in line with market expectations. While it was lower than the prior month's reading, it marked the third straight month over 50, which delineates economic expansion or contraction.
• (Canada) Employment – The Canadian economy added 245,800 jobs in August, slightly lower than 262,500 forecasts, and the unemployment rate rose to 10.2% vs. the forecast of 10.1%. Job recovery is now at about 63.5% as the nation attempts to return to pre-pandemic levels.
• (U.S.) Employment – August U.S. non-farm payrolls (NFP) rose by 1.371 million, which just missed analyst forecasts of 1.375 million, and the unemployment rate (U3) dipped to 8.4%, which was markedly lower than expectations of 9.8%. Average hourly earnings, the main wage measure, rose by 0.4% on a month-to-month basis, beating forecasts of 0%, although last month's print was revised lower to 0.1%. The average workweek rose by 0.1 hours to 34.6 hours, and the participation rate came in at 61.7%. Officially, after revisions, 21.568 million jobs were lost in March and April, and so far, approximately 49.1%, or 10.595 million, have been recovered.

Global Markets Performance

Commentary

The good news is that job recovery is ongoing, as evidenced by a positive NFP. The bad news is that this report appears to lend further credence to the thesis that job creation is slowing down. It was well documented that this report would receive a boost due to temporary government workers hired to complete the 2020 census, and this added 238,000 to the payroll numbers. Subtracting that brings August's headline figure down to 1.133 million, making it the second consecutive month where job gains decelerated. 

Moreover, the underemployment rate (U6), which gives a more comprehensive picture of the labor market than does the official unemployment rate (U3), is at a seasonally adjusted 14.2%, well above its August 2019 rate of 7.2%. Factor in the latest U.S. Department of Labor data revealing that 29.2 million-plus Americans are claiming weekly unemployment insurance (UI) benefits, a figure that rose by 2.1 million over the prior release, and the worry that many of the furloughed workers are not being hired back begins to gain purchase.

The only constant in this pandemic-ravaged environment is that a meaningful economic rebound will not be underway until a scientifically proven means of containing COVID-19 is discovered. Under these circumstances, the U.S. government appears to have no other option than to support the unemployed American worker until the promise of a cure becomes fact.

Forex

The Canadian dollar (CAD) was the best performing major last week, buoyed by economic data suggesting that the economic recovery is underway and gaining traction. The other currencies to end the week on a net positive note were the U.S. dollar (USD) and the New Zealand dollar (NZD). The rest of the majors ended the week on a net negative basis, with the Australian dollar (AUD) being the worst performer as a much worse-than-expected GDP figure pressured the currency. It was followed by the Swiss franc (CHF), Japanese yen (JPY), British pound (GBP), and the euro (EUR).

There are two central bank meetings slated for the upcoming week – the Bank of Canada (BOC) and the ECB. The former is expected to stay the course with possible tweaks to inflation targets, while the latter will have to weigh the need for additional stimulus measures in combating the effects of the pandemic, especially with the rise in new cases in some regions.

The ECB meeting will likely be the most anticipated financial event this week. Its importance will lie in whether the central bank can convince the markets of its effectiveness in managing the crisis at hand. Any additional monetary stimulus it provides may not be sufficient to allay investors' fears surrounding a sustained recovery until they see a coordinated fiscal response. Given that the European Union (EU) comprises sovereign nations, this might be outside the realm of what is realistically probable.

There is also the issue of the common currency's strength as it breached the 1.20 level before reversing course sharply. Analysts attributed this to comments by policymakers worried about the effects that further appreciation will have on exports and, by proxy, the economic recovery.

With this as a backdrop, the ECB might be hard pressed to implement policy initiatives that could provide the impetus for another bout of euro strength. On the other hand, there are the economic effects of a pandemic that need to be addressed. All this makes for a highly anticipated event on Thursday.

Global Indices

The Nikkei 225 was the best performing index ending the week, up 1.08%, while the technology-heavy NASDAQ was the worst performer, as it fell 3.69%. In fact, the rest of the global indices being tracked ended the week down, a result of late-week volatility brought on by concerns about the global economic recovery.

The severity of the shift in sentiment, especially in U.S. indices, led many an analyst to conclude that the recent meteoric rise had given way to investor concern about stretched valuations, leading to some profit-taking. Mega-cap tech companies like Mastercard Incorporated (MA), Microsoft Corporation (MSFT), PayPal Holdings, Inc. (PYPL), and salesforce.com, inc. (CRM), to name a few, ended the week down over 6%.

Of note, prior to the selloff, the market capitalization of Apple Inc. (AAPL) exceeded that of all the companies that comprise the FTSE100, which is an index of the 100 largest publicly traded companies in the United Kingdom.

Oil, Yields, and Gold

Crude oil (WTI) ended the week sharply lower despite a sixth consecutive weekly drop in crude inventories. Concerns about global economic recovery gave rise to legitimate worries about demand prospects for the commodity given that the world's leading importers (China et al.) had taken advantage of rock-bottom prices in early spring to stockpile inventories. Refiners are limiting output, and producers (OPEC+) are cutting prices, even as the USD strengthens, to stimulate demand.

U.S.10-year yield ended the week higher, while the German bund yield ended the week lower, although on a two-week time frame, they are both higher. Gold prices consolidated between $1,900 and $2,000/oz as the rise in bond yields gives traders pause.

Key Economic Events (next week)

Chart(s) of Interest – Crude Oil (WTI)

Crude oil (WTI) breached $40/bbl and closed the week at $39.32. The move suggests that further declines may be in the offing as the fundamental narrative of weakening demand is supported by the technical deterioration in price. Should this descent continue, then support at $35.84 should be its initial destination. A clear break would bring moderate support at $31.89 into focus ahead of major resistance turned support at $28.93. Conversely, a successful breach of resistance level at $43.52 will be needed for a resumption of the uptrend.

Pivot Points and Fibonacci Retracement Levels

The pivot point is calculated from the previous trading periods' price action and can be used to determine the short-term trend. If the instrument on the following period trades above the pivot point, it is thought to be exhibiting bullish sentiment, whereas trading below the pivot point is seen as bearish. The Fibonacci retracement is the potential reversal of the instrument's original move in price.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.