Early Morning Call: watching sterling amid slow UK economic growth in July

Equity marketws overview

Asia-Pacific equity markets rose overnight, as did US indices on Friday.

Japan’s Nikkei 225 ended the session up 1.16%, Australia’s ASX 200 rose 1.02%. Hong Kong and Mainland China indices are closed today for the Mid-Autumn Moon Festival.

In Europe, indices also started the session higher, although the UK session is hesitant, after the latest UK gross domestic product (GDP) data showed less than expected growth of 0.2% in July. Industrial production increased by 1.1% in July year-on-year (YoY), less than the 1.9% anticipated.

Last Friday, the Bank of England (BoE) postponed this week's interest rate decision following the death of Queen Elizabeth II. "In light of the period of national mourning now being observed in the United Kingdom, the September 2022 meeting of the Monetary Policy Committee (MPC) has been postponed for a period of one week. The Committee's decision will be announced at 12 noon on 22 September."

This marks the first postponement of the BoE since it became operationally independent 25 years ago.

Since the highs of January this year, US indices are in a downward trend. After the recent bear market summer rally, equity markets are on the way down again and some analysts are suggesting that they could drop further as the Federal Reserve (Fed) is due to accelerate the unwinding of its balance sheet this month.

The Federal Reserve's balance sheet has more or less doubled since the pandemic, to $9 trillion. In June it began unloading some of the Treasuries and mortgage-backed securities it holds at a pace of $47.5 billion. This month, the Fed will be ramping up the pace to $95 billion, $60 billion in Treasuries, and $35 billion of mortgage securities.

To some, combined with higher interest rates and the soaring dollar, the acceleration of quantitative tightening could further weigh on asset prices. The latest comments from Fed officials suggest that the bank could come up with yet another oversized interest rate increase. Fed board member, Christopher Waller, said on Friday he was not convinced the inflation was yet "moving meaningfully and persistently downward", and on that basis would be supporting a significant increase at the Fed's next meeting on September 20-21.

This Tuesday, we'll get the last round of inflation data before Fed bankers meet. Economists expect the headline figure to decelerate to 8.1% in August YoY, from 8.5% in July, but core inflation is seen rising to 6.1% YoY, after hitting 5.9% the previous month.

In Japan, senior government officials say the country must take steps as needed to counter excessive declines after the 24-year lows last week. The comments from Seiji Kihara, the deputy chief cabinet secretary of Prime Minister Fumio Kishida's government, are the latest to highlight authorities' deep concern about the yen's slide.

Kihara also said the government will consider "in the not-so distant future" relaxing strict border measures to further open Japan's borders to overseas visitors, such as by scrapping a cap on the daily number of entrants.

Corporate news overview

Little news is expected on the corporate front this Monday. Oracle Corp (All Sessions) is expected to report its quarterly results tonight after the US closing bell. Analysts anticipate the group to post earnings of $1.08 per share, which is about 5% higher than the same quarter last year. Revenue is forecast to rise by about 17% to $11.33 billion.

The market will be particularly attentive to the group's level of debt. Following the merger with Cerner Corp, liabilities increased by about $20bn to $57.6bn. As for the full-year forecast, current estimates are of earnings per share (EPS) of $5.25, on sales of $49.80bn.

Commodities

On the commodity markets, oil markets have started the week in the red. Friday’s Baker Hughes total rig count fell by 1 to 759, due to a fall of the number of oil rigs in operation. The Number of producing oil rigs fell by five to 591, while the number of gas rigs rose by four to 168.

According to research institute Energy Aspects, China's oil demand could fall this year. Crude imports are already down 4.7% during the first eight months of the year compared to the same period in 2021, and the ongoing zero-COVID policy is very likely to affect travel during the mid-Autumn festival that started this weekend.

Energy Aspects estimates that fuel demand could fall by 380,000 barrels per day, to just over eight million barrels per day (bpd).