Market Weekly Review: Unexpected! Major news from China and the US, a Fed official adds fuel to the reduction, gold plunges $40

Market Summary: September 6-10: Multiple risks overlapped this week, leading to volatile market movements. Several Federal Reserve officials added fuel to the tapering fire, the European Central Bank slowed its bond purchases as expected, and a phone call between the Chinese and US leaders stimulated risk appetite.

In terms of market performance, the three major US stock indices fell, the US dollar rebounded and closed up for the week, gold fell for the first time in five weeks, crude oil fluctuated, and commodities experienced sharp volatility. The market is focused on when the Federal Reserve will begin to reduce bond purchases.

Foreign Exchange Market: The US dollar rose overall this week, rebounding from a one-month low on Friday. It rose for three consecutive days starting Monday, reaching 92.86, before falling slightly to close at 92.64. It ultimately closed up 0.56%, ending two consecutive weeks of decline. The dollar has yet to establish a strong trend, and investors are waiting for new clues to determine when the Federal Reserve might begin reducing its bond-buying program and eventually raise interest rates.

The dollar's rebound weighed on non-US currencies. The euro fell for three consecutive days from the beginning of the week, hitting a low of 1.18 before attempting to stabilize. It ultimately closed down 70 points, or 0.56%, ending a two-week winning streak. GBP/USD was more volatile, falling continuously at the beginning of the week to a two-week low of 1.3726, before rebounding in a V-shape to above 1.38, closing at 1.3829. It fell 0.21% for the week, ending a two-week winning streak. USD/JPY was volatile this week, showing a pattern of rising and then falling. It rose continuously at the beginning of the week, reaching a high of 110.45, before quickly falling below 110, ultimately closing at 109.90, with a small increase of 0.2% for the week.

Regarding commodity currencies, AUD and NZD showed some divergence this week. The Australian dollar fell under pressure from the beginning of the week, continuously declining from around 0.7470 to 0.7343, falling nearly 100 points for a 1.32% decrease. The New Zealand dollar also fell continuously from the beginning of the week, falling below the 100-day moving average to a low of 0.7074, before rebounding slightly on Thursday and Friday, ultimately closing at 0.7109, down 0.58% for the week.

Precious Metals Market: Gold performed poorly this week, continuously falling from below $1830 at the beginning of the week to around $1782, ultimately closing at $1787. It fell $40, or over 2%, marking its first weekly decline in five weeks. Silver followed a similar trend to gold, continuously declining from the beginning of the week, reaching a high of 24.867 and a low of 23.700, with a weekly decline of nearly 4%.

Weekly News Summary:

Big News from China and the US! A call between the two leaders stimulates risk appetite.

Major news broke on Friday from China and the US, with a phone call between the two leaders after nearly seven months stimulating risk appetite and causing a short-term surge in the RMB.

Ahead of the G20 Leaders' Summit in October, the leaders of China and the US spoke again on September 10. This was the second time the two leaders have spoken since Biden took office in January. The last conversation was on February 11, when the two leaders exchanged New Year greetings for the Chinese New Year. There was no direct communication between the two leaders for nearly seven months after that.

China's official news agency, Xinhua, reported that Chinese President Xi Jinping spoke with US President Biden on Friday morning at Biden's request, engaging in "candid, in-depth, and extensive strategic communication and exchange" on China-US relations and issues of mutual concern.

Xi Jinping pointed out that the US's policies toward China have caused serious difficulties for China-US relations, which is not in the fundamental interests of the two peoples or the common interests of all countries. China and the US are the largest developing and developed countries, respectively. Whether China and the US can handle their relationship well concerns the future and destiny of the world, and is a question of the century that both countries must answer. Cooperation between China and the US will benefit both countries and the world; confrontation between China and the US will harm both countries and the world. China-US relations are not a multiple-choice question of whether to do well, but a required question of how to do well.

The White House said that Biden and Xi Jinping held "extensive strategic discussions," "discussing areas where our interests converge, and areas where our interests, values, and perspectives diverge."

A senior US government official said that the tone of the call between Biden and Xi Jinping was "familiar" and "frank," and that the two sides discussed economic issues. The official noted that the purpose of the call was not to reach specific agreements or outcomes.

"I think (the call between the two heads of state) is good, as long as there is communication," said a trader at a Chinese bank.

The phone call between Chinese President Xi Jinping and US President Biden raised hopes for improved relations between the two countries, and the RMB reached its highest closing level in nearly three months. The onshore RMB rose 0.3% to 6.4375 per dollar, its highest close since June 16. The offshore RMB rose 0.3% to 6.429 per dollar, having previously risen 0.4%.

"We saw selling in USD/CNH due to this news, and any unexpected improvement/restart in US-China relations could push USD/CNH further away from the 6.50 level," said ING strategists in a recent report. "This trend is usually favorable for pro-cyclical currencies and slightly unfavorable for the dollar—hence the dollar's decline today."

The RMB has remained virtually unchanged since early June, having risen 1.5% in the second quarter due to the decline in the dollar. The one-month implied volatility of the onshore RMB fell for the fourth consecutive day to its lowest level in more than two years, suggesting that the market expects the RMB to remain stable.

"There are signs that China is willing to push bilateral dialogue onto a more serious path, which is positive for the RMB and regional currencies." said Yanxi Tan, a foreign exchange strategist at Maybank in Singapore. However, further progress "may be limited, as it is unlikely that both sides will make more significant shifts in policy."

"In the short term, (the call between the heads of state) is definitely positive, but I think that's about it. Because the underlying logic hasn't changed, it's probably just some tactical adjustments. The relationship was so bad that it seemed bad for both sides, so they adjusted it, but the main logic probably hasn't changed much," said an economist in North China.

Dovish Tapering? The European Central Bank Slows Bond Purchases as Expected

As global output recovers to pre-pandemic levels and global inflation surges, major central banks are considering whether and how to gradually end emergency stimulus programs. The highly contagious Delta variant is currently putting pressure on the economic outlook. Against this backdrop, the decisions of central banks, especially the Federal Reserve, will send ripples through global financial markets.

On Thursday, September 9, the European Central Bank (ECB) announced its September interest rate decision, keeping the three main interest rates unchanged as expected. ECB President Christine Lagarde then held a press conference, denying any reduction in bond purchases.

Last week, borrowing costs rose sharply across the eurozone, with hawkish comments from some officials keeping markets on alert, suggesting the ECB might move towards gradually reducing its large-scale emergency stimulus program. However, the ECB's decision on Thursday to slightly slow the current €80 billion monthly bond purchases was in line with expectations.

The ECB meeting maintained a dovish tone and held no major surprises. The central bank will slow the pace of emergency bond purchases over the next quarter, taking a first small step towards gradually ending emergency aid. This emergency aid supported the eurozone economy during the pandemic.

The ECB purchased €80 billion in assets per month over the past two quarters. While the bank did not provide specific guidance on the size of bond purchases for the next three months, three sources said that policymakers set a monthly government bond purchase target of €600-700 billion for the PEPP at the meeting, maintaining flexibility to increase or decrease purchases depending on market conditions.

President Lagarde said in a subsequent press briefing that the economic recovery rebound is accelerating, the economy has largely recovered, and the ECB expects economic activity to reach pre-pandemic levels by the end of the year. While the inflation outlook has been slightly revised upwards, the financing environment remains favorable, inflation is well below the central bank's medium-term target, and inflation is largely temporary.

Regarding the reduction in bond purchases, Lagarde said: "We are not reducing bond purchases, but calibrating the Pandemic Emergency Purchase Programme (PEPP)."

She mentioned that the ECB has readjusted the stimulus plan for the next three months, but hasn't discussed the next steps yet. They will prepare in the coming months and discuss in December. The specific pace of bond purchases will be adjusted according to the overall bond market. She said: "We have a long way to go before ending bond purchases and raising interest rates."

"The ECB's actions were largely in line with expectations," TD Securities analysts said in a report. "Looking ahead, the focus will be on how the ECB defines 'moderate' – any number below €60 billion per month could be bearish."

Antoine Bouvet, senior rates strategist at ING, said: "It seems the answer to all questions is, let's see what happens at the December meeting. I don't think (the meeting) was very dovish at all. Expectations may have been too hawkish, which is perhaps the inference we can draw from the market reaction."

Chris Weston, head of research at Melbourne broker Pepperstone, said the euro at the $1.18 support level "needs to be taken out by the shorts to gain real traction."

Adding Fuel to the Tapering Fire! Multiple Fed Officials Join the Hawkish Camp

Last week's disappointing US non-farm payroll data cooled market expectations for a September tapering announcement by the Fed, but this week several Fed officials have stated that tapering is still possible this year.

On Friday, the US dollar index fell to its lowest level since August 3, after data showed the US economy created the fewest jobs in seven months, reducing the likelihood of the Fed's imminent reduction of its asset purchase program.

This week's data has been mixed. Data released on Thursday showed that initial jobless claims fell to their lowest level in nearly 18 months last week, providing further evidence that job growth is hampered by labor shortages, rather than cooling demand for labor.

On Friday, the US Labor Department said the Producer Price Index (PPI), which reflects final demand, rose 0.7% last month, slightly higher than the expected 0.6% increase. In the 12 months to August, the PPI rose 8.3%, the largest year-over-year increase since November 2010. This suggests that high inflation could persist for some time, as the COVID-19 pandemic continues and supply chains remain strained.

Investors have been closely watching employment and inflation data for clues as to when the Fed might announce the start of its tapering of large-scale bond purchases.

Cleveland Fed President Loretta Mester said Friday that the previously released August non-farm payroll data was weak, but it did not change her view on monetary policy, and she still favors the Fed starting to reduce bond purchases this year.

Several Fed officials have mentioned tapering this week, and Mester's view is consistent with these officials.

On Thursday afternoon local time, 2021 FOMC voter Bostic also said that recent weak data may have delayed the start of the tightening plan, but the door remains open for reducing bond purchases this year, and he is still looking at a Fed rate hike by the end of 2022. Moreover, if tapering occurs, it's best to end it as soon as possible, although he doesn't expect the FOMC to propose a gradual reduction in asset purchases this month.

Fed Governor Michelle Bowman spoke at an online event organized by the American Bankers Association on Thursday local time: "Although some recent data may not have been as strong as we expected, we still see very strong economic growth. We are very close to achieving maximum employment. In addition, with strong demand and persistent supply constraints, the rise in inflation is not surprising. If subsequent data are as I expect, we may begin reducing the size of our asset purchases this year."

On Wednesday local time, Federal Reserve Vice Chair for Supervision and President of the Federal Reserve Bank of New York, John Williams, said that if the US economy continues to improve, it may be appropriate for the Fed to begin slowing the pace of asset purchases later this year.

Dallas Fed President Robert Kaplan holds a different, more aggressive view. At an online event held by the Dallas Fed this week, he said he hopes the Fed will announce a plan to adjust the size of its bond purchases at its September meeting and supports reducing bond purchases starting in October.

The Wall Street Journal reported on Friday that Fed officials will seek to reach a consensus at the September meeting to begin reducing bond purchases in November.

"The Fed looks set to taper later this year, and this week's speeches from Fed officials highlight this," said Mark McCormick, global head of FX strategy at TD Securities, in a research note.

Market Outlook for Next Week

Looking ahead to next week, the Fed will enter a pre-meeting blackout period. The data will be busy over the next week, with key data releases from China, the US, and Europe, which are expected to provide clues about the global economic situation.

In terms of economic data, Monday will be relatively quiet; we can pay attention to Japan's August domestic corporate goods price index. On Tuesday, the market will see key US inflation data, with the release of the US August unadjusted CPI and core CPI. The UK will also release the three-month ILO unemployment rate for July and the unemployment rate for August. On Wednesday, the market will focus on China's August industrial added value above designated size; the UK, France, and Canada's August CPI.

Thursday will see a major event - the release of US August retail sales data, often dubbed "horror data." Also noteworthy are the Australian August seasonally adjusted unemployment rate and the Eurozone July seasonally adjusted trade balance. Friday will bring the UK August seasonally adjusted retail sales and the final Eurozone August CPI figures. It is crucial to watch the preliminary University of Michigan consumer sentiment index for September, as this data has previously caused significant market volatility.

Regarding central bank activity, the Federal Reserve is in a blackout period, and no major central banks have policy meetings scheduled. However, statements from Bank of Japan Governor Haruhiko Kuroda and European Central Bank President Christine Lagarde will be of interest.

At a press conference in September, European Central Bank President Christine Lagarde stated that the ECB expects economic activity to reach pre-pandemic levels by the end of the year. She also noted that while the inflation outlook has been slightly revised upwards, the financing environment remains favorable, inflation is well below the central bank's medium-term target, and inflation is largely temporary.

Regarding market concerns about slowing bond purchases, Lagarde explained that it is "not a reduction in purchases, but a recalibration of the Pandemic Emergency Purchase Programme (PEPP)." She stated that the European Central Bank has readjusted its stimulus plan for the next three months but hasn't discussed the next steps yet. They will prepare in the coming months and discuss this in December.