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Global risk assets got a bit of a reprieve this week in what was anticipated to be a heavy one for US data releases, mostly pertaining to jobs data. On Tuesday, the US Job Openings and Labor Turnover Survey (JOLTS) job openings report fell more than expected to 8.8 million, which spurred hopes that the Fed’s tightening measures was finally being passed on through to the labour market. The ADP employment data and Nonfarm Payroll (NFP) data also came in either on point or slightly below expectations, with the key unemployment rate coming in at 3.8% vs. 3.5% expected. The latter was probably due to an uptick in the participation rate.
On balance, US equities ended the week much higher than they started. It was a bit different for US treasury yields though. While they fell throughout the week and had a large selldown post NFP data, those moves were faded by the market. The 2y yield initially fell nearly 10 basis points post data release, but closed on Friday up 12 basis points from the low.
The US Dollar made a strong close on Friday on the back of the higher yields. For the most part though, USD was mixed over the week. Against regional peers like the Chinese Yuan, the USD was weak as China has since thrown out a slew of monetary and fiscal interventions to prop up the economy. In particular, the People’s Bank of China (PBoC) cut the FX reserve requirement for banks from 6% to 4% on Friday (beginning Sept 15), which would release roughly 19 billion USD into the market, and this weighed heavily on USD against Yuan.
While our Ringgit sees some correlation to the Yuan, we were not a big beneficiary this time around. There was some knee jerk selling lower in USD/MYR, but for the most part the pair has stayed in a tight range (4.6280 to 4.6560) this week.
The 3m Kuala Lumpur Interbank Offered Rate (KLIBOR) rate saw some fluctuations in its setting this week, after a prolonged period of being unchanged. A few local banks were seen contributing rates slightly higher (with one large bank showing a particularly high rate).
Against the backdrop of cooling inflation and stable Official Policy Rate (OPR), this is likely due to some short term liquidity adjustments in the banking system, but the exact reason for such remains a mystery for now.
PM Anwar rolled out a New Industrial Master Plan 2030 to solidify Malaysia's existing position in global industrial supply chains while improving capabilities in hopes of moving up the value chain. The RM95bn fundraising requirement is likely a short term negative to the local bond market as any resulting new supply is likely to be front loaded, but the impact is likely to be concentrated on the long end of the yield curve. For equities, we think that it's too early to tell but there is a potential for this to be a long term positive for the KLCI.
It was a volatile week for the crypto market.
There was a lot to cheer for on Tuesday, as the SEC was handed another legal setback in its crusade on crypto. A US court ruled that the Securities and Exchange Commission was wrong to reject an application from Grayscale Investments to create a Bitcoin exchange traded fund (ETF).
While this should not be construed as an approval of an ETF, it certainly does improve the odds for an eventual approval. Bitcoin and the broad crypto market rallied hard after the news. Bitcoin went from USD 26,100 to a high near USD 28,200 before settling in the USD 27,400 levels. In sympathy, most major cryptocurrency pairs rallied too.
However, this wouldn’t last.
On Thursday night, the SEC bit back and officially announced a postponement of its decision on all 7 Bitcoin ETF applications. This took all the wind out of the sails of crypto trades, who capitulated back into the previous week’s range. In fact, the momentum looks a bit more serious as post Friday closing, Bitcoin is starting to trade below the USD 26,000 level.
TL;DR:
We suspect that while the market responded well to the US employment data, the rally in US equities to close the month had a large portfolio rebalancing tailwind effect too. Going into the final week of August, the S&P 500 was down nearly 5%, and the Nasdaq 100 was down about 6.7%. A relatively large buying flow would be required to rebalance portfolio weights going into the close of the month, and this coincided well with the data release outcomes.
Monthly rebalancing is a structural facet of the US financial economy, given the prevalence of passive portfolios and ETFs. The resulting flows could disguise a lot of the underlying weakness (or even strength) in the financial economy. It is quite possible that this could be the case here, and we’d be cautious on declaring that the S&P 500 will make a new YTD high straight on from now.
This is particularly true when considering seasonality effects. Since the year 2001, September has on average been the worst performing month for the S&P 500, both in terms of average return and the percentage of times it has registered a positive return in that month. Seasonal effects in financial markets remain somewhat difficult to explain, and are hard to trade on their own. However, they can provide either a headwind (or a tailwind) to the underlying price trend/narrative.
We don’t have as much historical data on seasonal effects in Bitcoin, though given its obscurity until recently, any observed patterns might have been just noise anyway.
However, a broad market downturn is likely to impact digital asset prices too, especially now that the momentum in crypto markets seems to favour bears in the short term for now. Post Friday close, BTC has started to trade more frequently below the USD 26,000 price support level. While observations of exchange orderbook liquidity show that USD 25,000 remains a major support, it’s more likely now that we start to test those support levels. With Bitcoin trading on the backfoot, we can also expect major altcoins to be challenged. Ripple in particular (XRP) seems to be bearing the brunt of it, being unable to sustain prices above 50 cents.
The crypto markets continue to stay sensitive to the Bitcoin ETF application outcomes. The next deadline for the SEC to observe is October 16 this year. The SEC can in theory continue to delay their decision until March of 2024. Investors should prepare for this decision to be protracted.
Last, but certainly not least, we don’t think BNM will be taking any radical action this week at their monetary policy meeting on Thursday. Inflation continues to cool locally, and while the MPC has noted that rates at this level remain slightly accommodative, there should be no reason to tighten any further into neutral territory.
In summary, this month might prove to be a challenging one for investors. Over the long term though, this will probably be just another bump in the road. Opportunities come from such challenges, so take it in stride and be ready to act.
Thank you for reading and we’ll see you next week!
Team Halogen
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