Risk Rocked Ahead of NFP

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We have been highlighting the breakdown in correlations this week as the US dollar reversed alongside Treasury yields. We also highlighted the ugly reversals Wednesday in shares of Apple and Tesla. Ashraf is comparing Wednesday's bearish outside day candle on Apple to the Dax30's candle on Thursday. 

Those were crucial signs indicating that trouble was coming. Of course, there are always negative signs in a bull market and the timing of a break is always murky. At best, the risk-reward to the downside this week was increasingly tilted negatively but there was no 'trigger' on Thursday.

Weekly jobless claims at 881K compared to 950K were better than expected, though that was likely due to a new method of seasonal adjustments. Unadjusted claims and total ongoing claims were both higher on the week. The ISM services index had a fractional miss at 56.9 vs 57.0 expected. There was no knee-jerk move on either.

Instead it was a soft open to equities that cascaded as high-flying tech stocks fell. A rush to the exits was compounded by a rush into instruments like SQQQ (ultra-short tech) that traded at extremely high volumes. While the world has been infected by COVID-19, the market has been overcome with speculation and leverage. A pattern of easy money driving up equities followed by swift corrections is becoming increasingly clear.

Outside of stock markets, the price action was much less dramatic and that's an upbeat signal. EUR/USD finished the day flat after an early drop. The commodity currencies fell, but only in the 60-80 pip range. Notably, several risk-sensitive EM currencies like MXN and BRL finished higher on the day.

Outside of FX, the bond market was also well-behaved.

Looking ahead, the US is expected to add 1350K jobs in August. About a fifth of those jobs will be due to temporary census hiring but the seasonal risk is from teachers. Many schools delaying the reopening could compound the usual seasonal adjustment lower. Expect the market to focus on the details.

The Canadian jobs report is also due and forecast to show a +250K net change.