Who to Trust? Stocks or FX

We look at why a divergence emerged in stocks, bonds and FX on Thursday and what it means ahead of non-farm payrolls. Despite the 2% fall in the S&P 500, the Canadian dollar was the top performer and ranges were tight. A few indicators and a central bank speech will be released in Asia. A new set of Premium Insights will ve issued prior to the Nonfarm payrolls to leverage existing trades.

A few factors contributed to the stock market selloff:

    The failure to make a deal (so far) in Argentina

    More trouble at Portugal's Banco Espirito Santo

    The sense that the Fed will eventually turn more hawkish

    Earnings, to some extent, but there are always good/bad earnings

What undermines those factors is that the FX and bond market didn't react in unison. It's rare for stocks to lead a genuine risk rout so until we see more evidence, we're unconvinced it will last.

So the main factor might have been the end of the month. Fund managers hate to show losing trades and a trickle of window dressing might have turned into a flood as the move gathered momentum. At the same time, the Chicago PMI at 52.6 compared to 63.0 added a fundamental worry to the picture.

What's interesting is that despite the poor PMI, the employment component actually increased in July and that bodes well for Friday's non-farm payrolls report. There's some risk that a very strong report will stoke worries about rate hikes but ultimately more jobs will be seen as good news.

The market will continue to hunker down ahead of NFP but in the meantime some headlines could keep markets moving. The main one will be the Chinese official manufacturing PMI at 0100 GMT. The consensus is for a slight improvement to 51.4 from 51.0.

Thirty minutes later Australian PPI data for Q2 is due. Inflation concerns are low at the RBA and the report probably won't change the picture.

The final event to watch is a speech from BOJ leader Kuroda at 0330 GMT. The latest data has been weak and he could take a dovish line in an attempt to weaken the yen.