Vietnam's LNG Price Cap Puts Gas-Fired Power Target at Risk

Energy

Electricity-hungry Vietnam wants liquefied natural gas to fire 15% of power capacity by 2030 but is unlikely to meet that target as power producers and foreign investors balk at the country's strategy for making the super-chilled fuel affordable.

To promote LNG use and shield consumers from high prices, Hanoi in May set a price cap on generators' sales of electricity fuelled by imported LNG.

However, power producers are concerned that a price cap fails to reflect the volatility in the LNG market and will make gas-fired plants uneconomic if prices spike as they did in the past three years.

"It's risky for both suppliers and buyers as LNG supplies and prices depend on geopolitical conditions, which are currently not stable," said Nguyen Thanh Son, a Hanoi-based energy expert, adding the price cap was not appropriate.

The stakes are high for Vietnam as it struggles to wean itself off heavy reliance on coal to cut carbon emissions, and for global LNG producers, who see the fast-growing economy as a ripe opportunity.

PRICE CAP POSES HURDLES

In a national power development plan last year, the government set a target to have 13 LNG-fired power plants with a combined capacity of 22.4 gigawatts (GW) by 2030, accounting for 15% of the country's total power generation mix.

If built, those 13 LNG-fueled power plants would require imports of 14 million metric tons of LNG per year, according to state-owned PetroVietnam Gas, which on current levels would make the country the sixth-largest market in Asia.

The Ministry of Industry and Trade has now set a price cap of 2,590.85 dong ($0.10) per kilowatt-hour (KWh) for electricity sourced from LNG sold by power producers to state grid operator EVN in 2024.

EVN told Reuters the price cap is reasonable for both suppliers and end-users, as it "will be reviewed and adjusted annually by the ministry when input data changes, thus offering long-term stability to investors."

The 2024 price cap is based on LNG at $12.9792 per million British thermal units (mmBtu) excluding tax and storage, gasification and distribution costs, and a currency conversion rate of 24,520 dong per $1.

That is slightly higher than current Asia spot LNG prices, and roughly in line with the current value of LNG in long-term contracts linked to oil prices.

But average Asian spot LNG prices have trended higher since 2021, between $14 and $34/mmBtu on an annual basis, as COVID-19 and the Russia-Ukraine war drove them to record highs, making plant developers nervous about the price cap.

"The international practice is to link power prices to the LNG price without a cap, to ensure the project's viability and bankability. Vietnam should adopt this practice," said a source with a foreign developer of an LNG-supplied plant.

"The Vietnamese LNG power market is still nascent and any rules that deviate from international practice would deter foreign investment," the person said, declining to be named as they were not authorised to speak to media.

On the LNG import side, so far Vietnam has two LNG terminals, which together have a capacity to bring in 4 million tons of LNG a year. To-date, only five spot cargoes with a combined volume of over 300,000 tons of LNG have been imported.

Those cargoes have been blended with domestic gas and sold to the country's existing gas-fired plants.

Energy consultants at Wood Mackenzie view the government's targets as "quite aggressive" and expect LNG imports in 2030 only to reach between 2 million and 3 million tons a year.

"LNG imports into Vietnam will depend on the pricing structure of LNG and favourable policies for the gas sector which unlock demand," said Wood Mackenzie analyst Raghav Mathur.

Vietnam's industry ministry did not respond to requests for comment.

OFFTAKE MANDATE KEY FOR NEW PLANTS

Adding to the challenge, LNG is more costly than coal and hydropower, the main sources of power in Vietnam, so gas-fired plant developers are reluctant to commit to projects or to LNG purchases without a guarantee that EVN will buy their output.

"Investors want to sign long-term LNG contracts with suppliers, but suppliers see that it's very risky because EVN does not have any commitments," said an LNG trader.

The next key announcement developers are waiting for is a government mandate on EVN to buy LNG-fueled power.

The industry ministry said in April it was drafting a decree to set an LNG power offtake volume, which it initially expected would be around 70% of a plant's capacity.

PetroVietnam Power declined to comment.

The first of the country's LNG-fired plants, Nhon Trach 3, is scheduled to start generating power in November and the second, Nhon Trach 4, in May next year, according to developer PV Power.

Another 11 would be needed to meet Vietnam's 2030 target, but even the government said in a statement in May that projects are facing numerous challenges, including issues related to contracts, site clearance and a lack of offtake commitments.

"The delay in the development of these projects will impact national energy security," Minister of Industry and Trade Nguyen Hong Dien said in the statement.

Source: Reuters

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Warren Takunda

Economic

The Pound to Euro exchange rate fell below 1.18 and is on course to erase all its July gains after the Bank cut interest rates by 25 basis points. The Pound to Dollar exchange rate meanwhile fell a full per cent to 1.2712.

The weakness shows that the market did not fully expect a cut, while the Pound entered the August 01 decision with a major overhang of extended 'long' positioning, leaving it exposed to a big pullback.

However, Governor Andrew Bailey said the MPC will be "careful not to cut interest rates too quickly or too much." This will limit the downside in UK rate expectations and underpin the Pound once the position clear-out has happened.

"In our view the BoE delivered a hawkish cut. The decision was characterised as a "slight reduction" in the degree of policy restrictiveness. The BoE gave no clear guidance on future rate path and emphasised a meeting-by-meeting approach," says Sonali Punhani, UK Economist at Bank of America.

"The Bank of England has executed this hawkish cut very well. While the anticipated reduction in rates was delivered, market pricing for future cuts has remained largely unchanged," says Stefan Koopman, Senior Macro Strategist at Rabobank.

Analysts at Barclays said the Pound would fall as part of an initial reaction to the decision but that a "hawkish cut" would ultimately see it "benefit".

This suggests a profile of near-term GBP weakness and a reboot of outperformance down the line.

"We stay constructive," says Kamal Sharma, FX strategist at Bank of America. "Hawkish cut has no GBP impact. We remain constructive on better fundamentals."

Even if the Bank of England cuts again in 2024, the UK will continue commanding an elevated interest rate relative to most G10 economies, boosting the appeal of Sterling-denominated assets and Sterling itself.

"Hawkish" Cut Means Pound Sterling Will Refind Winning Ways Against Euro and Dollar_1

Above: The Bank's forecasts show inflation will rise again, limiting the need for a deep path of rate cuts.

Economists we follow are gravitating to the view that the Bank will likely pursue a cut once every quarter going forward, implying a relatively steady and predictable path for financial markets to adjust to.

"The accompanying guidance and forecasts suggest it will proceed cautiously. Accordingly, we suspect the Bank will keep rates on hold in September before proceeding with the next 25 basis point cut in November. And the risks to our forecast are tilted towards cuts being a bit slower and smaller than we currently expect," says Ruth Gregory, Deputy Chief UK Economist at Capital Economics.

Short-term Headwinds to Persist

The Pound entered Thursday's decision restrained by a record 'long' position, which meant a significant portion of the active market was already holding contracts that would deliver a return in the event of the Pound rising.

Such crowding can create headwinds as it becomes increasingly difficult to find new entrants into the trade. It also means that any setbacks in the newsflow or data can create a bonfire of these positions as investors exit trades by selling the Pound.

The Bank thinks it can cut interest rates further without stoking inflation, but it warns it sees an upside skew to its forecasts and that pressure here was largely domestic in nature.

The Bank said it was appropriate to keep monetary settings "restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term had dissipated further."

Bailey, Breeden, and Lombardelli joined Ramsden and Dhingra in voting for a cut, but Pill, Greene, Haskel, and Mann continued to support a hold at 5.25%.

"We continue to expect the MPC to cut Bank Rate again in November. We then expect the Committee to reduce the policy rate at a quarterly pace thereafter until Bank Rate hits 3% in 2026-Q3," says James Moberly, an economist at Goldman Sachs.

Source: Poundsterlinglive

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Cohen

Central Bank

Economic

After numerous bruising false starts, there's now a dash to lock onto what are still some of the highest government and corporate bond yields in 15 years before they evaporate as central bank easing finally gets underway in earnest.

Emboldened by headline inflation back at target and likely tax rises from the new British government, the Bank of England narrowly voted for its first interest rate cut in four years this week. That cut came within 24 hours of the U.S. Federal Reserve signaling it was ready to likewise cut rates in seven weeks time.

Although laced with "softly softly" rhetoric and caution about "data dependency", these two are merely catching up on the start already made by the central banks in the euro zone, Switzerland, Sweden and Canada.

And with real inflation-adjusted policy rates rising sharply to their tightest levels since the global banking crash of 2008, labor markets loosening and manufacturing growth stalling, there appears to be a consensus that now is the time to move to ensure they are not scrambling later on if the economic slowdown snowballs.

Central Bank Dam Burst May See Dash from Cash_1

Short-dated government bonds are leading the charge.

Two-year U.S. Treasury yields have clocked a cumulative 50-basis-point (bp) swoon in the space of a month to hit their lowest levels since February. Two-year UK gilt yields have shed as much in that time to plumb their lowest levels in more than year.

Central Bank Dam Burst May See Dash from Cash_2

But it occurred across the curve - with 10-year Treasuries losing their 4% handle for the first time in six months. Europe rallied in sympathy, with even recently edgy French 10-year government yields falling back below 3% for the first time since a contentious snap election was called there in June.

And the widest sweep of global bond markets at large - the Bloomberg Multiverse index of government and corporate bonds - has seen implied yields plummet through 4% again to their lowest levels since early February. Central Bank Dam Burst May See Dash from Cash_3

Central Bank Dam Burst May See Dash from Cash_3

Leak Out the Curve

There have been false dawns before of course.

The combination of creeping industrial slowdowns and better-behaved inflation, and wariness of many pricey equity markets, means still-brimming coffers of cautious cash may now start to leak out as short-term money market rates tumble.

The rush to secure a longer period of fixed returns in bonds while yields there are still historically high seems a likely first port of call.

And there's still a lot of money in cash.

According to ICI data, total assets in U.S. money market funds rose to the highest level on record this week at some $6.14 trillion - almost $1.6 trillion more than was there before the Fed started lifting rates in March 2022.

The question is whether it's now worth shifting to what are now much lower longer-term yields.

Anticipating a Fed move from its 5.38% policy mid-rate in September, three-month Treasury bill rates have slipped 10 bp over the month to 5.28% - but they remain 110 bp above fast disappearing two-year yield at 4.2%.

And yet futures markets already price a likely series of Fed cuts ahead that would bring policy rates below the current two-year Treasury by March of next year - and two-year notes themselves would almost certainly be far lower by then if that scenario unfolded.

Central Bank Dam Burst May See Dash from Cash_4

All things equal, the current rates universe suggests a new two-year note bought today would yield more than a 3-month T-bill for 18 months of its maturity.

Analysts at TS Lombard earlier this year calculated that current two-year yields are still attractive even if you assume the 200 bp of Fed easing in this cycle now priced by futures markets "normalizes" the yield curve and returns a premium on two-year yields over Fed policy rates to a 50-year average of 30 bp.

And even if you think 200 bp sounds like a lot of easing, bear in mind that would still leave Fed policy rates at twice the 20-year average and almost 60 bp above what Fed policymakers see as long-term neutral - still 'restrictive' in the parlance of the U.S. central bank.

The upshot is that the temptation to move cash holdings further out the curve may now prove irresistible and bond markets seem to see that wave coming at last. Central Bank Dam Burst May See Dash from Cash_5

Central Bank Dam Burst May See Dash from Cash_5

Source: Reuters

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FastBull Featured

Data Interpretation

On August 2, Eastern Time, the U.S. Bureau of Labor Statistics will release the non-farm payrolls for July, with market expectations set at 175,000, a decrease from the previous reading of 206,000. The unemployment rate is anticipated to remain unchanged at 4.1%. In terms of wage data, the average hourly earnings are expected to moderate to 3.7%, down from the prior reading of 3.9%, while the MoM change is expected to hold steady at 0.3%.

It is noteworthy that in June, the U.S. non-farm payrolls added 206,000 jobs, slightly exceeding market expectations of 190,000, while the unemployment rate rose to 4.1%. However, the market remains focused on the significant downward revisions of the prior two months' data, with April's non-farm job additions revised down from 165,000 to 108,000, and May's from 272,000 to 218,000, resulting in a total downward revision of 111,000 jobs.

Since the beginning of 2023, the non-farm payrolls have been frequently revised downward. The U.S. Department of Labor publishes a revised value in the month following the initial release and a final value in the subsequent month. Of the 16 months from January 2023 to April 2024, 13 months have seen final non-farm payrolls data lower than initial estimates, with only three months reflecting upward revisions. This has raised market skepticism regarding the accuracy of non-farm payrolls, leading to a notable decline in their market impact.

A key reason for this trend is the significant drop in response rates for post-pandemic employment surveys. The response rate for the Current Employment Statistics (CES) survey hit a historic low of 41.6% in June 2023, rebounding to 43.5% in March of this year, but still well below the approximately 60% response rate observed prior to the COVID-19 pandemic. The slow pace of questionnaire retrieval has necessitated adjustments to data after the initial values are reported.

Based on the non-farm payrolls data for June, the job additions were predominantly posted in the construction sector, which saw an increase of 27,000 jobs (compared to the previous value of 16,000). The education and health services sectors added 82,000 jobs (previously 81,000), and government sectors contributed 70,000 new positions (up from 25,000). Together, these three categories accounted for a total job addition of 179,000, representing 86.9% of the overall increase in non-farm payrolls for June. The manufacturing sector saw a decline, losing 8,000 jobs in June, while the services sector's job additions totaled 117,000, reflecting a significant decrease from the prior month's reading of 181,000.

The JOLTS job openings data released this past Tuesday indicates that government sector employment was a key driver of the non-farm payroll growth in June. The federal government saw a reduction of 62,000 job openings. Although this decrease can be influenced by various factors such as hiring freezes and filled positions, recruitment data shows that federal hiring rose from 35,000 last month to 41,000, with attrition rates remaining stable. Thus, it's possible that federal employment numbers have been supported. In contrast, there was a considerable increase in job openings at the state and local government levels (+118,000), particularly in state and local education positions, which reversed a downtrend with an increase of 24,000 openings, even as both recruitment and separation declined.

Overall, the employment numbers within government sectors may experience some easing, and the anticipated impact on non-farm payrolls is expected to be less pronounced than in the previous month.

In the private sector, job openings have declined in manufacturing (down by 100,000), education and healthcare services (down by 86,000), and construction (down by 71,000). The data indicates a widespread reduction in hiring across various industries, with the hiring rate in June at 3.4%, marking a four-year low. The number of hires has fallen to 5.3 million, the lowest level since the onset of the COVID-19 pandemic.

Meanwhile, the number of voluntary separations plummeted by 121,000 in June, reaching 3.282 million, the lowest level since August 2020. A higher number of voluntary separations suggests a tighter labor market, as workers are confident in leaving their current jobs in pursuit of better opportunities. Conversely, the low level of voluntary departures indicates a lack of confidence among Americans in their ability to secure alternative employment or higher-paying positions in the current market.

Currently, there is a rate of 1.2 job openings for every unemployed person, which has approximately returned to pre-pandemic levels (1.19). In the second quarter, an average of 177,000 jobs were added each month, indicating steady growth, but at a slower pace than in the first quarter. Following the pandemic, while a significant number of job opportunities have been created, the supply of workers has also increased. The labor force participation rate among individuals aged 25 to 54 has risen, coupled with an acceleration in immigration, which has contributed to narrowing the employment gap and creating a more balanced labor market.

An important data point to monitor is the unemployment rate. After rising for three consecutive months, it reached 4.1% in June, the highest level since November 2021. The initial and continuing claims for unemployment benefits released on Thursday both exceeded expectations. If the unemployment rate continues to rise in tonight's non-farm payrolls, it could signal an alarm for a potential economic recession, referred to as the "Sahm Rule."

The "Sahm Rule" indicates that if the three-month SMA of the unemployment rate exceeds the lowest point within the last twelve months by 0.5%, it shows that the U.S. has entered the early stages of an economic recession. The average unemployment rate over the past three months is 4%, while the lowest point in the past twelve months is 3.57%, resulting in a difference of 0.43%, which is getting closer to the 0.5% "threshold." Once triggered, the unemployment rate is likely to continue rising, leading to a sharp economic downturn, which could compel the Fed to implement more aggressive measures.

During a press conference on Wednesday, Powell was also asked about the "Sahm Rule." He stated, "This time (the recession signal) may not necessarily apply because the labor market remains robust, and wage growth is slowing." Although there is currently little data to suggest that a recession is imminent, and even if this is not the most likely outcome at present, the increasing possibility does not deter the market from "jumping the gun."

Aside from the unemployment rate, the changes in employment numbers also cannot be overlooked. The ADP report, released on Wednesday and often similarly referred to as the "small non-farm payrolls", indicated that private sector employment in the U.S. increased by 122,000 in July, significantly below the anticipated 150,000, marking the lowest reading in six months. The ADP report further revealed a deceleration in wage growth, with salary increases declining to their lowest pace since 2021 for both job-hoppers and existing employees.

This ADP employment data aligns with the signs of a gradual slowdown in hiring as indicated by the JOLTS job openings report. Supporting evidence includes an increase in initial and continuing unemployment claims, as well as the U.S. July ISM manufacturing PMI coming in at 46.8, which fell notably short of expectations and resulted in the largest drop in employment figures in four years. Various indicators suggest that the labor market is experiencing a slowdown.

The Fed's focus has shifted from inflation to the labor market, with recent data indicating that the risks associated with achieving employment and inflation targets are becoming balanced. As long as there are no significant changes in the economic landscape, the inflation situation in the U.S. is expected to remain largely stable. The market is keen to understand whether the labor market can provide a boost for rate cuts, making the non-farm payrolls for July critical.

If the data reveals strong employment figures and a stable low unemployment rate, it could undermine the market's expectations for a September rate cut, putting pressure on investor sentiment. Conversely, disappointing data could catalyze rate cut bets for November and December, acting as a significant positive driver for the market.

Given the unexpectedly cooling CPI in June and the various data points mentioned, it is expected that non-farm payrolls for July will show moderate growth and indicate a continued cooling of the labor market. This expectation is further supported by Powell's dovish remarks on Wednesday - "If inflation declines as expected and the labor market unexpectedly weakens, a rate cut could occur as soon as the next meeting in September." Currently, the market is pricing in a 100% chance of a rate cut in September, with investors betting on further cuts in November and December. This week's non-farm payrolls could lead to substantial changes in the likelihood of rate cuts in November and December.

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Warren Takunda

Cryptocurrency

Bitcoin fell over $1,600 in 60 minutes on Aug. 1 as a wave of volatility disrupted the market.

Data from Cointelegraph Markets Pro and TradingView showed a nightmare for long traders unfolding on Aug. 1, as BTC suddenly dropped from $64,000 to $62,800. Bitcoin Long Liquidations Hit $300M as BTC Price Falls to $62K_1

Bitcoin Long Liquidations Hit $300M as BTC Price Falls to $62K_1

BTC/USD 15-min chart. Source: TradingView

At the time of publication, the losses were still mounting after the BTC/USD pair hit lows of $62,212 at Coinbase, levels last seen two weeks ago.

Those betting on Bitcoin’s recovery lost big on Aug. 1, however, as the downturn liquidated long positions worth $310.27 million amid a 24-hour total wipeout of $337 million, according to data from Coinglass.

More than $77.07 million worth of long Bitcoin positions have been liquidated over the last 24 hours, with $26.6 million being wiped out in the last four hours alone. Bitcoin Long Liquidations Hit $300M as BTC Price Falls to $62K_2

Bitcoin Long Liquidations Hit $300M as BTC Price Falls to $62K_2

Total crypto liquidations. Source: Coinglass

The largest single liquidation occurred on the OKX crypto exchange involved an ETH-USDT swap worth $4 million.

For market analyst DW, the demise of the positions was not “extreme” despite the significant downward move. DW said that the market is back to experiencing low liquidity, cautioning high selling moving forward.

“Mt. Gox is not behind us. It is the summer, and post BTC 2024, it is back to low liquidity, so whatever selling is happening will be magnified.”

Meanwhile, independent analyst Mags had a more positive outlook for Bitcoin, saying that the price was holding above a crucial moving average support as it traded close to the upper boundary of a descending broadening wedge.

“The hash ribbons have also printed a buy signal,” the declared Mags in an X post on Aug. 1.

According to the analyst, the current BTC price action is a short-term pullback that resembles the previous instances when the ribbons turned green, followed by significant upward moves.

“The price dipped immediately after, followed by some consolidation and a nice V-shaped recovery. As long as the price is holding above $60,000, dips are for buying.”

BTC/USD chart. Source: Mags

History suggests Bitcoin is poised for a red August

Bitcoin’s correction on the first day of August is no surprise as historical data reveals that BTC price tends toward weak performance in August, after a volatile July.

Bitcoin returns in August have historically averaged 2.24%, according to data from Coinglass, which has tracked BTC’s monthly returns since 2013.

In eight out of the last 11 years, Bitcoin’s price closed in August in the negative, with a medium return of -6% historically. Bitcoin Long Liquidations Hit $300M as BTC Price Falls to $62K_4

Bitcoin Long Liquidations Hit $300M as BTC Price Falls to $62K_4

Bitcoin monthly returns. Source: Coinglass

Independent analyst Karen also highlighted this in an X post on Aug. 1, pointing to the sharp correction in the price of Bitcoin.

“On the first day of August, while gold and oil prices are rising, Bitcoin isn’t.”

Karen also noted that Bitcoin had ignored 100% Fed rate cut odds, which are apparently “not enough to push the BTC price higher.”

Source: Cointelegraph

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Economic

Stocks

US stocks decline amid tech sell-off

Wall Street experienced a sharp decline on Thursday, with technology stocks leading the downturn. The tech-heavy NASDAQ 100 Composite closed 2.3% lower, while the broader S&P 500 fell 1.4%. The Philadelphia Semiconductor index, tracking 30 stocks in the sector, suffered its worst day since 2020 with a 7.1% loss.

The cause was mostly attributed to very poor earnings from Intel, which missed expectations, suspended its dividend and also announced a broad programme of redundancies among its workforce.

While Amazon earnings beat forecasts, it missed on revenue, issued a weaker forecast for coming quarters, and also reported a rise in infrastructure investments, fuelling investor concerns that the artificial intelligence (AI) boom is pushing companies into making large spending plans that will not pay off in the longer-term.

The Asian session added to the gloomy situation. The Nikkei 225 fell over 5% thanks to a strengthening Japanese yen, while other indices in the region also fell.

Treasury yields sink to six-month low

In contrast to the stock market's performance, Treasury bonds rallied significantly. The benchmark 10-year Treasury yield dropped below 4% for the first time in six months, falling 0.12 percentage points to 3.98%. Two-year yields, which closely track interest rate expectations, decreased by 0.18 percentage points to 4.15%.

Economic data fuels investor concern

The dramatic shifts in both stocks and bonds were largely attributed to weak economic data released on Thursday. New applications for unemployment aid reached their highest level since last August, while manufacturing data showed a fourth consecutive month of contraction. These indicators suggested a slowdown in the US labour market and broader economy.

Federal Reserve signals potential rate cuts

The market movements also followed the Federal Reserve's (Fed) decision to maintain interest rates at their 23-year high. However, Fed Chair Jerome Powell hinted at the possibility of lowering borrowing costs as soon as next month. Investors are now pricing in expectations of three quarter-point rate cuts by the end of the year, with some even considering the possibility of a half-point cut.

The ISM data yesterday showed particular weakness, and if today's non-farm payrolls also come in weaker than expected it could see further selling of equities due to fear of a broader economic contraction. This could then push the Fed towards more aggressive easing in the months to come.

Geopolitical factors contribute to bond rally

Analysts noted that escalating tensions in the Middle East have further boosted demand for Treasury bonds, which are considered a safe-haven asset for investors during times of uncertainty.

An Iranian response to Israel's assassination of Hamas' leader is now expected. A number of airlines have cancelled their flights to the region, affecting airline stocks. The last Iranian attack on Israel lasted one day, but a wider attack could lead to more escalation and a bigger Israeli response.

Differing market interpretations

While bonds benefited from the weak economic news, stocks reacted negatively to the same information. Some analysts suggest that the market may be overreacting to the economic data, given the Fed's cautious stance on rate cuts.

To stay updated on all economic events of today, please check out our Economic calendar

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Economic

Carnage returns to equity markets

The mid-week bounce on Wall Street didn't last long as rate-cut optimism turned to gloom following soft economic data out of the US on Thursday. The ISM manufacturing PMI hit the lowest since November last month, with employment shrinking the most since June 2020 even as the prices paid component rose unexpectedly.

With some concerns creeping in lately about the health of the labour market, the PMI miss stoked fears that the US economy may be headed for a hard landing. Investors were already on edge from worse-than-expected weekly jobless claims released earlier in the day.

Shares on Wall Street reversed sharply lower, with the Nasdaq 100 falling the most on Thursday and global indices opening in a sea of red today.

Rate cut bets ramped up as NFP eyed

The selloff is somewhat surprising considering that the Fed gave its strongest indication yet on Wednesday that rate cuts will commence in September. But the rate cut question has quickly shifted from ‘when' to ‘by how much' as investors have upped their bets to more than three 25-bps reductions in 2024.

This raises the prospect of a 50-bps cut in December if the Fed stands pat in November due to the clash with the US presidential election. But this may all be a knee-jerk reaction and today's jobs report will be crucial in either reinforcing the slowdown fears or resetting the tone.

The US labour market likely added 175k jobs in July and the unemployment rate is expected to have stayed unchanged at 4.1%. Any figure below 150k or an uptick in the jobless rate will do little to calm the jitters.

Tech earnings fail to meet high expectations

But on Wall Street, it's not all about the Fed or the economy as traders seem to be re-evaluating their outlook on tech and AI stocks.

Apple and Amazon joined their tech peers yesterday in announcing underwhelming earnings and ambitious spending plans on artificial intelligence. Amazon additionally disappointed with a weak guidance for the current quarter, while Intel's announcement of massive layoffs sent shockwaves through the tech sector globally.

Worries about growth, the US elections, and overspending on AI, combined with elevated geopolitical risks, pushed the VIX index, also known as Wall Street's fear gauge, to the highest since April.

Yen leads flight to safety but pound tumbles

The sharp slide in Treasury yields has been of little comfort to equities this week, as much of the rally in bonds is down to safe haven flows rather than Fed rate cut expectations, and this is underscored by the US dollar's resilience.

However, the greenback has come under pressure against other safe havens such as the yen and Swiss franc, and gold has been edging up too and is fast approaching its July peak.

The yen is on track to finish top of the FX league table for the second week running as the Bank of Japan steps up its policy normalization, with more rate hikes likely later this year.

The pound, however, is the worst performing major this week following the Bank of England's decision yesterday to lower rates by 25 basis points. Although the BoE signalled that it will be ‘careful' about cutting again, this hasn't stopped sterling from brushing one-month lows against the dollar.

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