OVERNIGHT DATA & HEADLINES
• Little major news to drive global markets, leaving US equities near unchanged, interest rates drifted higher. The GBP outperformed after chances of a no-deal Brexit receded further.
• UK July GDP and production data beat expectations. GDP rose 0.3% m/m vs the median forecast of 0.1%, with services particularly strong, and industrial production rose 0.1% m/m (vs median -0.3% m/m). However, over the three months to July, GDP was 0.0% while production was -0.5%, better reflecting the headwinds of Brexit uncertainty and slowing global growth.
• The UK bill that stops a no-deal Brexit on 31 Oct became law. The law forces the Prime Minister to ask for a three-month Brexit delay if he hasn’t achieved a deal by 19 Oct. PM Johnson may call for a snap election, but he needs the votes of 2/3 of MPs and last week he was well short of this.
• U.S. stocks ended flat overnight as increased expectations of stimulus from central banks around the world were offset by losses in technology and healthcare shares. Dow Jones rose 38 points (0.14%) to 26,835.51, S&P 500 lost 0.28 points (0.01%) to 2,978.43 and the Nasdaq dropped 15 points (0.19%) to 8,087.44.
• The US dollar index is down 0.1% on the day.
• EUR rose after a report that Germany may boost fiscal stimulus – EUR gained to $1.1067, up 0.22% on the day from 1.1014 lows.
• Outperformer GBP rose from 1.2234 to 1.2385, as the chances of a no-deal Brexit fell.
• USD/JPY rose from 106.90 to 107.20.
• AUD extended recent gains, from 0.6850 to 0.6876.
• NZD ranged sideways between 0.6415 and 0.6445.
• AUDNZD eked a slightly higher range of 1.0660-1.0695.
• AUDEUR reached a 0.6228 high but fell back towards 0.6205
• U.S. Treasury yields rose to three-week highs, in line with gains in the European bond market, as risk appetite improved. US 2yr treasury yields rose from 1.54% to 1.59%. U.S. 10-year Treasury note yields rose to 1.63% from 1.55% late on Friday. Markets are pricing 25bp of easing at the 19 September Fed meeting, and a terminal rate of 0.92%.
• Germany's bond yields rose to one-month highs after a report that the country is considering the creation of a "shadow budget" that would allow Berlin to boost public investment above and beyond limits set by its strict national debt rules. Germany's 10-year Bund yield rose to a one-month high at -0.565% while longer-dated 30-year bond yields were 10 basis points higher at -.02%.
• Australian 3yr government bond yields rose from 0.82% to 0.87%, the 10yr yield from 01.05% to 1.08%. Markets are pricing 11bp of easing at the October RBA meeting, and a terminal rate of 0.50% (RBA cash rate currently at 1.0%).
• Gold fell to an over two-week low, briefly breaking below key $1,500 support on renewed risk appetite. Spot gold fell 0.2% to $1,503.56 but touched $1,497.30, lowest since Aug. 23.
• Benchmark iron ore prices erased early losses, tracking a rally in steel futures, driven by China's move to boost liquidity to shore up its slowing economy and hopes for more stimulus. The most-traded iron ore on the Dalian Commodity Exchange ended up 1.8% at 655.50 yuan ($91.90) a tonne, after slumping as much as 3.6% earlier in the session.
• Copper prices slipped as expectations of weak demand in China were reinforced by data showing a surprise fall in its exports, but losses were limited by the likelihood of policy stimulus to shore up growth. Benchmark LME copper ended down 0.3% to $5,815 a tonne.
• Oil prices rose about 2% after the new Saudi energy minister, Prince Abdulaziz bin Salman, confirmed expectations that he would stick with his country's policy of limiting crude output to support prices. Brent crude futures gained $1.05 (1.7%) to settle at $62.59 a barrel while U.S. WTI crude futures rose $1.33 (2.4%) to settle at $57.85 a barrel.
EVENT RISK TODAY
• Australian Economic data today : Aug NAB business survey (looking for any signs of a policy stimulus boost). Also released will be the Q3 AusChamber-Westpac survey.
• NZ: Electronic retail spending is expected to have risen 0.5% in August, leaving a modest picture of household spending. REINZ housing data may be released.
• China: Aug CPI and PPI data are released.
• UK: Jul ILO unemployment rate is expected to hold at 3.9%.
• US: Aug NFIB small business optimism is anticipated to edge down from 104.7 to 103.5 – a still elevated level. Jul JOLTS data will provide detail on the labour market.
AUD continued its recent run higher overnight reaching 1st major resistance level at 0.6875. It also seems as though AUD has made a bottom on a technical basis but it has been fuelled by the notion that Chinese authorities can somehow pull their economy out of a bottomless hole by pushing on a rope and that US/Sino trade talks will miraculously save the day next month.
Indeed, the markets are buying the optimism, for now, and it stands to reason that the AUD is the best performing G10 currency on a 7-day view followed by the NZD & GBP.
However, the drop in the value of the AUD this year is likely to be insufficient to put much of a dent in the debate about the need for further policy stimulus in Australia in the months ahead.
Currently the RBA is mandated to target CPI inflation between 2% and 3%. The implication is that the RBA is likely to be under pressure to ease monetary conditions further. Given that the rates may soon be approaching a floor, the debate about whether QE could be used in Australia is likely to remain alive despite Lowe’s conclusion that “we risk just pushing up assets prices”. Expectations remain lower for AUD to edge towards the 0.6500 area on a 12-month view.
Today in the market we have tier 2 Australian data releases however all eyes will be on the August China inflation (CPI & PPI). For now, consumer inflations seems under control however upstream price pressures are weak despite tariffs & CNY.
Technical outlook :
AUD pierces 0.6875 in overnight trade, very little pullback from the highs has been seen. USD/CNH drop towards 7.1120 & AUD/JPY lifts above 73.65 helping to boost AUD. AUD close to clearing key techs and extending the recent rally. Limited corrections in the recent rally suggests that bulls have the upper hand for now. However, equity falls and the lack of commodity gains help limit run higher for now. The break of 55 Day moving average, 50 Fib & daily cloud will bolster already bullish techs.