OVERNIGHT DATA & EVENTS
• The market received some respite from the ongoing trade wars between the US and China after President Trump delayed the introduction of some tariffs until December 15. The perceived de-escalation of the simmering trade tensions caused a sharp bounce in risk assets with the NASDAQ bouncing 2% and the S&P 500 gaining 1.8%. Oil bounced 3.5% and led a strong night across the commodity sector while US 2 yr yields gained 8bps.
• European equities opened in the red after a weak lead from Asia. Bonds continued to rally with precious metals also bid. Sentiment also soured by reports that protests had once again begun inside the Hong Kong airport.
• The UK unemployment rate ticked slightly higher to 3.9%. There was good news on the wage growth front with weekly earnings (excluding bonuses) growing at an annual rate of 3.9% per year which is an 11 year high. Wages were helped by increases for some NHS staff and minimum wage increases. GBP traded up to 1.2075 but couldn’t break the daily ranges.
• The German ZEW survey was weak across the board in August as the current situation fell to -13.5 (-6.3 expected) which was the lowest reading since October 2010. Expectations slumped to -44.1 compared with a forecast of -28.0 which is a low dating back to late 2011. Euro saw a brief dip but was soon pushing higher as the USD lost ground.
• US CPI for July printed at +0.3% MoM as expected and rose 1.8% YoY, coming in 0.1% higher than expected. Core measures were both better than expectations with the MoM increase at 0.3% and YoY at 2.2%, both higher than expected by 0.1%.
• Headlines soon afterwards that senior US and Chinese officials had held discussions via a conference call with further talks to talk place in the next two weeks. The US Treasury also reported that some items had been taken off the tariff list citing health, safety and national security reasons while tariffs on some other items were delayed until December 15.
• President Trump on the wires saying that the reason for delaying tariffs was to ensure there was no impact on the Christmas shopping season. He also made headlines after saying that US intelligence officials had informed him that China were moving troops to the Hong Kong border. This came after riot police had clashed with protestors at the airport in violent scenes.
• Little movement for currencies over the NY afternoon - the commodity currencies generally holding their gains while EUR & GBP remained heavy.
• The optimism remained into the Wall St close with the Dow +1.4% at 262680, S&P +1.8% at 2925, NASDAQ +2.0% at 8013.
• US 2yr treasury yields rose from 1.56% to 1.67%, the 10yr yield from 1.62% to 1.70%. Markets are pricing 26bp of easing at the 19 September Fed meeting, and a terminal rate of 1.13% (Fed funds rate currently 2.13%).
• Australian 3yr government bond yields rose from 0.64% to 0.70%, the 10yr yield from 93% to 0.99%. Markets are pricing 11bp of easing at the 3 September RBA meeting, and a terminal rate of 0.36%
• Market pricing for RBNZ is for 6bp of easing on 25 September, with a terminal rate of 0.63%.
• USD/CNH was sold heavily to trade briefly under 7.00 while USD/JPY climbed 1.4% towards 106.65
• AUD bounced off its lows and traded to a high of 0.6818 before settling just under 0.6800.
• NZD fell to 0.6422 and USD/CAD made highs above 1.3290.
• EUR dipped modestly from 1.1229 highs while GBP also dipped modestly before making new highs of 1.2097.
• USD/JPY rallied from near 105.20 to hit highs of 106.98 while the antipodeans bounced from near their lows to respective highs of 0.6818 and 0.6470.
• USD/CAD fell more than 100 points to hit 1.3185 lows
EVENT RISK TODAY
• Australia - August consumer sentiment & Q2 wage price index.
• RBA Deputy Gov speaks
• China - July retail sales, industrial production & fixed asset investment
• Germany - Q2 GDP
• UK – July CPI
• Europe - Q2 GDP & employment
AUD thoughts :
A busy day ahead with the Australian Q2 Wage Price Index. Expectations remain for a subdued result at 0.5% and some calling for a rise to 0.6% q/q and 2.3% y/y following two quarterly increases of 0.5%.
Wages growth have lagged however very slowly edging higher and there have been some signs of modestly higher wage outcomes in enterprise bargaining agreements struck this year. But the recent modest increase in labour underutilisation, softer consumer inflation expectations and weaker reported wages growth in business surveys limits risks to the upside.
The China data dump is also upon us and we expect July credit growth to pick up slightly. It is likely to be boosted by local government special bond issuance and a low base while dragged lower by bank loans. Industrial production growth could fall in July. Official Manufacturing PMI improved to 49.7 in July, but industrial activities will likely slow. It’s just the opposite of June, when the PMI was weak but activity data rebounded.
China July Retail Sales growth could fall. The quite strong retail sales growth in June was boosted by auto sales, which added 1.6ppt to overall retail sales growth, according to the NBS. But it is unsustainable, as dealers no longer offered discounts aggressively after the new smog standard in July.
For the AUD – a fresh offering interest is expected ahead of 0.6850 while demand likely remains thin although can be expected to intensify ahead of 0.6700.
AUD initially tried to go higher but found plenty of sellers above the turn things around again. AUD of course is very sensitive to the Asian economies out there, and it certainly looks as if the US/China situation isn’t getting better.
Technical outlook : AUD now approaches technical resistance posed by the 38.2% Fibonacci retracement of the currency pair’s decline from its July swing high and year-to-date low printed earlier this month. The bearish trendline extending from the lower highs marking the aggressive slide down from 0.7082 in addition to AUD’s high last week around the 0.6823 could also serve as technical resistance.
Because of this, believe we will continue to see continued selling pressure even though its favourite commodity, Gold, is taking off to the upside in general.