OVERNIGHT DATA & HEADLINES
• The market saw heavy selling in US equities and other risk-correlated assets overnight as the US 2yr and 10yr rates inverted for the first time since 2007 and sparked further fears of a slowdown. 10 year Treasury yields fell towards 1.57%
• Trump on the wires making his almost daily criticism of the Fed, calling Chair Powell clueless in the process. No reaction to the tweets.
• White House trade adviser Navarro said that Trump had made a “strong and flexible” decision on tariffs and made the claim that markets now have “total certainty” on tariffs and that they should have no material effect on growth. He also said that the biggest fight the White House has is with the Fed and that the yield curve inversion is a signal for the Fed to make further cuts.
• Little in the way of US data with no reaction seen to some higher than exported Import and Export Price Index data.
• UK CPI was flat for July (-0.1% expected) with core CPI coming in at an annual rate of 1.9% (1.8% expected).
• Early European data saw German GDP contract in Q2 by 0.1% which matched the market forecast. The decline was mainly driven by falling exports as the trade war begins to bite.
• European equity markets fell into the close to end the day with heavy losses. The FTSE was the best performer with losses of 1.4%, the CAC, DAX and IBEX all lost around 2% while the MIB closed 2.5% down on the day.
• Oil was heavy as losses extended beyond 3% with gold 1% higher on the day. Oil fell 3.5% as fears surrounding global demand mounted meanwhile, safe have flows pushed gold back toward its recent highs.
• All 3 major US equity indices fell over 3% and the volatility index rose 26%. Wall St lower into the close with the Dow -3.0% at 25479, S&P -3.1% at 2840, NASDAQ -3.1% at 7773.
• EUR fell from 1.1190 down towards 1.1131 lows
• GBP traded sideways for the most part with USD/JPY falling to 105.78.
• After opening the session around 0.6790 AUD drifted lower into the NY close falling towards 0.6736
• NZD price action dipped from 0.6456 towards 0.6421
• AUDNZD remained relatively rangebound however falling back under 1.0500 to 1.0483 lows
EVENT RISK TODAY
• Australia Labour Force report is released today characterised by below-average employment growth and a tick higher in the unemployment rate to 5.3%. Employment is expected to have risen ~10k in July following the broadly flat outcome in June (as usual we caution that these figures have very wide standard errors). Monthly employment growth of around +20k is necessary for the jobless rate to remain unchanged (assuming a constant participation rate). The unemployment rate in June printed at 5.24% and we expect it to have ticked over the rounding barrier to 5.3% in July.
• In the US, auto sales volumes declined by 2.8% MoM in July. This may weigh on US July Advance Retail Sales, which could be due for moderation after strength in recent months, which partially reflected a rebound from a soft 1Q. Underlying consumer fundamentals remain healthy with spending gains underpinned by strong fundamentals including still solid jobs growth and rising wages.
AUD thoughts :
The deteriorating risk environment overnight pushed AUD further to a low of 0.6736. Expect price action to remain heavy in this environment with initial demand likely resting ahead of 0.6700 while topside resistance should be present nearer the 0.6820 area which has managed to keep a lid on the AUD ascent on its last 4 attempts.
Markets will be watching today’s Australian key employment data very closely for further clues on the direction on the domestic Labour front and in turn the need for further interest rate cuts. AUD could be further at risk if there numbers disappoint and rekindle RBA rate cut bets.
Technical outlook : AUD likely to continue to reach down towards the bottom of the hammer that ended up forming during the previous week. Potential for an attempt to see a break through there, and perhaps reaching towards the 0.65 handle underneath. This market of course is highly levered to the US/China trade situation, so therefore we need to keep in mind that as long as things aren’t going that well, we should continue to see selling pressure. US bond markets have been on fire as of late, as the demand for treasuries continues. At this point, it should continue to attract a lot of attention for the USD, so we think it’s only a matter time before money flows towards the USD anyway. The 0.68 level was a major level, so the fact that it broke through there was of course a significant situation.