20th September 2019 - Buoyant risk erodes overnight losses



Good morning


OVERNIGHT DATA AND HEADLINES


• A relatively subdued session overnight with flat performances seen in all three major US equity indices while US yields were marginally lower.

• EU’s Jean-Claude Juncker was quoted saying he thinks a deal with the U.K. can be reached, while indicating the “backstop” may not be needed if there are suitable alternatives.

• A number of banks brought forward their RBA rate cut calls to October with markets now pricing in a cut next month.

• The Norges Bank bucked the trend of dovish Central Banks by raising rates by 0.25% to 1.5% while pointing to further hikes.

• The SNB also held their policy meeting with rates unchanged at -0.75% (expectations the Swiss Central Bank would follow the ECB in loosening monetary policy).

• UK retail sales (excluding fuel) fell by 0.3% in August to match the forecast. Falling internet sales were cited as a reason for the slight contraction.

• Trump said that Powell doesn’t know how to play the game well but that his job is safe. He later said on Iran: it’s possible we won’t have a peaceful solution.

• US Q2 Current Account deficit shrunk to $128.2 bio though this was a slightly worse result than expectations of a deficit of $127.4 bio.

• September Philly Fed Business Survey printed at 12.0, down from 16.8 though better than expectations of 10.5. Weekly jobless claims and continuing claims both modestly beat expectations.

• U.S. August Existing Home Sales rose 1.3%, beating forecasts of a 0.7% decline. The leading Index was flat in August, beating estimates of a 0.1% decline.

• An article in the South China Morning Post quoted Trump’s adviser on China as saying that the President was ready to escalate the trade war if a deal was not reached soon and tariffs could go to 50% or 100%. Chinese commentary released shortly afterwards noted the US should not misread Chinese good will and that China was not as anxious to make a deal as the US.

• Wall St was mixed into the close. Dow Jones fell 52.9 points (0.19%) to 27,094, S&P 500 gained 0.03 points (0.00%) to 3,006 and the Nasdaq added 5.49 points (0.07%) to 8,182.


INTEREST RATES


• U.S. Treasury yields fell - 2yr treasury yields fell from 1.77% to 1.72% & 10-year notes gained 4/32 in price to yield 1.770%, down from 1.784% on Wednesday.

• The yield curve between two-year and 10-year notes has flattened to 2 basis points, from 7 basis points before the Fed statement.

• Australian 3yr government bond yields preserved yesterday’s jobs data related decline of 7bp, holding around 0.74%, while the 10yr yield fell another 2bp to 1.03%.


CURRENCIES


• The USD fell against most major currencies – down 0.3% to 98.35.

• EUR – rose from 1.1040 towards 1.1070 however late U.S. trading saw it back to 1.1040.

• JPY - ranged between 107.80 and 108.10.

• GBP - rallied from 1.2450 towards 1.2550 in late U.S. trading (highest since mid-July) following comments from EU’s Juncker

• CNY - fell to its weakest level in a week. Onshore CNY traded down 0.2% at 7.1025. Offshore CNH was off by 0.26% at 7.1025.

• AUD - skidded to a two-week low under 0.6800 (0.6780 lows) but recovered back towards 0.6800 levels.

• AUD/NZD - rose from 1.0750 to 1.0790.

• AUD/EUR – continued its descent lower, falling from 0.6190 towards 0.6130

COMMODITIES

• Gold prices gained, helped by a weaker USD and investors looking for clarity on future U.S. interest rates. Spot gold was up 0.2% to $1,497.30 per ounce after falling to $1,484.16.

• China's Dalian iron ore futures stumbled, extending losses to a fourth session, on concerns about future demand. Prices for spot cargoes of benchmark iron ore with 62% iron content for delivery to China fell for a second straight day to $96.5 a tonne.

• Copper prices eased as the market focused on weak demand in China and a meeting in Washington between Chinese and U.S. officials aimed at resolving a prolonged trade dispute. Benchmark LME copper ended down 0.5% at $5,788 a tonne.

• Brent crude oil prices rose more than 1% on fears of longer-than-expected supply shortfalls following Saturday's attacks on a key Saudi Arabian oil processing facility and escalating tensions in the Middle East. Brent settled 80 cents higher (1.3%) at $64.40 a barrel, while U.S. WTI crude pared earlier gains and ended largely steady at $58.13 a barrel.

EVENT RISK TODAY


• No Australian Economic data / events today

• Japan – August CPI

• Europe – Sep consumer confidence

• U.S. – Fed speak from Rosengren in NY


AUD thoughts :


AUD came under pressure yesterday on the back of a perceived soft employment report. The mixed employment report was seen by many as providing a green light for the RBA to cut interest rates in October. AUD steadily drifted higher overnight despite the upbeat US economic data, focusing more on the comments from EU Juncker as risk was boosted following the Brexit commentary.

AUD bottomed out at .6780 before recovering to trade around the 0.6800 level in NY close.


News overnight from the ongoing UK/EU Brexit negotiations was well received with the EU’s Juncker saying he thought a Brexit deal could be reached - a significant change in stance by the EU.

Of course, we will need to see how these "objectives" are met but this is potentially a step in the right direction of de-dramatizing the Backstop which the GBP is clearly liking.

Trade talks between China and the US are scheduled to continue in early October and whilst there has been increased optimism of late, investors are still wary of inflammatory comments after Trump suggested he was ready to escalate the trade war if a deals is not reached soon. China rebutted by saying they aren’t anxious to make a deal but traders will keep one eye on the rolling headlines for any sign of escalation.


No major Australian data to absorb today and the same applies overnight offshore.


Technical outlook :

With the October RBA meeting now 75-80% priced for a cut, expectations are that selling pressures continue into the following sessions. AUD demand should be expected ahead of 0.6740-50 while offering interest has drifted lower ahead of 0.6825/30.

Technical levels are sending mixed signals which could leave investors indecisive. Maintains a negative stance in the short-term as the 20 SMA is heading sharply lower, well above the current level, while it´s now developing also below its 100 simple moving average. Technical indicators have recovered from oversold readings, but lost strength upward within negative levels, in line with another leg lower, to be confirmed on a break below 0.6770.

Support levels: 0.6800 0.6770 0.6735

Resistance levels: 0.6840 0.6885 0.6920.




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