OVERNIGHT DATA AND HEADLINES
• An index of global stock markets surrendered early gains on Friday after Chinese agriculture officials who were to visit U.S. farm states next week cancelled their trip, dampening optimism on U.S.-China trade talks. Renewed worries about the state of the ongoing trade tensions between Washington and Beijing drove Treasury yields lower.
• Wall Street dropped and finished the week lower. Dow Jones fell 0.59% to end the week at 26,934 points, S&P 500 lost 0.49% to 2,991, Nasdaq fell dropped 0.8% to 8,117.
• U.S. DXY rose for its first weekly increase in three, up 0.24% at 98.51 for a weekly gain of about 0.25%.
• GBP fell after the Irish foreign minister said that London and the EU were not yet close to a Brexit deal. GBP was down 0.37% at $1.2470 after a 2 month high at $1.2582.
• EUR fell 0.2% on the day to $1.10175
• USD/JPY fell 0.37% from 108.00 to 107.65.
• CNY firmed at 7.0909 as the Chinese central bank delivered a less aggressive cut in its lending benchmark
• AUD was on track for its worst weekly showing. AUD was last at 0.6770 after hitting a 0.6757 two-week trough.
• NZD fell towards 0.6250 from 0.6285
• AUDEUR ranged between 0.6130 / 0.6160
• AUDNZD peaked up to fresh highs at 1.0840 but fell back towards 1.0800.
• U.S. Treasury yields fell after a Chinese delegation cancelled planned visits to U.S. farms, raising concerns the U.S. and China are unlikely to forge a trade deal in the near term.
• US 2yr treasury yields fell from 1.75% to 1.68%, while the 10yr yield fell from 1.79% to 1.72%. Markets are pricing 26bp of easing by year end
• Australian 3yr government bond yields fell from 0.73% to 0.70%, while the 10yr yield fell from 1.04% to 0.99%. Markets are pricing 20bp of easing at the 1 October RBA meeting
• Spot gold gained 0.6% to $1,508.63 per ounce, up about 1.5% last week. Silver firmed 0.3% to $17.83 an ounce, up about 2% for the week.
• China's iron ore futures ended a turbulent week with additional losses on Friday, dragged down by growing worries about demand prospects for the steelmaking raw material. The most-traded iron ore contract on the Dalian Commodity Exchange, for January 2020 delivery, closed down 1.9% at 635 yuan ($89.57) a tonne.
• LME aluminium slipped by 0.3% to close at $1,795 a tonne. LME lead gained 1.2% to finish at $2,120 after touching $2,125, its highest since March. LME copper added 0.2% to close at $5,798 a tonne but gave up 3% over the week for its steepest weekly decline since the week ended Aug. 2.
• Oil prices eased on renewed concern over the U.S.-China trade war, but futures still posted weekly gains, with Brent marking its biggest weekly increase since January, after an attack on Saudi Arabia's energy industry last weekend. Brent crude futures fell 12 cents to settle at $64.28 a barrel, while U.S. WTI crude futures ended 4 cents lower at $58.09 a barrel.
EVENT RISK TODAY
• No Australian Economic data today
• Eurozone: Manufacturing and services PMIs (Markit) have diverged recently, manufacturing underperforming.
• US: Manufacturing and services PMIs (Markit) sit at multi-year lows.
AUD thoughts :
AUD dropped to fresh two week lows, below the 0.6800 support as the USD regained traction amid recovering US bond yields. AUD failed to capitalise on its intraday recovery and dropped to fresh two-week lows, around the 0.6757 but managed to make a late bounce towards 0.6770.
The recent optimism over the resumption of the US-China trade talks already seems to have faded and was seen as one of the key factors weighing on the China-proxy Aussie.
The contradicting comments by two White House advisers, followed by China’s warning to the US for its intervention in the Hong Kong issue raised doubts over any breakthrough from the upcoming talks between the world’s two largest economies in early-October and weighed on commodity-linked currencies. The already weaker sentiment surrounding the major deteriorated further in the wake of reports, suggesting that the US President Donald Trump was not interested in making a "limited" trade deal with China. Hence, the key focus will be on the lower-level trade talks, which will lay the groundwork for high-level discussions in early-October.
Adding to this, a modest pickup in USD demand, supported by an intraday rebound in the US Treasury bond yields, further collaborated to the pair's weaker tone through the early North-American session, with bulls failing to gain any respite from a positive turnaround in the global equity markets. It will be interesting to see if AUD is able to attract any buying at lower levels or the ongoing slide marks the resumption of the prior/well-established bearish trend, setting the stage for a slide back towards challenging multi-year lows.
Nevertheless, AUD remains on track to post weekly losses and snap two consecutive weeks of a positive move.
Today will be important in setting the tone of this week’s economic calendar, with the release of flash Markit PMI data, ECB President Draghi’s European Parliament testimony, and a speech from FRBNY President Williams. Given the recent pronounced weakness in the Eurozone, it will likely be the focus of the flash PMI release (as well as the preceding outturns for France/Germany). We expect the data to show the same pattern of a resilient services sector holding the Eurozone economy’s head above water as the contraction in the manufacturing sector continues apace.
Governor Lowe will give a speech titled An Economic Update on Tuesday evening. We expect the tone of the speech to be dovish and to set the groundwork for further policy easing.
The October Board meeting should be considered “live” in our view. Given the title of the speech, Lowe is likely to emphasise that momentum in the economy has been softer than expected. Q2 GDP growth was weaker than the Bank had forecast in August and the unemployment rate has remained at 5¼% in recent months, up ¼ppt from the low. The Governor has been very concerned about global developments and is likely to again emphasise the inherent downside risks for the Australian economy.
Technical outlook :
AUD opens near Friday low of 0.6760 as RBA Oct rate cut bets increase. The probability of Oct 1 cut now @ 81%, "big four" AU banks all predict cut. Slowing economic growth, smaller chance of fiscal support emboldens doves. RBA governor Lowe speech on Tuesday awaited for any hints of further easing. Risk mood sours, fading optimism on US-China talks, Gulf tensions weigh. Support 0.6761, 0.6729, resistance 0.6800-10, 0.6830; sell rallies.