OVERNIGHT MARKET HEADLINES
• The USD gained and global equity markets rose on upbeat U.S. economic data while amicable messages from Chinese President Xi Jinping and U.S. President Donald Trump helped defuse tensions over the prolonged U.S.-Sino trade war.
• U.S. manufacturing output accelerated in November to its fastest pace in seven months and services activity also picked up more than expected. IHS Markit said its "flash" purchasing managers index for manufacturing rose to 52.2 in November from a final reading of 51.3 in October, while its preliminary services PMI increased to 51.6 this month from 50.6 last month. Both indexes were at their highest since April and were modestly above the median forecasts among economists polled by Reuters.
• The leaders of the U.S. and China both underscored their desire to sign an initial trade deal and defuse a 16-month tariff war that has lowered global growth, providing a welcome boost to financial markets. Chinese President Xi Jinping, in rare comments on the trade tensions with Washington, said Beijing wants to work out an interim or 'phase one' trade pact, but is not afraid to retaliate when necessary. Hours later, U.S. President Donald Trump said a trade accord with China is "potentially very close," although he insisted that any deal would have to be weighted to favour the United States after years of trade imbalances with China.
• Wall Street advanced on positive comments for the potential of a trade deal. Dow Jones up 109 points (0.39%) to 27,875, S&P 500 up 6 points (0.22%) to 3,110, Nasdaq up 13 points (0.16%) to 8,519.89.
• The USD shook off early weakness to advance – DXY index was up 0.24% at 98.26.
• EUR fell from 1.1070 towards 1.1010.
• GBP also suffered from a stronger USD, falling from 1.2920 down towards 1.2830 (opened slightly higher this morning at 1.2855).
• China's yuan eased and set for its second straight weekly loss – CNY opened at 7.0266, reaching 7.0417 but closed a little stronger at 7.0390.
• AUD was left to languish with investors frazzled by a week full of conflicting headlines – AUD was pinned at 0.6785 having lost 0.5% for the week so far.
• NZD remained volatile, dropping from 0.6420 down to 0.6400 and back up to 0.6420.
• AUDEUR jumped up higher from 0.6125 towards 0.6165.
• AUDNZD fell down to 1.0570 but managed a recovery up to 1.0595.
• U.S. Treasury yields were mixed in choppy trading, as data showing a pickup in manufacturing and services activity was counterbalanced by persistent uncertainty related to trade negotiations with China.
• U.S. short-term yields edged higher, benefiting from strong economic reports, while those on long-term debt were flat to slightly lower.
• U.S. two-year yields rose to 1.627% from 1.605%. U.S. 10-year note yields were unchanged at 1.772%. Yields on 30-year bonds were lower at 2.221%, from Thursday's 2.231%.
• After steepening on Thursday, the yield curve flattened again on Friday. The spread between the two-year and 10-year note yields narrowed to 15.3 basis points (curve has flattened in seven of the last eight sessions).
• Most euro zone government bond yields fell after data showed euro zone business growth almost ground to a halt this month while activity in the dominant services industry rose at a much weaker pace than expected.
• Germany's benchmark 10-year bond yields saw their biggest decline in over a week and were last down 3.7 bps at -0.361%, nearing almost three-week lows hit earlier this week.
• Gold prices edged lower as the USD and Treasuries strengthened. Spot gold was down 0.1% at $1,462.97 per ounce.
• China's steel rebar futures clocked a fifth straight weekly gain, buoyed by expectations of strong demand as steel inventories fell to a two-year low.
• Copper rebounded - Three-month LME copper rose 0.5% to $5,855 a tonne.
• Oil prices fell, pulling back from two-month highs as concern over U.S.-China trade talks overshadowed expectations of an extension to OPEC+ production cuts. Brent crude futures eased 58 cents to settle at $63.39 a barrel (touched a high of $64.27 early in the session). West Texas Intermediate crude fell 81 cents to settle at $57.77 a barrel, dropping from its session high of $58.74.
ECONOMIC CALENDAR TODAY
• No Australian Economic data today.
• Germany – Nov IFO business climate survey (sentiment weak. Recent easing in global tensions may help).
• U.S. – Oct Chicago Fed activity index & Nov Dallas Fed index (Regional surveys remain volatile amid uncertainties).
AUD remained under pressure for the most part over the Friday night session, trading around 0.6780 and unable to make it back up through 0.6800.
For the week ahead, local markets will look towards RBA Governor Lowe speaking on Tuesday evening in Sydney on Unconventional Monetary Policy: Some Lessons from Overseas.
Presumably the speech will be based on the BIS paper (Unconventional monetary policy tools: a cross-country analysis) led by Lowe and released in early October. The Bank has declined to provide much detail on what unconventional tools they may use under different circumstances so we would be surprised if Lowe decided to reveal his hand next week. Nevertheless, Lowe has stressed that the overseas experience suggests that a “package of measures” works best, and that effective communication is vital to increase the chances of “success”.
We also have Australian Q3 construction work on Wednesday. Construction activity fell in each of the four quarters to Q2 2019, to be down 10.5% y/y. Expectations for another decline in Q3 lead by weakness in dwelling construction. Q3 private capital expenditure is out on Thursday, and we anticipate a broadly flat result, with ongoing solid growth in plant & equipment investment offset by a decline in private non-residential construction.
Firms’ fourth estimate of capex for 2019-20 will also be released. Fourth estimates are typically revised higher, with the average upward revision being 7¼% for non-mining firms and 3½% for mining firms over time.
We expect firms’ fourth estimate to reveal expected capex of ~$121bn for 2019-20 vs. the previous estimate of $113.4bn.
In the US, Wednesday sees the release of October PCE inflation data and the Federal Reserve’s Beige Book. Consensus expectations are for a modest monthly gain of 0.1% in the core PCE deflator, in line with the average of the past three months. Such a gain would keep the year-on-year measure at 1.7%. Of note, health care services, which represents ~19% of the core deflator, showed a pick-up in the October CPI release.
The Beige Book will provide qualitative data about the performance of the US economy in recent weeks. The latest release, on 16 October, suggested the economy had been expanding at a "slight to modest pace". The upcoming release is likely to be monitored for any alteration to this growth description and any further signs of the impact that recent tariff increases and associated trade policy uncertainty are having on growth.
Thursday sees U.S. Thanksgiving holiday.
AUD opens slightly higher this morning. U.S.-China trade deal hopes.
Upside limited, upbeat US data & underlying Sino-U.S. tensions to cap. Hong Kong rights bill, Huawei controversy mar ties.
Speeches Tues by RBA Governor Lowe, Deputy Governor Debelle keenly awaited
Resistance comes in heavily at 0.6808 / 0.6813 (10 & 55 day moving averages). Next topside resistance level at 0.6845. Support 0.6769-70, 0.6750.