OVERNIGHT DATA & HEADLINES
• The twist and turns of the ongoing trade negotiations continued overnight with renewed uncertainties weighing on risk sentiment. US equities were choppy through the session although the S&P 500 was about 0.6% lower in late trade. US yields were also lower with the 10 year rate falling 0.5% while oil climbed 2.5%.
• The Q2 House Price Index rose 1.0% to beat expectations of a 0.3% gain while the FHFA House Price Index for June rose 0.2% as expected. Case Shiller House Prices rose 0.04% MoM in June and 2.13% YoY, both modestly lower than expectations. Little reaction to the mixed data.
• The second round of US data saw the Richmond Fed Manufacturing Activity Index for August rise to 1 to beat expectations of -4. August Consumer Confidence meanwhile dipped marginally to 135.1, down from 135.8 though better than expectations of 129.0.
• German GDP for Q2 was confirmed at -0.1% to match the initial reading. Equities meanwhile opened in the red with the FTSE softest amongst the majors as the UK market returned from the bank holiday weekend.
• European stocks got a boost over the morning with automakers leading the way. The push higher came after news reports that China is considering removing restrictions on auto purchases. The DAX was soon 0.5% higher with only the FTSE in negative territory amongst the majors.
• The EU commission said it is willing to work with the UK on Brexit if suitable propositions are put forward. A joint statement was issued from UK opposition parties saying that they had agreed to act together to find ways to stop a no-deal Brexit. Talk the move was the caused by social media comments that the EU would renegotiate the Withdrawal Agreement.
• Wall St was higher at the open though shed opening gains to be back near flat into the NY lunch. Wall St closed lower : Dow -0.3% at 25813, S&P -0.6% at 2866, NASDAQ -0.3% at 7836
• In Brexit news, the PM’s office said that Johnson had a “positive and substantive conversation” with Juncker but said that Johnson said there would be no deal unless the Withdrawal Agreement was reopened and the backstop abolished though he also noted there would be no hard border. Meanwhile Irish press reports suggested that alternative arrangements to the backstop suggested by the UK ths far had been “not even close to being acceptable”.
• Copper prices steadied but remained near two-year lows on worries about damage to industrial activity and demand from the prolonged U.S.-China trade war. Benchmark LME copper was untraded at the close but bid up 0.9% at $5,682 a tonne.
• Aluminium slipped 0.5% to $1,760 while lead added 1.5% to $2,100.
• Brent crude oil rose 1.4% to $59, iron-ore fell 3.0% to %82, and safe-haven gold rose 0.9% to $1541.
• Chinese steel futures slumped more than 3% on Tuesday, plunging the most in nine months, due to heightened worries about a prolonged weakness in demand for the construction and manufacturing material. Benchmark 62% iron ore for delivery to China rebounded to $87.50 a tonne, after hitting its lowest in nearly five months at $86.50 last week.
• US 2yr treasury yields ranged between 1.51% and 1.55%, while the 10yr yield fell from 1.52% to 1.47%. Markets are pricing 26bp of easing at the 19 September Fed meeting, and a terminal rate of 0.97% (Fed funds rate currently 2.13%).
• Australian 3yr government bond yields ranged between 0.68% to 0.71%, while the 10yr yield slipped from 0.94% to 0.88%. Markets are pricing 3bp of easing at the 3 September RBA meeting, and a terminal rate of 0.41% (RBA cash rate currently at 1.0%).
• The US dollar index is down 0.1% on the day
• USD/JPY traded off its high on the back of the weakening sentiment – reached 106.06 highs before settling at 105.73
• AUD struggled to gain any traction reaching 0.6772 highs before settling back towards 0.6750 levels (0.6747 lows).
• GBP and CAD were the biggest movers – GBP up towards 1.2300 with the latter trading back toward 1.3300.
• NZD fell back down towards 0.6356 from 0.6400 highs
• EUR fell towards 1.1085 lows from 1.1115 highs.
EVENT RISK TODAY
• Australia: Q2 construction work done is expected to decline 1.0% following a 1.9% decrease in Q1.
• Euro Area: Jul M3 money supply and lending data are released.
• US: Fedspeak involves Barkin to the Virginia Chamber of Commerce.
AUD thoughts :
AUD has been choppy this month, absorbing mixed signals from US interest rate expectations and US-China trade developments. The dip below 0.6700 to a 10 year low came after the USD/CNY break of 7.00 and the US’s angry reaction in labelling China an FX manipulator. AUD has plunged almost 40% from its 2011 post-GFC peak, with this month's 0.6678 trend low virtually completing the 161.8% Fibo-projected base at 0.6649 derived from 2011's 1.1081-0.9388 range.
But rates markets are likely to remain aggressively priced for further easing at both the Fed and RBA, so enough downside is probably priced in for AUD in terms of yield spreads and spec shorts are large. Meanwhile, although iron ore prices have tumbled this month, this follows Australia’s record trade surpluses and large resource company dividend payments which should lend some support to AUD in early-mid Sep, to the 0.6850/0.6900 area. (20 August).
Despite glimmers of hope, there's been nothing official from either side to reinforce the notion that the new round of tariffs set for this Sunday won't lead to the further tariff increases already announced.
Technical outlook : AUD slips back toward 0.6743 after 21-DMA at 0.6781 capped. Despite Aug dives below Jan's 0.6715 low, it's yet to close below there. 0.6678 low close to 0.6649 Fibonacci target off 2011 post-GFC top. Need some good news on trade to give major bottom call credence. RBA's DeBelle is hoping for more AUD weakness. June's low, 38.2% of July-August drop at 0.6832 is key above 21-DMA.