OVERNIGHT DATA & HEADLINES
• US equity markets bounced overnight despite the ongoing uncertainties surrounding the trade negotiations between China and the US.
• In early European data German consumer confidence for September came in at 9.7, slightly above the forecast of 9.6.
• The 2-10 year Treasury yields moved deeper into inversion. Equities opened in negative territory following a mixed lead from Asia.
• A number of UK based journalists reported that new PM Johnson would seek to prorogue parliament for 5 weeks from early September which could minimise the time MP’s have to prevent a no-deal Brexit. For his part Johnson said that MPs will have “ample time” to debate Brexit before October 31, and when asked if the decision was designed to enhance the chances of a no-deal Brexit he said “No, that is completely untrue. We are bringing forward a new legislative programme on crime, hospitals, making sure we have the education funding we need”.
• The Irish Foreign Minister again said that the backstop cannot be renegotiated and is currently the only viable solution for the Irish border, adding that any alternatives must do the same job.
• Trump on the wires taking his almost daily swing at the Fed, declaring they could not “mentally” keep up with the competition. He later said he could do a quick trade deal with China and be a hero and that China was supposed to have bought US corn but did not.
• Wall St a little mixed in early trade though pushed higher over the NY morning. Remained buoyant into the close with the Dow +1.0% at 26036, S&P +0.8% at 2890, NASDAQ +0.4% at 7856.
• Fed commentary coming from Barkin who said the US economy “appears great” but international economies were weaker with a lot of uncertainty around trade. In later comments he said that he was holding back his decision on rates until the September meeting and was not yet convinced about weak inflation.
• U.S. Treasury yields held at lower levels following solid demand at a $41 billion auction of five-year government debt, part of the $113 billion fixed-rate coupon-bearing government securities for sale this week. Yields on five-year Treasuries were 1.358% (down 3.4 basis points from Tuesday) while 10-year yields were 1.45% (down 4 basis points on the day).
• Two-year U.S. government bond yields rose further above 10-year yields to a spread as low as minus 6.5 basis points. The spread was last at minus 3.7 basis points.
• Nickel prices hit their highest in a week as speculators bought on fears of shortages from major producer Indonesia, while at least half of LME inventories were under the control of one party. Nickel has shot up 50% so far this year, fuelled by concerns that Indonesia will move forward a mineral export ban due in 2022. Nickel advanced 2.5% trading to $16,090 a tonne.
• Other metals : LME copper rose 0.1% to finish at $5,690 a tonne, aluminium declined 0.8% to $1,746, zinc lost 0.8% to $2,257 & lead slid 1.6% to $2,066
• Dalian iron ore futures fell for a second straight day to their lowest in 2-1/2 months as a glut and falling prices of steel in China raised concerns over demand. Benchmark 62% iron ore for delivery to China settled at $86 a tonne on Tuesday, the lowest since March 29.
• Oil prices rose nearly 2% after a larger-than-expected decline in U.S. crude stockpiles helped ease worries about weakening oil demand caused by the trade war between Washington and Beijing. Brent crude futures settled 98 cents, or 1.7%, higher at $60.49 a barrel. West Texas Intermediate crude ended at $55.78 a barrel, rising 85 cents, or 1.6%.
• U.S. DXY rose but moves were small and range-bound. DXY rose 0.25% to 98.24 from 97.85 lows.
• Chinese yuan edged lower to 7.169 in offshore markets, not far from the record low of 7.186 it touched on Monday.
• GBP slumped as much as 1% against the EUR and the USD on British Prime Minister Boris Johnson's move to limit parliament's opportunity to derail his Brexit plans.
• GBP was last down 0.62% at $1.2211 and 0.55% lower versus EUR at 90.70 pence
• EUR was slightly weaker against the USD down 0.12% at 1.1077
• USD/JPY was buoyed by the positive risk sentiment and has reclaimed a 106 handle
• AUD drifted to a low of 0.6730 and NZD settled near 0.6335.
EVENT RISK TODAY
• Australia : Q2 CAPEX & new capital expenditure
• NZ – August business confidence
• Europe : August economic confidence & business climate indicator
• Germany : August CPI
• US – weekly jobless claims, July pending home sales, Q2 Core PCE & GDP (second reading)
AUD thoughts :
AUD came under modest selling pressure overnight dropping to a 0.6730 low where it practically remains on the open this morning.
The lack of major developments surrounding the US-China trade conflict and the subdued trading action didn't allow a decisive move in either direction following that drop, forcing it to move sideways near mid-0.67s.
Today, in Australia, we have Q2 private new capital expenditure & 2019/20 capex plans. The market expecting a 0.4% q/q increase for Q2 private capital expenditure following a 1.7% q/q fall in Q1.
The third estimate of firms’ 2019-20 capex expectations will attract even more attention and we look for a capex estimate of around $114bn. We expect a relatively strong upward revision to mining capex estimates to ~$38bn. The weakening in business conditions, however, leads us to expect a more ‘normal’ upward revision to non-mining capex expectations to ~$76bn.
A busy run of offshore data overnight will keep major currencies on the lookout for any further deterioration in underlying econoic weakness.
The slow drift lower in AUD continues poised towards the downside however demand still likely ahead of 0.6700 while offering interest is expected to dominate order books and rests ahead of 0.6790. Noting also that month-end flows are likely to dominate price action over the coming days with speculation of a USD-selling bias against most pairs.
Technical : AUD broke its 0.6745 tenkan prop on weak AUD building data however downside limited somewhat by PBOC's stabilizing CNY fix. Trade war uncertainty will remain a weight on AUD & other hi-beta currencies. Official silence on trade talks is deafening for AUD/USD longs. AUD needs good news, no silence, on trade to make a major bottom call. AUD bears looking for a close below January's 0.6715 low. August's 0.6678 low is close to 0.6649 Fibo target off 2011 top. The 21 day moving average, last at 0.6775, remains the nearby topside pivot point