OVERNIGHT DATA AND HEADLINES
• Signs that a deal to end the trade war between the U.S. and China might not come until after the November 2020 elections weighed on global equity markets as investors sought out the safety of bonds.
• Markets were in retreat again as a game of pressure seems to have taken root in the US-China dialogue, causing the all-too-familiar jitters. Pressure on China to come to terms was apparent yesterday, when Commerce Sec’y Wilbur Ross said that December 15 is a “logical deadline”, but if nothing happens by then, the President would go forward with the scheduled tariff increase. Then, this morning, Trump tweeted that he “has no deadline on [a] China deal, and it might be better to wait until after the November 2020 election”. Trump’s adversarial negotiation tactics are meant to work through manipulation, of course, but if China has already read Trump’s “book”, then pursuing pressure tactics is highly risky. December 15 are likely be postponed, anxiety will stay elevated as we approach this deadline.
• Going after Argentina & Brazil on steel and aluminium, Trump may just be seeking to pressure them into limiting their co-operation with China on trade. In Trump’s vision, China may then be forced to see no choice but to increase its farm imports from the US again – in a ‘phase 1’ deal - and Trump would gain favour with critical farm interests in the battleground states of Minnesota, Wisconsin, Ohio, and Iowa, Michigan, and Pennsylvania – also the key soy-growing states. For their part, Argentina and Brazil are working on a joint response to the steel tariffs. A channel of communication has been opened with Wilbur Ross, who may be their best shot at tempering Trump’s tactical impulses.
• Wall Street fell more than 1% and the benchmark S&P 500 hit a near one-month low - Dow Jones -1.19% at 27,453, S&P 500 -0.88% at 3,086, Nasdaq -1.24% at 8,461.96.
• The U.S. DXY index slipped 0.12% overall to 97.73.
• USDJPY strengthened from 109.20 down towards 108.50.
• EUR remained in an elevated range trading between 1.1070 / 1.1090.
• GBP rose from 1.2940, breaking through 1.3000 to a 1.3010 high.
• AUD held onto hefty gains after the RBA’s comments from yesterday – AUD climbed 0.37% to hit a 0.6862 high.
• NZD retraced after hitting 0.6533 highs back towards 0.6515.
• AUDEUR managed to find new highs at 0.6192 but fell back towards 0.6170.
• AUDNZD traded 1.0518 highs however fell back towards 1.0500 in late NY close.
• The 10-year U.S. Treasury yield fell 12.7 basis points, on track for its biggest daily drop since May 2018, reflecting tough trade talk by Trump and his Commerce Secretary Wilbur Ross.
• The benchmark 10-year had fallen as low as 1.693%, 14.3 basis points off their close on Dec. 2 and the biggest daily fall since May 2018. The yield stood at 1.71% into NY close.
• The two-year yield was down 8.2 basis points to 1.54%. The two-year had its largest daily decline since Oct. 31.
• European bond yields turned lower, reversing all the previous day's gains. 10-year German government debt slipped 7 bps to -0.347% after rising to -0.26% in early European trading, highest in 3 weeks.
• Gold jumped more than 1% on fading optimism surrounding a U.S.-China trade deal. Spot gold gained 1.0% to $1,476.80 per ounce after touching $1,481.80, its highest since Nov. 7.
• China's iron ore futures rose after Vale SA lowered its production outlook for the steelmaking raw material. Iron ore exports by Brazil, China's main source of high-grade material, reached 27.25 million tonnes in November, down from 33.35 million tonnes in October. Benchmark 62% iron ore's spot price dropped to $88.50 a tonne from $89.00.
• Lead prices hit five-month lows as funds and traders bet on weaker prices because of rising production of the auto battery metal in China and the potential for market surplus. LME lead ended 0.3% down at $1,900 a tonne. Aluminium fell 1.3% to $1,767, Copper was down 1.2% at $5,815.
• Oil steadied as expectations of output cuts from OPEC and allied producers brought prices back up after they slid briefly following comments from Trump. Brent crude futures fell 10 cents to settle at $60.82 a barrel. U.S. WTI crude futures rose 14 cents to settle at $56.10 a barrel.
EVENT RISK TODAY
• Australian Economic data today : Q3 GDP (last 0.5%, market expect 0.5%) & Q3 GDP, %yr (last 1.4%, Market 1.6%)
• NZ Global Dairy Trade auction 1.7% (Futures prices flat since last auction)
• China - Nov Caixin China PMI services 51.1 (Weak employment prospects impacting services)
• Europe - Nov Markit services PMI final 51.5 (Starting to soften, gap closing with manufacturing)
• UK - Nov Markit services PMI final 48.6 (Weaker Nov brings Composite into contraction)
• US - Nov ADP employment change (last 125k, market expect 140k). Trend moderation in employment apparent.
• Nov ISM non–manufacturing (last 54.7, market expect 54.5). Employment indexes to be watched closely for payrolls lead.
• Fedspeak - Quarles on regulation to Congress.
• Canada - Bank of Canada policy decision (last 1.75%, market expect 1.75%). Global headwinds, but inflation close to target and u/e low.
AUD held onto hefty gains overnight after yesterday’s soft U.S. economic news and the move from the RBA to put rates on hold for the next couple of months.
The RBA stuck with its optimistic outlook for the Australian economy, arguing that low rates were boosting asset prices and incomes and would eventually feed through to more spending.
That led the market to pare back chances of a cut in February to around 48%, from 60%, though a move by May was still considered a done deal.
Many of the domestic banks are now jumping on the two rate cuts next year with quantitative easing expected to begin in the second half of 2020 (Westpac, CBA).
The next hurdle will be data released today on Australian GDP which is expected to show another middling rise of 0.5% in the third quarter. That would nudge annual growth up to 1.7%, from a decade low of 1.4%, which while still subpar, could be taken as a tentative sign of a turnaround.
For the AUD, a very tentative watch following the gains from yesterday & overnight. Trade concerns repel further upside for now especially on the Dec 15 deadline approach.
Upside AUD progress can be made on technical outlook shift, AU-US yield spreads tightening sharply and potential for GDP y/y to improve from 1.4% towards 1.7% today.
AUD longs take a stand despite trade concerns. Sharply tighter AU-US yield spreads help to limit AUD downside.
RSIs rise, AUD now above 21-DMA & daily cloud, techs favour longs.
Immediate target focused on the 0.6876 Fibonacci resistance – if broken eyes 0.6900 and 0.6918 (200 day moving average).