OVERNIGHT MARKET AND HEADLINES
• Oil prices and stocks across major markets fell as tensions rose between China and the U.S. ahead of high-level trade talks, while the GBP sank on reports that Brexit negotiations were close to breaking down.
• U.S. producer prices unexpectedly fell in September, leading to the smallest annual increase in nearly three years, likely giving the Federal Reserve further room to cut interest rates for the third time this year in October. The producer price index for final demand dropped 0.3% last month, weighed down by decreases in the costs of goods and services. That was the largest decline since January and followed a 0.1% gain in August. In the 12 months through September the PPI increased 1.4%, the smallest gain since November 2016, after rising 1.8% in August. Excluding the volatile food, energy and trade services components, producer prices were unchanged last month after jumping 0.4% in August.
• A Downing Street source said German Chancellor Angela Merkel and British Prime Minister Boris Johnson had spoken and that she had made clear a deal was "overwhelmingly unlikely". The source said that if the call represented a new position, it meant a deal was impossible "not just now but ever". Hypermind, a company that allows punters to "bet" on the outcomes of geopolitical events using play-money, sees the chances of a no-deal Brexit before the end of the year at 18.9%. While Johnson has repeatedly vowed to take Britain out of the EU on Oct. 31 even without a divorce deal in place, GBP implied volatility gauges maturing around the Oct. 31 deadline were little affected by the pound's moves.
• U.S. stocks fell as hopes of progress in high-level trade talks were dashed by a report Washington was moving ahead with efforts to limit capital flows to China and the inclusion of some top Chinese start-ups to a blacklist. Dow Jones down 229.90 points (0.87%) at 26,248.12, S&P 500 down 31.94 points (1.09%) at 2,906.85, Nasdaq fell 88.97 points (1.12%) at 7,867.33.
• The U.S. DXY capitalised on a better perception of risk taking overnight – DXY was up 0.07% at 99.036.
• CNY weakened overnight upon the Chinese market reopening after a week-long holiday. Opened at 7.1328, fell to 7.1260 but then shot up overnight towards 7.1422.
• GBP dipped below 1.2200 support as British sources saw Brexit talks collapsing this week, blaming Ireland for refusing to talk. GBP fell from 1.2300 down to 1.2197.
• EUR took another beating, falling from 1.1000 towards three-day lows at 1.0940
• AUD saw some strength yesterday towards 0.6757 however fell back towards 0.6720 on broader USD strength and offshore developments.
• NZD fell from 0.6325 down towards 0.6295
• AUDNZD recovered in smalls, up from 1.0665 towards 1.0690
• AUDEUR was generally quiet, supported above 0.6125 finding a brief 0.6150 high.
• U.S. Treasury yields fell as expectations of a Fed Reserve rate cut in October rose following big declines in producer price index data and an intensification of trade tensions with China.
• The U.S. Treasury yield curve steepened, driven by a falling two-year yield after Federal Reserve Chair Jerome Powell flagged openness to further rate cuts and said the Fed would expand its balance sheet to ensure money markets function smoothly.
• Expectations of a 25 basis point interest-rate cut by the Fed at its meeting later this month rose to 83.9% from 74.8% a day prior.
• The two-year yield was last down 4.1 basis points to 1.424%. The fall in the two-year yield drove the yield curve steeper, last at 10.8 basis points
• The benchmark 10-year yield was last 3.1 basis points lower to 1.522%, falling near the psychologically significant 1.5% level, which has not been breached since early September.
• Gold prices gained, bouncing off a one-week low touched earlier in the session, as uncertainties over U.S.-China trade talks and Brexit drove a decline in stock markets and prompted investors to seek refuge. Spot gold was up 0.4% at $1,499.67 per ounce after rising as much as 1% to $1,508.31 earlier in the session.
• Shanghai steel futures fell to their lowest in two weeks, reflecting worries about demand prospects and excessive supply in China, while iron ore rose on the first trading day after its week-long National Day break. On the Singapore Exchange, the front-month November iron ore contract was up 0.6% at $89.12 a tonne in afternoon trade.
• Shipments to China from Australia's Port Hedland terminal, the world's biggest iron ore port, dropped more than 5% to 36.05 million tonnes in September from a month earlier.
• Copper prices slipped as investors worried that U.S.-Chinese trade talks would make little progress, but the metal remained vulnerable to a squeeze higher in the event of positive news due to an increase in bearish positions. Three-month LME copper fell 0.8% to $5,675.50 a tonne, trimming gains of 1.4% in the previous session.
• Oil prices slid about 1% as Washington's blacklisting of more Chinese companies dampened hopes for a trade deal between the two countries, although unrest in Iraq and Ecuador lent some support to crude prices. Brent was down 45 cents (0.8%) at $57.90 a barrel and WTI was down 49 cents (0.9%) at $52.26.
EVENT RISK TODAY
• Australian Economic data today : October Consumer sentiment (headline returned back below 100 in September).
• China : September M2 money supply & new loans.
• U.K. : August GDP (stabilising after Q2’s 0.2% contraction)
• U.S. : August JOLTS job openings, August wholesale inventories
• U.S. : Fed chair Powell speaks (at Fed listens event Kansas City alongside George)
• U.S. : FOMC minutes (further detail on spread of opinions and key risks)
AUD thoughts :
AUD fell overnight towards 0.6720 lows after news offshore saw broader strength in the USD with most currencies falling as a result.
A combination of ‘no-deal Brexit fears’ & ‘US-Sino trade tensions’ grew which soured risk trades, global bond yields & equity markets.
The Chinese below estimate Caixin services PMI number from yesterday added to the global growth fears.
Today we have Australian consumer sentiment data (expecting a weaker result) however much of the hype will be directed overnight towards Fed speakers Evans & Powell (key risk of dovish rhetoric due to recent data) and the breakdown from the FOMC minutes. Should Fed rhetoric suggest a more aggressive rate cut path is coming AUD is likely to test resistances near 0.6810 and 0.6870.
Leading into the remainder of the week markets will focus on the U.S. September CPI release (Thursday) particularly after the weaker than expected PPI data overnight. The drop in the PPI does lend some downside risk to the CPI forecast. Economists are expecting a weak U.S. CPI reading in September. According to a Reuters survey of economists, the CPI likely rose 0.1% in September after a similar gain in August.
Technical outlook :
AUD longs are dented but have not folded - Risk sours on US-Sino trade tensions, Brexit & China non-manufacturing PMI.
U.S.-Sino trade tensions are heating up again as talks between to two economic superpowers are set to begin. Investors' are increasingly concerned that talks will not result in progress and additional tariffs will be applied to Chinese imports. Risk-off sentiment is driving investors out of riskier bets and into safe haven assets.
AUD slides near 0.6710/20 support but bears are cautious. RSIs turn down & 10-DMA (0.6736) gets pierced, techs lean a bit bearish.
Large net-short AUD positions & Fed speakers could be a lifeline for longs. AUD needs a dovish Fed to counter trade, slower growth risks.