Another crazed lunatic has gone on a shooting spree in the USA. Robert Bowers stormed into the Tree of Life synagogue in Pittsburgh over the weekend and opened fire on its patrons with an AR-15 semi automatic rifle and 3 handguns killing 11 people and wounding many. The killer yelled anti-sematic comments during his frenzy. Six people were also injured including four police officers. The shooter was described as being an isolated and awkward man who lived alone and struggled with basic interactions. Equity markets in the US closed down for the week with the DOW at -3.0% and the S&P and Nasdaq both around -3.9%. Amazon plunged 10% after its 3rd quarter revenue fell short of expectations and Google was left backtracking after sexual misconduct allegations. This week we have company earnings results for Coca Cola, General Motors, Apple, Starbucks, US Steel and Exon Mobil so we expect the roller coaster to continue well into this week with volatility in equities and currencies. The New Zealand Dollar could come under further pressure on a lack of local data this week if further risk aversion continues. The Bank of Japan (BoJ) releases its interest rate decision Wednesday with investors widely expecting the rate to remain unchanged while a few fine tuning policy changes are expected. US Non-Farm Payroll releases at the end of the week with 190,000 people expected to be formally added to the workforce for October. Average hourly earnings follows with expectations of a jump from 2.8% to 3.1% p/a with US unemployment also releasing around the 3.8% area up from last month’s 3.7%. The US Federal Reserve will be watching these results closely to re-affirm the continued tightening program into 2019. Read more
FX Update
Australia
The Australian Dollar continues to drift lower across the board, perilously close to long term support of 0.7040 against the US Dollar Thursday. If we see further weakness, through 0.7040, due to risk averse market sentiment we could expose key support at 0.6800 levels. Equities have affected price action over the past week or so, the 3 main indices falling over 5%. Australia was upgraded to AAA this week by Fitch as they expect Aussie GDP to be 3.3% at the end of 2018, 2.8% in 2019 and 2.7% in 2020. The government deficit is expected to drop to 0.4% of GDP by 2020. This week sees zero economic data to comment on with the overall risk off tone expected to continue. Next week’s quarterly CPI and Retail Sales will be key with Core CPI forecast to print 0.3% showing annual pace to drop back to 1.8% from 1.9% y/y.
New Zealand
With little in the way of local led economic data the New Zealand Dollar has been restricted to mainly range bound movement. Risks adverse conditions have dominated markets with equities falling again continuing last week’s bearish mood. We think the kiwi should be weaker than it is, particularly against the US Dollar and with the massive drops in stocks, but it has shown remarkable resilience considering. NZ’s Trade Balance for September released at a deficit of 1.6 Billion the largest deficit on record. Imported petroleum products such as crude oil and a heavy weighing in exports of dairy and beef at a low point in the season contributed to the high deficit number. With NZ Business confidence down of late, hinged to the new labour government all eyes will be on the ANZ Business Confidence poll result releasing early next week. With better than expected figures last month based on improving employment and residential construction hopefully this will continue. Read more
FX Update
Australia
Healthy September jobs data yesterday showed that the unemployment rate hit a seven-year low, dropping to 5% in September on the back of the continuing jobs boom in Victoria and NSW. Employment increased by only 5600 jobs in seasonally adjusted terms, but the 0.3% decrease in the number of people looking for jobs was also a factor in the overall unemployment rate falling from 5.3 % in August. The participation rate fell from 65.7% to 65.4 %, the lowest level in 11 months. This stronger than expected result, would have come as a surprise to the RBA who had forecast an unemployment rate of 5.25 % to June 2020, reinforcing the view that the next cash rate move from the RBA is likely to be up not down. The Aussie dollar firmed after these figures, rising to 0.7132 against the Greenback. In the prevailing risk-off tone the AUD has struggled to hold onto yesterday’s gains and this morning is trading down around 0.7095. Given that the Australian equity market is trading down we look for the AUD to remain under selling pressure especially if this afternoon’s Chinese GDP, retail sales and Industrial production data disappoints. Next support level is 0.7085 but look for test of 0.7000 over next week.
New Zealand
Little in the way of economic data to drive the NZ dollar in the back end of the week.
Migration data released this morning, showed that net monthly migration slowed to 4,640 in September, the lowest monthly net inflow since 2014. That translated to annual net inflow of people into the country falling to 62,700 – the lowest level since October 2015. Expectations are that migration will continue to ease back over the next few years, pulling population growth down in the process. This reinforces our forecasts for a period of soft demand growth over the coming years.
The NZ dollar has held up reasonably well over the week in the face of a firmer USD, making a high of 0.6598 on Wednesday, but has now drifted back to the 0.6530 level against the Greenback and will remain under pressure if the current risk-off sentiment prevails, another test of the 0.6500 support level looks likely next week. Read more
Global Tensions Stress Equities
Market Overview:
Twas a week dominated by Equity movement. Stocks rebounded off lows Friday with markets posting gains of over 1%. While the Friday gains were a good way to end the week we must remember that overall all US based indices are still down over 4% which marks the third biggest weekly loss this year. The DOW had the largest falls, down over 5% and still shows downward momentum. Crude Oil ended a four week surge higher but has posted a 4.5% loss much the same as the indices. Holders of long equity positions never reacted with panic selling, instead markets corrected closing the week higher. A major factor in the equity movement was the spike in US interest rates, in particularly the 10 Year treasury bond moving into lofty territory Thursday when it spiked at over 3.25% causing the sell off and damaging risk sentiment. Brexit negotiations continued over the weekend with Brexit secretary Dominic Raab travelling to Brussels to try and agree on final details of a transition deal in advance of the EU leaders meeting on Wednesday. No signs of an Irish border resolution has been agreed yet, the only major part of the deal still missing in what turned out to be a tense stalemate. Both parties the UK and EU will more than likely miss this week’s meeting in Brussels on Wednesday. Both sides seem to have given up on a resolve this week with everyone now starting to become increasingly nervous with time running out before the UK’s exit in March 2019. Crude Oil jumped in value to 72.18 amid rising tensions between the Saudi Arabia and the US over missing journalist Jamal Khashoggi after he walked into the Saudi Arabia’s consulate in Turkey to get some documentation sorted for his upcoming wedding. So far the US has stayed clear of the controversy but this may have changed after President Trump said “severe punishment” against the Kingdom if leaders are found responsible for the killing of the Washington post columnist. This week we have key market data announcements, UK and Canadian CPI and US and UK Retail Sales along with Australian Unemployment. Read more
FX Update
Australia
The Australian dollar saw a little upside momentum earlier in the week but lost support after Equity markets plummeted sending the Aussie back towards recent lows. Experts are expecting further declines in the Aussie dollar towards 0.6500 against the big dollar. With falling Aussie Housing Sentiment clearly making its mark I’m not convinced any drops will be this significant. The Mining downturn since 2011 could be coming to an end with the RBA expecting the industry to bottom out in the following quarters with the large LNG (gas) expansion projects are wrapped up. Housing market sentiment has dropped to its weakest in two years with confidence in the residential sector the lowest since 2012. The outlook for construction has deteriorated with tighter credit conditions and funding issues to blame with foreign buyers demand also dropping. No further significant local data for the rest of the week on the docket, movement will be based on risk perception.
New Zealand
Heightened risk aversion saw the kiwi trade lower from its recent splurge north this week, and while it’s made some further gains overnight, we fear downside action will resume. US Equities have fallen heavy in line with an uncomfortable feeling in markets around the rise of the 10 year US Treasury prices going to a staggering 3.261%. The DOW and S&P are both down over 4.0% along with the Nasdaq which has fallen a whopping 4.5% in the last two days. Over the following few days Stocks will be key to further currency market momentum especially with the kiwi being risk associated, we could easily see further weakness develop. The IMF (International Monetary Fund) released a report projecting the world’s economy will grow by 3.7%. This is slightly lower than the July estimated figures showing a small slow down from 3.9% – they are blaming President Trump’s trade policies as part of the reason. 2019 world growth has also been revised down with the recently announced trade tariffs placed on US imports from China. The local economic calendar is light this week with nothing on the radar to impact the kiwi. Read more
NZD Plunges to Multi Year Lows
Market Overview:
Brett Kavanaugh has been sworn in to the US Supreme Court after weeks of unsettling controversy. After the FBI’s investigation into claims of sexual assault the Senate have backed his nomination by a vote of 50 to 48. This clearly falls into the hands of President Trump ahead of important midterm elections in November. Hundreds of people protested outside Capitol Hill in Washington against his nomination. The appointment to the US Supreme Court is for life and strengthens the current conservative government’s control of the nine judge panel who have final say of law. The president tweeted – I applaud and congratulate the US Senate for confirming our great Nominee to the United States supreme court. Trump also caused a stir when he said he was 100% certain the women accusing Kavanaugh of sexual assault had named the wrong person – how in the hell would he know? Mid-term US elections will be interesting with potentially many women voters to vote “democratic” in a continued show of outrage. Since the mid 60’s women have out voted men in every election, republicans should be concerned about this. US and global equities have traded off their highs from Thursday in what promised to be another week of record setting never eventuated. Markets turned ugly with the DOW falling back 200 points to close the week 1% down. The S&P and the NASDAQ also gave back gains closing down over 1% and 3.5%. US Non-Farm Payroll printed down for September at 134k based on 185k expected but an upwardly revised August figure made up for the shortfall. US Unemployment fall to the lowest level since 1969 at 3.7%. The tightening job market is contributing to push up interest rates higher – significantly the 10 year US Treasury note rose to 3.23% and hit the highest level since 2011. Notably the 2 year yield advanced to 2.89 amid strong US data. The tipping point for investors to sell equity products and buy bonds must be fast approaching and has the impact to drop current equity prices significantly for some time. The NZ Dollar continues to trade lower, the weakest currency of the G10 over the past week. At some point we should see a correction to the upside when traders and Investors bail on short positions, for the meantime this week’s quiet local economic data is light and shouldn’t offer up any changes to recent price activity. US holiday (Columbus Day) and Japanese holiday (Health Sports Day) should make for light trading conditions through to Wednesday. Read more
US, Mexico and Canada shape new trade agreement- USMCA replacing NAFTA
US Dollar strength was the theme closing the week out on a high as markets retreated on risk sentiment. Equity markets were flat as the Italian Budget drama continues. Italy has defended its massive budget deficit with Italian equities trading down over 4% as the uneasiness over budget levels continues. The coalition government proposed a 2019 deficit of 2.4% of (GDP) Gross Domestic Product, Italy’s economic Minister Giovanni Tria defended it declaring that Rome was not a challenge to Europe after he said the debt levels will decrease over time. Economic growth over the next two years will be stemmed by investments Tria went on to say. China celebrate “National Day” all week which usually implies the markets could be a little less liquid producing increased volatility in currencies. Trump’s “good friend” Xi – (China President) may not be a good friend any more after Trump accused Xi of meddling in the US congressional elections in November. As the two countries impose fresh tariffs on each other the world’s largest economies will get together to avoid a drawn out trade war which dampen global growth. President Trump has threatened to slap tariffs on just about the total of all Chinese imports with China remaining staunch. US equity index the Nasdaq traded back into the negative after a Facebook security breach has apparently affected 50 Million accounts. The Nasdaq fall 3.4% on the news. Tesla shares have also taken a dive following on from the SEC suit against CEO Elon Musk with the price down nearly 12% Typhoon Trami is bearing down on Western parts of Japan as 100 mph winds have hit the mainland with 3.7 Million people on the evacuation plan. Tokyo is not in the path of the storm but very strong winds have been reported with trains and over 1000 flights being cancelled. US and Canadian officials have agreed on a new trade deal, Trump has called it USMCA (United States, Mexico, Canada) which replaces the old NAFTA trade deal. It sounds like Trump has won out on his hard ball negotiating tactics putting other world leaders, European Union, China and Japan on notice. The deal needs to be approved by congress before it comes into play on January 1 2020. The Canadian Dollar strengthened across the board against the G10 currencies reaching a 4 month (31 July 2018) high against the greenback. Price action in the NZD/AUD will be subdued this week with a lack of economic data on the docket and a Aussie bank holiday (labour day) Monday. Read more
FX Update
Australia
Yesterday morning’s Federal Reserve rate meeting took the Aussie outside its weekly range back into the 0.73’s against the US Dollar it but soon retraced lower easing to 0.7255 Thursday. Generally the Aussie Dollar has been choppy across the board only claiming victory over the kiwi, Japanese Yen and the Canadian Dollar in uncertain geopolitical times. US Fed’s Powell delivered a statement markets were expecting reiterating monetary policy would stay on its current path well into 2020 with further rate increases to come. The Aussie has endured a quiet week with no actual local economic data on the docket highlighting lighter volumes of currency trading. For now the Australian Dollar appears reasonably resilient with higher annual GDP and recent buoyant wage growth taking the currency off its recent low’s. Trade talks continue to weigh on overall Aussie sentiment after China pulled the pin on this week’s chats with Trump and his administration. Next week’s RBA cash rate meeting Tuesday will be the main event of the week, where the RBA is widely expected to keep the cash rate unchanged at 1.5%. We may get a surprise or two, Retail Sales releases next Friday.
New Zealand
The (RBNZ) Reserve Bank of New Zealand kept the main cash rate unchanged at 1.75% Thursday as widely expected. Comments made by Adrian Orr were not as dovish as markets were predicting with Orr confirming his view that growth will gather momentum over the coming year. He also made comment that the next rate move could be “up or down” with policy to remain expansionary for a considerable time keeping the OCR at the current level until at-least through 2019 and possibly into 2020. Ongoing global trade tensions could see global growth in trouble if the situation didn’t improve with the lower New Zealand Dollar expected to support local exports. Local spending by individuals and government is expected to assist with ongoing growth with inflationary pressures expected to rise. Read more
US Fed and RBNZ rate decisions to look forward to this week
Market Overview:
This week kicked off with Asian equities lower, as stocks in Hong Kong fell with U.S. equity futures and the Australian dollar after China withdrew from planned trade talks with U.S. officials, potentially triggering an escalation in the protracted tariff war between the world’s two-biggest economies, as additional trade tariffs came into force on Monday. The escalation in U.S.-China trade tensions will test two strong weeks of gains for Asian equities that lifted stocks off this year’s lows in part due to optimism that economies can weather the hit from trade restrictions. Investment bank JPMorgan Chase & Co commented that it was factoring into its strategy, a growing potential for a “Phase III” of the trade war next year affecting all Chinese imports, which would lead to weaker Chinese growth and hit U.S. stocks. Also of main note this week is the Fed rate decision at Wednesday’s FOMC meeting, where the Fed is expected to increase interest rates by 0.25% for the third time this year, with the market increasingly pricing in a fourth rate hike in December given the solid economic results still flowing from the US. On currency markets, look for the stronger USD trend to continue and the EUR to remain under pressured with the stronger USD and Brexit issues. The GBP continues to swing at the mercy of Brexit headlines and now the wildcard of a snap UK election (in our view unlikely) with any upside severely limited. The Australian and New Zealand dollars will very much remain driven by offshore sentiment although the RBNZ rate decision on Thursday may provide a local diversion (no rate change expected but forward projections will be closely watched). Read more
FX Update
Australia
The Australian dollar has put in a solid performance over the last few days making new highs for September at 0.7291 overnight against the US dollar, mainly on the back of stronger US equities and an increase in risk appetite. Also underpinning AUD strength were increase in base metal prices and supportive comments on Wednesday, from Chinese premier Li Keqiang, who said that the country will accelerate its process of opening up, cheering globalization moving forward. He added that the country will not devalue its currency to stimulate exports, ruling out currency manipulation as a tool to fight the US tariffs. There is potential for the AUD/USD to extend its advance to the 0.7361 level , the August high, but this would only be possible with further sustained USD weakness which in the short term looks unlikely.
New Zealand
The New Zealand Dollar pumped higher yesterday as Q2 GDP data came in substantially higher than expected at 1% against expectations of 0.5-0.8%, and last quarter’s 0.5% figure.
This was not only a much better than expected but the details were more encouraging for the economy’s growth prospects going forward. Particularly positive, was that growth was widespread over the June quarter, with only one major industry (mining) reporting a decline. The strongest performers included agriculture (up 4.1%, with milk production up and forestry rebounding from a sharp drop last quarter), electricity generation (up 3.7%), retail trade (up 1.5%), transport (up 1.8%) and recreational and other services (up 3.5%). This result is significant for the Reserve Bank’s OCR decision next Thursday. The RBNZ has said that if economic growth doesn’t accelerate in the way that it expects, it is likely to move towards OCR cuts. However, with its forecast for the Q2 data at 0.5% and this result double their expectations, any potential cuts in OCR levels look firmly off the table for now. The NZD rallied strongly after the release of the GDP data jumping 50 pips to a high of 0.6652 and remained around this elevated level for the rest of the day. With continued strength in offshore equity markets, the appetite for global risk remains strong and this has underpinned further NZD strength overnight, with the NZD/USD at 0.6691 high, the highest level since 30th August. However, we remain wary of the sustainability of continued NZD strength, given that US economic data continues to be solid and the US Fed is on track for another rate hike at next Wednesday’s meeting. Read more