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.
Australia
Experts out there are predicting the Australian Dollar may continue to slide down to mid 60’s this year against the greenback. There have not been many weeks where it has pushed higher since the massive decline from 0.8130 early this year. Descending through 0.7000 seems a likely scenario now with tomorrow’s and the week’s only significant local data likely to not give the Aussie Dollar much upside momentum. The building industry is struggling at the moment which became evident in the Building Approvals figures published the indicator reading – 9.4%. Australia are in the tail end of a construction and infrastructure boom but this looks to be easing quicker than predicted with mining and other industries spending less on construction. Friday’s Retail Sales printed at 0.3% bang on expectations offering no upside for the currency. High commodity prices equal a higher Australian Dollar- at the moment we are not seeing this with coal and iron ore prices down based on a struggling China construction industry.
New Zealand
US Non-Farm Payroll Friday printed well short of market expectations in September but upwardly revised August numbers made up for the shortfall. US unemployment followed falling to 3.7% the lowest level since 1969. The US Treasury note improved to 3.23% its highest level in 7 years with investors selling out of equity markets, the DOW, Nasdaq and S&P all closing lower. The New Zealand Dollar reacted negatively continuing its bearish run into the depths. Global themes this week will be offshore drivers, we are expecting further trade discussions to surface again. China has pumped 109 Billion into their economy recently after the impact of US tariffs is starting to show on the economy.
United States
The US Dollar has been the strongest performer over the past 10 days against all the G10 except the GBP. Non-Farm Payroll figures released Saturday morning a little down on expectations of 185,000 jobs added coming in at 135,000 for September. An upwardly revised August NFP number netted out any negative price action. The official US unemployment figure is now 3.7% after 3.8% was widely expected raising the bar once again in the US economy. The US 10 Year Treasury Bond rose to 3.23% along with the two year Bond putting pressure back on US Equity markets. The correlation between Govt Bonds yields and Equity prices are heavily aligned. Months back investors were starting to become concerned with the equity/bond relationship which have worrying concerns for their portfolios. We think the pivot point which turns investors out of equities into Bonds was around the 3% area. We have long surpassed this level with the recent spike to 3.23%, it seems just a matter of time before we see major corrections in US equity indices, S&P, Nasdaq and the DOW. Rising inflation diminishes fixed income returns and indirectly threatens bond markets by triggering central banks to raise interest rates far more aggressively. US Holiday Monday and crucial CPI data releasing Friday the main event.
Europe
Softer German industrial production has weighed on the Euro early in the week down 0.3% from the previous month, the indicator down the last 4 occasions in the past 5 months. The Euro slumped to 1.1460 against the greenback trading down to last week’s low. The Euro demise assisted by strengthening US Treasury Yields with the Fed facing inflation risks which sees the Fed raising rates as fast as the possibly can. The standoff between Italian government and the European Union continues to spook markets with budget targets. Italian equities have plummeted since the budget deficit was announced with proposals to be handed to the EU on October 15. The Japanese Yen has rallies on the back of safe haven assets. The ECB meeting minutes later in the week the only stand out this week.
United Kingdom
The EU are in the throes of offering the UK a trade deal which will be more detailed than any of the previous agreements. The deal will contain snippets of Theresa May’s demands for trade and security, the agreement will be presented this Wednesday. Talks will continue for a while yet with expectations that a Brexit deal can be reached next month. The offer will fall short of what May wants but will be worded so that changes can be made and May is able to sell it in a positive light. The downside for Theresa May is that voting could be persuaded by a less than perfect deal just to get Brexit across the lines. The Irish border solution remains a key discussion point and could derail negotiations, a solution is expected to be released sometime this week. The British Pound looks to extend on last week’s gains post 1.3100, we would not be surprised if 1.3200 is retested if Brexit news prints well and Wednesdays monthly UK GDP is over 0.1% growth.
Japan
The Japanese Yen has started the week firmer against its rivals. A US Holiday Monday saw light trading conditions as the greenback drifted lower across all main currency pairs. Despite higher US yields the Dollar broke through 113.50 support. The Chinese Yuan has slid to its lowest level since mid August after the central bank move to help the economy was pushed aside sparking risk off markets, equity markets closed lower. The Japanese Yen posted small gains on Friday after mixed US employment data with NFP falling to 134,000 its smallest gain in over a year, well short of the estimate of 185,000. A factor in the figures was due to hurricane Florence, many people were unable to unable to make it into work because of the storm. The Bank of Japan has acknowledged that reaching its target of 2.0% will be tough with Japanese officials remaining stumped with how to deal with the elusive 2% goal. The next BoJ meeting is on the 31st May and its safe to say they will hold rates as they are.
Canada
The Canadian Dollar has underperformed in what has been a slow start to the week with US and Japanese Holidays. The recent move seems to relate to the recent pull back in Crude Oil prices. The US Dollar rose by a quarter percent over the Loonie trading at 1.2960. Canada added 63,000 jobs smashing estimates of 25,000 driven by an improvement in part time employment. The unemployment rate remains unchanged at 5.9%. The Fed have reiterated they will continue with its policy of rate hikes into 2019, this will put pressure on the Bank of Canada to follow and raise rates also. The BoC will hold its next monetary meeting on the 25th October and with solid revised US employment figures printing the odds of a hike have increased which should ultimately send the Canadian Dollar higher.
Major Announcements last week:
- RBA kept rates unchanged at 1.50%
- US ISM Manufacturing prints higher than expected at 61.6 vs 58.0
- Non Farm Payroll released lower at 134k in Sep but August figures were revised higher.
- US Employment drops to 3.7% – lowest since 1969
- Canadian unemploument unchanged at 5.9%
- US and Japanese Holiday’s Monday – slow start to the week.