Market Overview:
Good news emerged from the G20 weekend meeting, with U.S. President Trump and his Chinese counterpart Xi Jinping agreeing to hit the pause button on the introduction of new tariffs and intensify their trade talks. This saw US equity markets jump higher with the S&P 500 up over 1%, while the Aussie, New Zealand dollar and the currencies of South Africa, Turkey and Mexico all rose. Shares from Sydney to Seoul gained and the 10-year Treasury yield jumped back above 3%. The greenback traded lower against most of its large developed-market counterparts. Trump and Xi have now agreed to halt any new tariffs for 90 days as the countries continue negotiations. The U.S. had been scheduled to push ahead on Jan. 1 with increased tariffs on $200 billion worth of Chinese goods. Although far from resolved, the easing in tensions between the leaders of the world’s largest economies goes some way to assuage sentiment that’s been weighed down by concerns that the trade war is having a damaging effect on global economic growth. Also adding to a more positive tone were last week’s dovish comments from the Federal Reserve around interest rates approaching more neutral levels which helped propel a revival in risk taking. We expect this more “risk-on” approach to be the prevalent theme over the coming week for both equity and currency markets. Market focus will also be on US data released throughout the week, culminating in the Non-farm payroll data on Friday, the last for the year.
Australia
The weekend truce between China and Trump on trade tariffs has suited the Australian Dollar perfectly with the currency jumping higher off the open to 0.7400. The news indicated the US President and Xi Jinping have agreed on a 90 day period without tariffs to further discuss trade issues. Both leaders have called the meeting a success and although there will be some differences they won’t be able to agree on. This should keep equities and risk currencies like the Aussie ahead of the game for now. Australian Building Approvals disappointed with a reading of -1.5% compared to -1.4% which wasn’t a whole lot different but it’s the continuation of terrible data accumulating over the past 4 months which has pundits worried. The Sydney housing downturn is 0.1% from being the worst run since 1989 with the annual decline now at 8.1%. Today’s Current Account for October should reflect a better number than September around the -10.2B. The RBA Cash Rate is announced later today with no change from the 1.50% expected. Retail Sales and GDP print later in the week which hold significant weighting on how the economy is tracking leading into Xmas.
New Zealand
The New Zealand dollar is out of the blocks for the week on a firmer tone, as the economy continues to hold steady in spite of dairy prices continuing to drift lower. Over the past few weeks we have seen a raft of New Zealand data, some of it mixed, but the overall theme remains positive with vacancies in the labour market at an all time low and confidence levels now starting to recover from the winter doldrums. Later tonight there will be another Global Dairy auction with prices expected to be higher by around 2% as per current futures market pricing, however this market has not always been an accurate predictor of price direction in the past. The New Zealand dollar has opened firmer against the AUD this morning trading over the 0.9400 level and could push on to resistance at 0.9460 depending on this afternoons RBA announcement…no rate change is expected. The continued risk-on tone has seen the NZD hold above the 0.6900 level against the USD, currently at 0.6920 with resistance at the 0.6950 mark we expect current levels to hold for most of this week.
United States
US President Trump agreed on a truce of sorts over the weekend at the G20 summit in Argentina when he agreed to suspend the 1 January 2019 tariff shift from 10% to 25% on 200 Billion worth of Chinese products between China and the US. The 3 months grace period was offered so an agreement can be negotiated with further talks to take place, but Trump reiterated if nothing can be agreed to his satisfaction the new tariff will be implemented. In a moment of controversy, the president was supposed to stay for the group photo ending the G20 event but walked off stage off camera still miked up and said “get me out of here”. President Trump has indicated to congress he wants to formally terminate the North American Trade Agreement (NAFTA), the new agreement USMCA will come into effect after the new agreement is signed off in in the next 6 months. The US Dollar was stronger over the week compared to the Yen up 0.5% but weaker than the Aussie Dollar and the New Zealand Dollar mainly due to risk associated currencies closing the week in positive territory with US equities trading higher- the S & P, DOW and Nasdaq all up nearly 1% on Friday’s trading. Interest this week lies with several Fed speakers Tuesday through Friday and our monthly Non-Farm Payroll figures Friday.
Europe
The Euro regained some of Fridays losses Monday after it gaped higher on risk sentiment to 1.1350 after being down towards 1.1300 against the greenback. The G20 summit has ended without too much argy bargy over the weekend pushing risk associated products higher as markets breathed a sigh of relief. President Trump has agreed to halt the additional the 15% tariff on Chinese goods on 1 January 2019 for 3 months to allow additional negotiations and talks to continue with US and Chinese officials. The Italian Budget debacle is still a hot topic in Euroland. Italy’s Prime Minister Conte met with EU’s Jean Claude Juncker over the weekend with rhetoric around both parties working to come to an agreement. It’s unknown yet if the EU will need to implement heavy fines on the Italians if their budget is not altered to their satisfaction. It’s a quiet week on the European calendar this week with only Draghi speaking Wednesday along with the twice yearly OPEC meeting Friday.
United Kingdom
After nearly two years of negotiations the EU have finally given the go ahead with the divorce of the UK Sunday during a meeting in Brussels. After less than an hour of discussions the EU has given the thumbs up for Theresa May to continue. The Problem now lies with her ability to convince her parliament to support the agreement which is reportedly slim. A no deal Brexit could see the Pound diving to unknown territory, worse than the global financial crisis and the weakest level since world war two. The Bank of England (BOE) has publicly said the British Pound could deteriorate in such a crisis by more than 25% in value. It wouldn’t end there – UK Housing could fall by a third and the UK economy could weaken by 8-10%. This assumption is clearly a worse case scenario based on a “disorderly Brexit”. This is an event where the UK crashes out of the EU with no deal and nothing to show. The withdrawal deal now faces a yes or no vote in the British parliament on December 11. Over the weekend PM Theresa May ran into trouble with the government at risk of being declared in contempt as a dispute over publication of official legal advice on the divorce deal. Boris Johnson is leading calls for the full legal disclosure on the Brexit deal to be published – analysts are concerned that this could end the deal in a ball of flames. This week on the economic calendar we have UK Manufacturing data along with the (BOE) Bank of England Carney speaking.
Japan
Japan released a raft of economic data on Friday which painted a mixed picture of the current economic situation. Tokyo Core Inflation was unchanged at 1.0%, a touch below the 1.1% expectation, while the unemployment rate ticked up to 2.4% from 2.3% prior. On the positive side we saw stronger readings for Industrial Production and retail Sales, which both printed well above expectation. We saw further mixed data yesterday with Capital Spending coming in well below forecast, but Manufacturing PMI increasing a touch. I think it’s fair to say the Bank of Japan wouldn’t be overly happy with the releases, but they are nowhere near bad enough to see the bank reassess its current policy settings.
Canada
The Canadian dollar has struggled over recent weeks thanks to declining oil prices, but there may be a light at the end of the tunnel for the beleaguered currency. Oil production cuts from Alberta in Canada boosted the price of Canadian oil overnight, and there is speculation that this weekend’s OPEC meeting could see production cuts from OPEC members of around 1.1 million barrels per day. Anything that supports the price of oil, is going to be positive for the CAD at this stage. In terms of Canadian economic data, at the end of last week we saw a mixed bag of numbers with monthly GDP disappointing at -0.1%, but better than forecast outcomes for the Current Account and Raw Material Price Index. This week should prove interesting with the Bank of Canada Rate Statement out on Wednesday night, and employment data on Friday night.
Major Announcements last week:
• NZ Trade Balance prints down at 1.295B compared to 850M expected.
• US quarterly prelim GDP is down at 3.5% after 3.6% forecast.
• Fed Chair Powell throws up a dovish outlook to 2019 fed hikes
• Canadian GDP comes in weak at -0.1% from 0.1% expected
• G20 summit was highlighted by Trump and China agreeing on a temporary trade tariff truce.