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).
Australia
The Aussie heads into the new trading week trading on thin ice, with Monday kicking off with a sharp downside gap for the AUD/USD after weekend headlines reported that China has snubbed the idea of any more trade talks with the US. The Aussie Dollar has had a tough year. But whether in the aftermath of this week’s Fed meeting the message from Fed Chair Jerome Powell is deemed US dollar dovish or hawkish will help to determine if the AUD/USD can hang onto recent strength and can mount another assault on the 0.7300 level. Today will see consumer confidence data released but this is not expected to have much influence on current market levels. The AUD is back around 0.7250 against the USD and if it can hold around current levels the potential for a push to test back over the 0.7300 level on a neutral to dovish Fed statement will increase. Base metal prices are still holding, and this also lends support for further AUD consolidation. Although USD strength is still the preference in the AUD/USD, with an Australian economy that now seems to be moving along quite nicely, better than expectations at the start of the year, June Q2 GDP up 0.9% annualised at 3.4%, any suggestion of a watering down of Fed rate moves on Thursday would likely see the AUD test back at the aforementioned 0.7300 level.
New Zealand
With the PM being feted around New York this week, which should bring more positive attention to New Zealand, any “Jacinda” effect on the NZD will be overshadowed by the RBNZ statement on Thursday. After the better than expected jump in GDP data last week saw elevated NZD trading continue, although now focus is on Thursday’s RBNZ rate decision, while no change is widely expected , it is the forward projections that will be of interest. If the RBNZ is more dovish and looks through the stronger GDP data, which is by nature somewhat historical and is more focused on risks to global trade any hints of further “accommodative” measures (read rate cuts) the NZD will take a knock. We look for a more neutral stance with the usual comments in the tone of “will continue to observe ongoing economic data” which should see the NZD maintain its gradual softening trend against our main trading partner currencies. From a high last week of 0.6696 after the strong GDP release the NZD has drifted back to the 0.6640 level and we expect a 0.6620-0.6695 range ahead of the Thursday RBNZ release.
United States
US equity markets were lower overnight on continuing concerns over the outlook for global trade and US politics and with the news that Deputy Attorney General Rod Rosenstein may leave his post on Thursday. Industrial shares led the S&P 500 Index lower after China warned it won’t meet with American officials unless they stop threatening to expand tariffs. All eyes are on the Fed rate decision on Thursday and the following press conference by Fed Chair Jerome Powell. Also on Thursday US durable goods, jobless claims and GDP data will be released. An uptick in political temperature and the escalation in cross-Pacific trade tensions are testing global equities, which have posted two strong weeks of gains in part due to optimism that economies can weather any potential tariffs. Obviously, the main mover for US and global markets is the Federal Reserve’s policy meeting that will likely see interest rates increased for the third time this year, with markets increasingly pricing for another one in December. Continued hawkish talk from the Fed will underpin the USD and is likely to drive the US unit higher against all its trading partners into year end. The counterweight to this is the increasing trade war, but any gauge of flow-on from the increased tariffs is not likely to be reflected in US economic statistics until very late this year early 2019.
Europe
Overnight ECB President Draghi gave an upbeat address to the European Parliament reiterating the ECB’s forecast for solid growth and commenting that they were looking for a “relatively vigorous pick-up in underlying inflation” amongst some solid growth in the medium term. EU capacity utilization remains elevated and over 9.2 million jobs have been added across the EU over the last 5 years. Although these have not been evenly balanced across all member countries. On the risk side Draghi downplayed emerging market risks but noted that trade protectionism was rising in risk profile. Higher oil prices have contributed in a large part to an increase in inflation and despite the ECB’s expectations on increases in underlying inflation there is little evidence that its core inflation is about to embark on a broadly-based increase. German CPI is due for release later this week and given Draghi’s comments, the risk is to the upside for this report. EUR/USD levels received a boost from Draghi’s comments making a high of 1.1814, it has slipped back to the 1.1745/50 level and should tread water in a 1.1725-1.1820 range ahead of the FOMC meeting on Thursday. Any sign of an end of rate hikes from the US Fed would see a move back to test the 1.1850 level last seen mid-June. On a more hawkish Fed stance, look for move back towards the 1.1680 levels. Brexit volatility holds in the wings.
United Kingdom
Brexit confusion has been joined by political confusion for the UK as rumours abound of the Government calling a snap election in November to get a clear mandate to cut a Brexit deal. Given the last election result for Conservatives we view this scenario as extremely unlikely, akin to “turkeys voting for an early Christmas”. However more uncertainty abounds for the GBP, with the Labour party offering hints of support for a second Brexit referendum. All eyes are back on PM May’s leadership prospects heading into next week’s Conservative party conference. UK data continues to be patchy, although there are a few bright spots. However, industries are getting very nervous around a “no-deal” Brexit and several large companies, particularly in the auto sector have issued dire warnings on the consequences for jobs and profitability should a no-deal Brexit occur. UK Brexit Secretary Raab commented a couple of times through overnight, with optimistic comments aimed to cool down fears rather than offering something substantially relevant. He dismissed chances of a snap election and said that the Cabinet meeting ended after a “healthy discussion.” GBP trading continues to pretty much be focused on the Brexit swings with the GBP/USD having eased back from 1.3165 highs to the current 1.3113 mark. Trading in the GBP unit remains confused, but we see the downside favoured especially if support at 1.3090 gives way.
Japan
Japanese PM Abe is in New York to discuss trade with President Trump but no major market moving announcements are expected. With Monday being a Japanese holiday JPY trading was thin and we expect little action ahead of Thursday’s FOMC meeting. The USD/JPY although showing no clear trend, has ticked higher overnight to 114.78, but until a break of 112.85 is made and sustained a move to take out the 113.00 level is off the table. The Fed data Thursday, could provide the catalyst for such a move.
Canada
Canada’s inflation rate slowed in August after hitting a seven-year high as gasoline prices moderated, though underlying price pressures continued to inch higher, with the CPI recording an annual pace of 2.8% during the month, in line with economist expectations, in data released on Friday. Although a slowdown in headline inflation was recorded, accelerating core inflation suggests the theme of an economy running up against capacity constraints and generating inflationary pressures still holds, strengthening the case for the Bank of Canada to hike rates again next month (this would be the fifth time since mid 2017). NAFTA negotiations continue with the latest deadline for a resolution being September 30th. The USD/CAD continues to trade with a positive tone currently around 1.2946 back marginally from overnight highs around the 1.2955. Support id down at 1.2900 and if this holds and the Fed result on Thursday is dollar hawkish, look for a test of 1.3000.
Major Announcements last week:
• UK CPI 2.7% vs 2.4% expected
• NZD GDP 1.0% vs 0.8% expected
• UK Retail Sales 0.3% vs -0.2% expected
• Canadian CPI -0.1% as expected
• Canadian Retails Sales 0.9% vs 0.6% expected