The new week - APAC brief 08 Oct
It’s likely global markets will sway to begin the week, in a bid to find some semblance of equanimity following a raucous week. The international bond rout will be the essential force underpinning price action, with other markets and asset classes to take cues from there. Anxieties regarding trade wars and global growth will probably become more present too, as Chinese traders return from holiday, adding a layer of uncertainty on-top of increasingly volatile fundamentals. The shaky sentiment will weigh heavily on riskier assets one must assume, boding poorly for equity markets and currencies such as the Australian Dollar. Risk from here appears skewed more-and-more to the downside, especially considering numerous geopolitical risks, in the form of US mid-term elections, Brexit negotiations, and a fresh reporting season, will surely throw-up new unknowns.
ASX200: That’s the general context that the ASX200 will open within this week. The last price for SPI futures indicates that the Australian share market is poised for a 28-point drop to kick-off the week. It follows a day in which the index inched higher on Friday, despite the overall mire that swamped global equities at the back end of last week. Higher global bond yields, particularly at the back end of the curve, has supported the banks, while a catch-up rally in materials stocks from slightly higher commodity prices and another oil led climb in the energy sector constituted much of the activity within the ASX200. This confluence of variables made for a day of low breadth across the sectoral map, symptomatic of an insubstantial market, pointing to an overstretched run for the index.
US Non-Farm Payrolls: The first step for local traders this morning will be to digest the impacts of Friday evening’s US Non-Farm Payrolls. The data was shaping as potentially the most significant release for the year, by way of virtue of the rout in US Treasuries last week. Upon its release, the data proved to be mixed and on-balance a trifle underwhelming in contrast to its big expectations. The unemployment rate hit a nearly 50-year low at 3.7 per cent, but the headline jobs-added figure missed forecasts considerably, printing a relatively meagre 134k versus an expectation of 185k. The centrepiece, as has been the case for some-time, was the wage growth component of the data, which came in bang-on expectations at 2.8 per cent annualized, assuaging same fears of a short-term break out in inflation.
Rates and Bonds: Reactions in markets were delayed, but throughout the US session, came to be interpreted in a bullish-hue. The prevailing sentiment evolved into this: the data does nothing to stand in the way of what a slew of US Fed speakers concertedly impressed upon markets last week: US interest rates need to head higher to manage booming economic growth. Sensibly it seems, given that the labour-market is operating at a rate not witnesses since US military employment was 4 times higher than it is today. The sell-off in US Treasuries regained its hold, as traders increased their bets on higher US interest rates, pushing the yield on 10 Year US Treasuries to a new 7 year high of 3.23 per cent.
US Shares: Wall Street equity traders demonstrated their displeasure toward the prospect of higher global rates, selling-down on Friday night (AEST) to push US stocks to a 3-week low. The NASDAQ led the dip, with investors pulling funds out of low yielding and risky growth stocks in the tech sector, ultimately pulling the comprehensive S&P500 down 0.55 per cent. The pop in global bond yields sets-up an interesting dynamic for US equity markets leading into the back end of the year, with the strength of very strong fundamentals colliding with the weight of higher discount rates, coupled with a series of global and US-centric political risks, pulling US indices in opposing directions. It establishes a fascinating earnings season in a few weeks’ time, during a period what is traditionally the most fruitful for US stock markets.
Currencies: Price action in currency markets in response to the Non-Farm Payroll release was subdued. The risk-off-value of the US Dollar diminished, leading to a pop in the other major G4 currencies. The pound experienced the strongest bid, climbing above 1.31 once more, supported by reports that a Brexit deal is realistic and imminent. Despite the generally weaker greenback, the AUD is still losing friends, registering a low over the weekend not seen from the Aussie Dollar since February 2016. The local unit awaits its date with the 0.7000 handle, as bond traders move en masse to price in higher US interest, threatening to drive the spread on the interest rate sensitive 2 Year US Treasury Note and the Australian 2 Year Commonwealth Government Bond further above 90 basis points.
China: The fascinating story to start this week is what effect the return of Chinese market participants will have on Australian and global markets. Investors probably benefited from China’s absence last week, placing trade war concerns and fears about slower Chinese growth to the side, temporarily. The off-shore Yuan depreciated to the key 6.90 resistance level without the influence of the PBOC, probably bolstering the USD across the board. The activity within Chinese markets will be made more interesting by the intervention announced by the country’s policy makers over the weekend, who have cut once more the reserve ratio required for some banks in response to softer credit and growth conditions. Watch for activity in copper prices as the barometer of how successful China’s economic boffins are at improving perceptions of Chinese growth, with the bears taking hold of that metal late last week is response to a weaker global growth outlook.
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