Head of FX Strategy
Summary: The market is clearly betting on a significant shift in outlook from the Fed. Elsewhere today, Brexit dynamics to accelerate on hyperactive parliamentary schedule.
The Nvidia sales warning and Caterpillar profit miss yesterday spooked markets anew on China’s growth trajectory, and despite a cratering business confidence survey out of Australia, AUDUSD is essentially unchanged.
Risk sentiment took a fresh hit yesterday on ugly news from Nvidia, a company associated with consumer tech and cloud computing data center tech and from Caterpillar. For perspective, Caterpillar’s profit miss was its worst in a decade and if Nvidia’s new sales outlook for Q4 is correct, it will be the worst slowdown in the company’s topline growth since 2010. The blame in both companies was squarely on developments in China.
Piling on to this story overnight, the latest Australia NAB business confidence survey showed the worst month-on-month drop in the Business Conditions portion of that survey since the teeth of the global financial crisis. The Aussie hardly reacted to this ugly development, as the market. On that front, note that while top Chinese negotiation Liu He is scheduled to visit Washington tomorrow and Thursday, the US has just charged Huawei on a number of accounts, not only on Iranian trade sanctions, but also on industrial espionage. The timing can’t be a coincidence and the situation is a pressure cooker that may not result in the deal everyone is hoping for. The end of this week could be downright explosive on all fronts if developments take a wrong turn on US-China negotiations, the Federal Open Market Committee meeting or Brexit.
On the Brexit front, today marks the beginning of the endgame into the March 29 Article 50 deadline, a process that will either take us closer to a new version of May’s original deal that can find its way through parliament or to a delay of the Article 50 deadline to give more breathing room for where the process leads next. The process is becoming so Byzantine that it has become increasingly tough to understand what is going on, but a Reuters article today gives a solid overview of today’s calendar. Basically, the House speaker John Bercow will announce at 13:00 GMT the amendments that will be voted on later in the day, and those amendments will be voted on at 19:00 GMT in serial fashion. The two most pivotal issues at stake are first, whether parliament will take control from the government on avoiding a No Deal risk as the March 29 deadline approaches and second, whether May can impress the EU with a vote sufficiently in favour of her strategy to revisit the Irish backstop portion of the existing deal that was so profoundly rejected.
Chart: AUDUSD
AUDUSD rallied sharply on Friday on the hopes that the Fed is set to signal a reassessment of its commitment to QT at tomorrow’s FOMC meeting. The AUD has also been held aloft despite various desperately bad corporate announcements clearly pointing to weakness in demand in China because offsetting that news we have the FOMC hopes and China continuing to boost its currency.
Another test for the Aussie dead ahead over tonight’s Q4 CPI release. We’re negative on the currency, but the immediate path is very unclear and the “right” outcome of US-China talks and the FOMC could engineer a further squeeze before fresh headwinds arrive to drive the Aussie back lower.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
