Head of FX Strategy
Summary: Uncertainties across the board confront a very complacent markets, whether it is the US-Trade deal, the political path forward for Europe and the ECB, or Brexit, and markets potentially have a long way to come down from the recent high in complacency.
The Friday close rather spooked me as it was already glaringly clear Friday that the US and China were much farther from coming to terms on a trade deal than the market seemed to believe all last week. And yet we sailed into the close with an extremely modest correction in the major equity markets and almost no correction in US treasuries, perhaps one of the more stunning non-reactions in recent memory. And yet, with the Asian session, it appears a bit more reality has settled in, with the US-China trade deal as uncertain as ever, the Hong Kong situation crescendoing once again, and Spanish elections reopening the populist-centrist fault lines as the Vox party jumps 50% from the recent election to grab 15% of the vote.
In short, the world makes a little more sense this morning as equity futures, treasuries and the yen all point to a reversal in last week’s extreme complacency, a development we have been covering extensively in our recent Market Call podcasts. Looking ahead to the rest of the week, we will have the ongoing grind of headline risks on the fate of the US-China trade deal, but a fairly interesting economic calendar as well this week, especially for the UK and Australia. Today’s calendar highlights area at the bottom of this post. Also this week we have:
Tuesday – The latest UK earnings and employment data and the latest German ZEW survey, helping to understand if the Germany economy is beginning to stabilize.
Wednesday – New Zealand RBNZ – looking for another cut. Australia’s latest Consumer Confidence survey, interesting because it has suffered a long and ugly slide. Traditionally, confidence most coincides with the labour market, see Thursday! Also Sweden, the UK and the US all reporting CPI ahead of a US Fed Chair Powell before a congressional committee.
Thursday – Australia’s jobs report and AUD looking very vulnerable if US-China trade deal news sours further and this proves a negative report. Germany to report Q3 GDP and prove or disprove that it has avoided a technical recession.
Friday – US Retail Sales offers evidence on Fed’s hoped for resilient US consumer, and the Bank of Canada’s Poloz out speaking in the US with Q&A afterward, could let slip with thoughts that influence market’s perception of policy outlook.
Note that today is a banking holiday in the US while the equity exchanges are open, so we won’t be fully back down to business in global markets this week until tomorrow.
Chart: AUDJPY
AUDUSD and perhaps with higher beta, AUDJPY, are interesting to watch this week over the possible US-China trade deal headlines, but also the flurry of important data out of Australia, especially the confidence and employment data tonight and Wednesday. For the JPY, it is all about safe haven sovereign bonds and whether yields have topped out here now that we have reached pivotal levels like the 2.00% area in the US 10-year benchmark. If risk appetite sours further here and treasury yields drop, we could be in for a significant reversal in AUDJPY after a very sell organized, three-wave correction sequence.
The G-10 rundown
USD – the US dollar comes into this week after firming all last week – interesting that the strengthening move unfolds with or without risk sentiment supporting but pattern of strength could shift more notably against EM if the latter is in for consolidation (and USDJPY could actually fall as the USD strengthens elsewhere.
JPY – the JPY has managed to turn the corner just as US treasuries have picked up a stronger bid after oddly failing to register more of a reaction already on Friday to US-China trade deal news. JPY could be set to rally across the board if long save haven yields have topped out here. Watching AUDJPY and EURJPY.
EUR – The fact that Germany may have skirted a recession in the third quarter is getting plenty of attention, but is hardly a sign of great things to come. As long as the policy mix from the EU remains uncertain, the Euro will have a hard time finding sustained support. For now, a failure of 1.1000 in EURUSD suggests a full test of the lows.
GBP – UK today expected to report its slowest rate of GDP for the cycle (+1.1% year-on-year) and the market beginning to warm to the idea that the Bank of England may need to take a precautionary rate cut – but sideways EURGBP action suggests market is unwilling to draw conclusions for now.
CHF – EURCHF to come under pressure again if we lurch into risk off – but CHF appears relative inert.
AUD – AUD at the centre of the US-China trade deal headline risk, but plenty of data to distract this week as well – for now, momentum is rolling over and looks set to push lower still if 0.6800 or so can’t survive on a daily close.
CAD – USDCAD is up through 1.3200 after the very weak jobs numbers on Friday, though after the prior couple of months very large payrolls gains, it will take more evidence of a weakening Canadian economy (as well as the usual risk off and weak oil prices) to secure a larger CAD sell-off that take USDCAD out of its seeming perma-range between 1.30 and 1.35.
NZD – important RBNZ meeting as we await more guidance on how the RBNZ sees policy shaping up as the zero bound approaches. The market looking for a 25-bp chop this Wednesday, but could Orr and company pull another 50-bp surprise?
SEK – EURSEK was taken to the brink of a pivot lower ahead of 10.60 last week but has bounced again – keeping the pair in neutral until further notice and doubly underlining that 10.60 level.
NOK – slightly lower than expected core CPI release this morning and soft oil prices and soft risk sentiment have EURNOK pulling farther away from the key 10.00-05 pivot zone lower.
Today’s Economic Calendar Highlights (all times GMT)
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
