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Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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FX Update: Sterling backs up on stumbling BoJo. Risk rally smacks USD, JPY
John J. Hardy
Global Head of Macro Strategy
Summary: Sterling consolidated higher on Boris Johnson losing immediate control of the Brexit process, while risk sentiment has perked up strongly around the world on the Hong Kong leadership withdrawing the controversial extradition bill and China’s softening tone.
Trading interest
- Taking profit on EURJPY shorts rather than holding for bigger move.
- Abandoning USDCAD longs on the mood shift.
- Maintaining AUDNZD longs with stops below 1.0570 for 1.0950
UK Prime Minister Boris Johnson is losing control of the Brexit process as Parliament today vote and likely approve a forceful extension of the Brexit deadline to next January if no deal is agreed ahead of the October 31 deadline. Boris Johnson has vowed to call snap elections for October 14 on this vote passing, but may not get what he wants, meaning we further extend Brexit uncertainty over the horizon (later elections and/or a second referendum) while he stumbles along with what is now a weak minority government with several Conservative MPs set adrift for sabotaging Johnson’s. Before we take the big relief rally as a sign of greater things to come, however, let’s consider whether yet another extension of Brexit will do the UK economy any favours and how this still feeds into the risk of an eventual Corbyn government in an election scenario. Our Steen Jakobsen penned an excellent piece on Brexit yesterday, calling it a “never-ending story” that will continue to drive sterling weakness.
In early European hours this morning, a generally positive tone in Asia improved further and sharply so on the news that the Hong Kong leadership will move to formally withdraw the controversial extradition bill. As well, signs of a softer tone on Hong Kong from China added support for the recover in sentiment. The last puzzle piece for improving global sentiment further would be the US and China agreeing to sit down for trade negotiations.
A weak US August ISM Manufacturing survey (49.1) yesterday suggest a manufacturing sector on the verge of a recession. This may have driven the slight yield curve steepening yesterday as the market prices in higher odds of further Fed easing, comments from known hawk (and dissenter to the latest FOMC rate cut) Rosengren yesterday notwithstanding.
Chart: AUDJPY
A classic barometer of risk like AUDJPY may offer a high beta exposure to the last sentiment shift, particularly if a consolidation in bond markets sets in and if the US and China manage to set a date for trade negotiations. Plenty of room for a consolidation here without reversing the downtrend – possibly back toward 74-75.00 if an improving mood lasts for more than a few days.
The G-10 rundown
USD – the US dollar on its back foot on the sentiment shift and possibly as the weak ISM brings hope that the Fed brings forward its easing plans.
EUR – ECB hawks apparently leaning against Draghi as we await next Thursday’s ECB meeting (where options like tiering for bank reserves could actually prove EUR supportive). The more important thing to watch for is the prospect of fiscal stimulus, also EUR supportive.
JPY – the yen at risk of consolidating weaker here if risk sentiment stages a comeback and long bonds consolidate.
GBP – relief rally may not have legs as the market may have to shift to considering what yet another Brexit extension will mean for the UK economy, not to mention the spectre of a Corbyn government.
CHF – ditto for JPY comments, a bit surprised we haven’t seen a more pronounced bounce in EURCHF already in today’s action.
AUD – a resumption of US-China trade talks could drive further AUD consolidation as heavily positioned AUD bears must be losing patience after AUDUSD has failed to sustain a move lower after pausing over the prior three weeks.
CAD – losing conviction in USDCAD upside given the sentiment shift here, assuming the latter holds, as even a Bank of Canada dovish guidance lean may fail to push CAD lower if inter-market factors are otherwise CAD-supportive.
NZD – still prefer AUDNZD upside even if some risk of a pause in the important 1.0700 resistance area.
SEK – firmer risk sentiment offers SEK some support, as does a strong August Services PMI from Sweden this morning and a firmer EUR. Even if RIksbank waxes dovish at the Riksbank meeting tomorrow, SEK could yet stage a rally if EU fiscal stimulus is in the pipeline.
NOK – firmer risk sentiment also boosting NOK here, but EURNOK reversal not picking up significance until/unless the pair works down through 9.85-80.
Upcoming Economic Calendar Highlights (all times GMT)
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