Asia on US political headline watch

After having started the session on a negative note, US equities swiftly reversed and rallied to a fresh all-time high with a deal looking like it is close to being done.

  1. US leaders close to a deal
  2. Equities rally to October highs
  3. AUD in focus on minutes
  4. Local market facing a stronger open

As US trade rolled on, markets got quite excited that negotiations in the Senate were actually seeing strong progress and it seems likely that we will see a short-term solution announced soon. Reports are that we will see the government re-opened until January 15, while the debt ceiling will be extended until either February 7 or 15 (depending on what media reports you read). The can will be kicked into the New Year, and from here we will probably have the pain of watching new negotiations begin. It is also worth pointing out that once we get a deal in the Senate, it will subsequently have to be passed through the Republican controlled House (although it should still pass).

Equities rally to October highs

Equities responded in an overwhelmingly positive manner, with the S&P rallying to an intraday high of 1,711 and closed at an all-time high of 1,710. The US dollar also managed to regain ground against some of the majors, with a particularly big move in USD/JPY. The pair had gapped lower at the beginning of yesterday’s Asian trade as talks looked like they had collapsed. However, this has swiftly changed as the safe-haven trade evaporates and US dollar flows pick up.

The greenback had been looking increasingly cheap against the majors for a while and I always sensed at some point a reversal would come about. USD/JPY traded as high as 98.69 – its highest level since September. Japan returns to trade today after a break yesterday and this lead will be very positive for equities there. We are currently calling the Nikkei up 0.8% to 14,525.

AUD in focus on minutes

The other interesting move in the FX space was in AUD/USD which rallied to a high of 0.9507. This saw the pair trade just shy of September 19 highs which were printed following the Fed’s decision not to taper. We have been talking about a new trading range for the pair between 0.93-0.95 and it really seems the top end of this range will be tested over the next 24 hours, particularly if a US deal is announced.

Locally we have the RBA minutes from the last meeting due out at 11:30 AEDT along with new motor vehicle sales. From a currency perspective, the minutes will carry significant weight as the market is looking for more clarity on the RBA’s removal of the high AUD concern language from the statement. Should this change in language be confirmed by the minutes, and subsequently Glen Stevens’ speech on Friday, then we could see renewed strength for the AUD.

Local market facing a stronger open

Ahead of the open we are calling the local market up 0.9% at 5,257. The risk-on trade will be on headline watch all session long as US political leaders try to knock up a deal. We expect to see a strong start from the resource names; with BHP’s ADR pointing to a 1.7% rise to 35.64. Iron ore climbed 0.4% and gold also enjoyed some gains along with base metals.

While China’s trade balance numbers were disappointing, the pickup in imports is a good lead into the next month as it implies a pickup in productivity. We will also be eyeing China’s GDP figures at the end of this week very closely. Rio Tinto is set to release its 3Q output at 15:00 AEDT with analysts expecting iron ore production up 1.3%. We expect to see the defensive names underperforming unless US political leaders fail to deliver.

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