The S&P 500 started on a positive note, but fell heavily after voting Fed member and Atlanta President Dennis Lockhart said it would take a significant deterioration in economic data to make him hold off raising rates at the September meeting. This saw strong moves in the US dollar Index and the front of the Treasuries’ yield curve, while the market’s probability of a September rate cut moved up to 50%. It should be noted that Lockhart is one of the most hawkish in the Fed, but markets have taken his comments quite seriously.
Despite the rise in the USD, commodities bounced off their record lows yesterday. Brent crude moved back above the key psychological level of $50 a barrel, rising 1.4%. And the main US contract, West Texas Intermediate (WTI), moved up 1.5%. Gold also saw upwards moves, lifting 0.5%.
Coming into the Asian open, one of main things on traders’ minds is the AUD. After the shock change in Glenn Stevens’s language around the Aussie dollar, we saw it rally up into the $0.74 region overnight before sliding back. However, with the comments from Lockhart contracting the spreads between Australian and US bond yields, AUD/USD is not the place you want to trade; focus will turn to the other crosses.
With the record decline in ANZ’s New Zealand commodity index yesterday and the Global Dairy Trade auction seeing milk prices decline 9.3 percent for the tenth straight auction in a row, the NZD is looking particularly weak. With a high likelihood of RBNZ rate cuts in the second half of this year, the AUD/NZD cross still looks like it has more room to run.
Yesterday Japan saw labour cash earnings contract by the largest amount since 2009. Combined with expectations of a 2Q contraction in QOQ GDP growth, there are increasing concerns that the BOJ’s 2% inflation target is not going to be met by the middle of next year. Chatter about a further extension of the BOJ’s QQE program is increasing. And with the RBA’s statement yesterday, AUD/JPY is looking like an excellent trade at the moment.
Monday evening saw the release of more restrictions on short-selling in China’s stock markets, pushing the Shanghai Composite and CSI 300 upwards on low volumes. Yields on China’s 1-year government bonds have been ticking upwards this week as CNY 1 trillion (USD $161 billion) of new bond issuance to fund infrastructure spending through China’s policy banks comes on stream. Excess bond supply and the Chinese government’s grim determination to see markets move higher could see more money moving back into China’s stock markets in search of returns. Attention will also be paid to the Chinese Services PMI number today after Monday’s Caixin PMI number led to record lows in the commodities complex.
Ahead of the Australian open
We are currently calling the ASX down 14 to 5684.
A solid earnings report from Suncorp yesterday saw it close up 1.5%, helping drive the ASX up toward a third test of the 5700 level. Unfortunately, it could not be held, but investors are clearly seeing value in the defensive part of the market, with industrials and banks continuing to perform well.
After underperforming the MSCI world index by as much as 9% during the April-June rout, the ASX was up 4.4% in July compared to the MSCI’s 2%.
ASX outperformance has been down to several factors, none more so than the AUD and bond yields driving yield hunting (although this has been less of a driver than in the past three years).
AUD tail winds continue to drive equity investment; in the last month alone CSL added 14%, JHX 9.7%, RMD 9.5% and even QBE, which has seen plenty of issues over FY15, added 6.3%. All names have high P/Es, but the overriding factor is that all four names derive the majority of their earnings overseas.