There has been a heavy tone in US fixed income across the curve, with the US ten-year treasury yield falling four basis points to 2.25% and traders eyeing the 21 July low of 2.22%. A break here takes the benchmark bond into the June lows of 2.10% and we start talking about a 1-handle again! Interestingly enough, despite oil falling we haven’t seen any real reaction in inflation expectations and therefore ‘real’ yields have dropped and added further to the recent decline in inflation-adjusted yields and this of course is creating ever more accommodative financial conditions in the US. It is also a headwind for the USD, although the USD is closing the session on a modestly higher footing.
Perhaps fixed income traders have cast an eye on reports doing the rounds and starting in an article in France24 quoting, ‘a Republican Senator said Tuesday that US President Donald Trump has told him he would go to war to destroy North Korea rather than allow it to develop a long-range nuclear-armed missile.’ We then heard from US Republican Senator (Carolina) Lindsey Graham, who detailed on NBC TV, ‘there is a military option: to destroy North Korea's program and North Korea itself... They've kicked the can down the road for 20 years. There will be a war with North Korea over the missile program if they continue to try to hit America with an ICBM.’
Not great reading and the various polls I have seen on Twitter overnight (with decent participation) show US public opinion is favouring pre-emptive action.
US data needs to convince those short USD’s this week to close and take profits. The ball has started, with the June ISM manufacturing growing at a slightly slower pace from May, with the index printing an in-line with expectations print of 56.3. Let’s put perceptive on this though, the May print was exceptionally strong and historically a read of 56.3 in manufacturing has been associated with a GDP read of 4.1%, not 2.6%. There has been good expansion in the new orders and new exports orders sub-component of the survey, highlighting external demand is still strong. What is also interesting is we saw core PCE (the Federal Reserve’s preferred inflation read) tick up 10 basis points to 1.5% (1.4% expected) and there was little fanfare here. Presumably, this was offset by personal income data that was unchanged in June, with the market expecting +0.4%.
US equities have closed modestly firmer, with the S&P 500 gaining 0.2% and the Dow honing in on 22,000. Volumes in both markets have been modestly above the 30-day average, although somewhat lighter volumes have been seen in the Nasdaq, although this has changed after-hours with Apple clearly pleasing the market with some cracking Q3 numbers, while its Q4 revenue outlook of $49 to $52 billion compared favourably to the streets consensus forecast stood at $49.12 billion. It’s incredible to think they have $261.5 billion of cash on the balance sheet, which is just a staggering number. Either way, the stock is flying in the afterhours and trading at an all-time high and NASDAQ futures are pushing up nicely given Apple’s weighting here.
Unfortunately for those who bought into the Asian markets, including the ASX 200, we haven’t seen much of a move in S&P 500 futures and this is where we find the stronger correlation than NASDAQ futures. SPI futures were open for 30 minutes, while the Apples’ results out and perhaps the best guide for the ASX 200 open is to look at the change in SPI futures from 4:10pm AEST ( the official close of the ASX 200) to 7:00am AEST (when SPI futures closed). Here, we see this completely unchanged and this includes much of the good-will towards Apple, thus we see a flat open in Australia.
The call also includes the API (American Petroleum Institute) crude inventory report, which showed a 1.8milliom increase in US crude stocks and a huge 4.8 million barrel draw in gasoline. We haven’t seen much of a move in US crude since they reported the numbers at 6:42am AEST, as there isn’t a really clear read through to tonight’s (12:30am AEST) official Department of Energy inventory report, in which analyst expect a 3.4 million draw in crude stocks. We have also seen a 1.7% drop in iron ore futures, so after a 19.4% rally in FMG in the prior six sessions we may see some selling on open here.
RIO will get good attention from clients, as they 1H 17 earnings at 4:30pm AEST, with the market expecting underlying NPAT at $4.125 billion, on sales of $20.15 billion. Given iron ore is expected to account form close to 80% of its bottom line they could find sellers on open too, but investors are not necessarily going to close out before earnings and good numbers could see the stocks gravitate towards $70 by the end of the week.
Keep an eye on June Aussie building approvals (11:30am AEST) and while they may not be a huge mover of the AUD the trend is quite concerning and the market expects the annualised pace of -11%, after -19% in May.