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- Bond markets had an impressive rally last week. German ten-year bund yields are down to -0.082% after trading as high as +0.079% on 14 September. And this renewed yield compression in bond markets provides further benefits to long duration assets, such as equities, through the lower implied discount rate.
- Emerging markets were also a major beneficiary of the renewed collapse in yields last week, as the EEM Emerging Markets ETF gained 3.1%. The bounce in the US dollar on Friday trimmed some of these gains though, as EEM was up 4.4% at the end of Thursday’s session.
- Oil has had an incredibly volatile week in the lead up to the 28 September OPEC meeting in Algeria. WTI oil had traded as high as US$46.55 last week on hopes of a deal coming together, but collapsed 3.2% on Friday as Iran and Saudi Arabia clashed over the final details of the deal. Although it seems fairly reasonable to have most OPEC members cap their production at average 1H 2016 levels and let Iran have 4 million barrels a day as their own production cap. The question is whether this happens at this meeting or the one in November.
- Tonight also treats us to the first presidential debate between Hillary Clinton and Donald Trump, which will take place at 9-10:30 PM US Eastern time (Tuesday 11:00 AM-12:30 PM AEST). Polls have noticeably tightened in Trump’s favour over the past few weeks, and there is an open question whether his strong debate performances in the Republican primaries will work against Clinton. Certainly, Trump’s new campaign manager Kellyanne Conway has done an impressive job of keeping Trump’s mouth under control over recent weeks, but that may be much harder to do in a debate format. Although a “good” performance by Trump could see a rally in safe haven assets, JGBs/yen, gold, German bunds, and that further yield compression conversely may actually assist long duration “riskier” assets such as emerging markets, high yield bonds and US equities. The Russian equities ETF RSX looks particularly compelling as Trump’s disinterest in supporting Eastern European NATO allies would be a major boon to a Russia that is already steadily seeing an economic turnaround.
- The BBDXY Bloomberg US dollar index gained 0.2% on Friday as Federal Reserve member Rosengren explained the reason behind his dissent at last week’s Fed meeting. But the standard DXY closed the session flat with little moves seen in the heavily weighted Euro and yen.
- The Aussie dollar lost 0.4% to close at US$0.7613 as USD strength and commodities weakness hit the currency on Friday. A much bigger capitulation in long positions was seen in the Kiwi, which collapsed 1% on Friday to US$0.7230.
- The poor performance in US and European equities looks likely to drive a fairly negative open in Asia. All major Asia-Pacific markets look set to open down. According to ASX SPI futures the ASX is set to open down by 24 points, with materials and energy stocks likely to be a major drag on the index.