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The flat open, indicated by SPI futures (closed -2 points at 5667) possibly could mask a number of interesting trends that need to be monitored. Firstly, we cannot go past the USD and how the greenback trades this week, given the US dollar index lost a further 1.6% last week and is trading at the lowest levels since late 2014. There is little doubt the USD has seen a strong input as to why commodities have fared so well of late, and if we can take China Producer Price Inflation (PPI) print (released on Saturday) coming in at 6.3% versus estimates of 5.7%, one can argue that the world is not ready for commodity-led inflation. If it happens, of course.
Consider that the US interest rate markets are pricing a 24% chance of a hike from the Federal Reserve by year-end and close to 20 basis points of tightening by the end of 2018. We see a market feeling that the Fed is most probably done tightening here. Also, consider that the US 2-year treasury sits at 1.26% and is testing the top of the Fed fund range of 1% to 1.25%, which again reinforces the market message that the Fed is done tightening. Keep an eye on the US 2-year treasury this week as further falls into the Fed funds range could indicate the market is starting to actually price in rate cuts, which seems far too pessimistic in my opinion. There is always a strong focus too on the longer end of the fixed income US 10-year, which closed up 2bp at 2.08% on Friday, but this could be a guiding light for the USD.
New York Fed president, Bill Dudley, gave a modestly more dovish portrayal of policy on Friday detailing that it ‘was too soon to judge exactly the timing of when the next rate hike might occur’. That debate will open up with US core CPI due on Thursday at 10:30pm AEST and another downside miss will likely push the implied probability of a hike below 20%.
As mentioned, commodities are getting strong focus, where we can see a sharp move lower on Friday, with the exception, perhaps, of gold which hit a high of $1357. US crude was sold off 3.3%, with focus that Florida is the fourth largest consumer of oil, despite having little refinery exposures. There is increasing supply of US crude, amid solid demand for Brent, with traders subsequently happy to be long Brent and short US crude, and playing the widening spread differential. Hurricane Irma has made landfall on Florida a couple of times, notably towards the cities of Naples and Fort Myers, and is heading towards Tampa as a Category 2 Hurricane.
Staying on the commodities thematic and we can also see the spot iron ore price falling 1.7% and lower for a third day, falling 5.1% in the process. In the Dalian exchange, iron ore futures fell a sizeable 3.9%, while steel and coking coal fell 2.7% and 2.5% respectively. Vale’s US-listing closed 4.6% lower and that could indicate a tough day for some of the pure-play Aussie commodity plays. BHP’s ADR closing lower by 2.2%.
By way of equity leads, we can see the S&P 500 -0.15%, with tech and energy sectors faring poorly, falling 0.9% and 1.1% respectively. Tech will garner further focus this week, with Apple holding its product launch, unveiling up to three new iPhones and a new Watch. As mentioned, SPI futures closed on a flat note and our call from the ASX 200 sits at 5672. If BHP’s ADR is a correct indication, then we are going to need to see some solid moves form the Aussie banks to offset the weakness in materials and energy or the broader ASX 200 could find sellers on open.
That said, we have seen USD/JPY push a touch higher (high of ¥108.32) on open this morning, as traders close out of JPY hedges put on in anticipation of further missile tests in North Korea. That hasn’t materialised, so the modest selling of JPY seen here could see S&P futures open around 0.2% higher this morning, in turn putting modest upside risks into the ASX 200 call. US crude futures, could potentially stabilise here, given the magnitude of the damage the market is likely pricing in, while we have the US oil rig count fall three rigs to 756.
Locally traders continue to watch the AUD/USD exchange rate, with the pair hitting a high of $0.8125 and currently sitting 70 pips lower. While the market focusses on US CPI and Aussie employment this week, there is a strong inverse correlation between AUD/USD and USD/CNY (and USD/CNH). All eyes on the CNY fixing at 11:15am AEST, with the moves from the People’s Bank of China (PboC) on Friday to cut reserve requirements (or the tariff) for institutions when buying FX forward contracts (from 20% to 0%). This has seen a strong negative reaction in the CNH (offshore yuan) and this could market the end of the USD/CNH selling. This could be a big short-term negative for AUD/USD too, despite this being another move from the PboC, whereby they are far more confident that the capital outflows are abating.