Fallout from the Payrolls collapse

The disastrous US Non-Farm Payrolls (NFP) release on Friday has killed off any chance of a June rate hike by the Fed.

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While the door is still ajar for a July rate hike, it has turned into a sliver from being wide open. While one data point does not a trend make, the worst NFP since 2010 was also accompanied by a large 2.6 index point decline in the US ISM Non-Manufacturing PMI heightening fears that there could be a more concerning trend developing. Certainly, should a similar NFP number be seen for June, the question no longer becomes when the next rate hike will be but more what the introduction of negative rates will mean for the US and the global financial system.

The US dollar collapsed 1.6% on the news, causing great ructions in the FX space. The Japanese yen and the Kiwi dollar both saw 2.2% increases, while the Aussie dollar and the Euro both increased 1.9%. The DXY dollar index collapsed below the lower Bollinger band (two standard deviations below the 20-day moving average), which often indicates an unusually extreme move and some investors often use this as a signal for mean reversion. The last time we saw a daily move this large was 3 December, but by 17 December half of that selloff had been retraced.

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Surprisingly, the move did not have the same effect on the equity index. By the time the market closed, the S&P 500 had trimmed its losses to -0.3%. A range of other asset classes understandably benefitted, notably emerging market assets, commodities, gold and bitcoin.

The iron ore price regained the US$50 handle off the news, and BHP’s ADR gained 3.9%. This all bodes well for the ASX today, which we are currently expecting to open relatively unchanged from Friday’s close around 5319. However, it will not be a good day for US dollar earners or stocks like QBE that people view as a US rates proxy. It especially bodes well for Whitehaven Coal (WHC), our momentum pick last Monday (+11.3% on the week), which is likely to continue its irrepressible rise for the moment despite being one of the most hated stocks in the index.

However, Japanese markets are unlikely to be seeing the same optimistic start. The massive strengthening of the yen to the 106 handle is likely to see the Nikkei to open up 1.9% lower today.

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