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There has been a high degree of trepidation amongst traders yesterday and overnight, as inflaming trade-war concerns take the wind out of what has been a strong reporting season for Wall Street. It was the tech-stocks that were really behind the rescue procedure, led by Apple’s remarkable milestone of becoming the first trillion-dollar company in history, with the Nasdaq reclaiming most of the ground it gave-up this week. The strong lead establishes an interesting dynamic for the Asian session today, which will no-doubt have trade-conflict at front of mind.
ASX200: SPI Futures are currently up 21 points this morning, indicating a higher open for the ASX200 following a day in which Australian shares shed 0.56 per cent. The ASX 200 closed yesterday’s trade bang on the familiar support level of 6240, abandoning a three-day long battle to hold onto the ~6280 mark. The index did show a remarkable amount of determination throughout the session, holding tenuously flat for most of the day. However, the initial selling in the materials space followed by a region wide flight out of equities proved too much in the end, forcing the Australian market to accept a week long low.
Asia: Asian shares were belted yesterday, displaying the most severe symptoms of financial market’s recurring trade war anxiety. Chinese and Hong Kong equities tumbled more than 2 per cent, erasing practically all the gains made since the PBOC’s stimulus announcement over a fortnight ago. The Nikkei wasn’t spared from the wreckage, weighed down by the general sell-down in industrial stocks, coupled with a stronger Yen, which rallied off the back of higher Japanese bond yields and a general safe-haven play. As it stands, Asian markets look poised to participate in the globe’s mini-recovery in stocks this morning; however, one must think that any sign of trade-war aggression from either the US or China will quickly reignite selling in Asian shares.
BOE: Turning to economic fundamentals, the major event overnight was the last of the week’s three central bank meetings: the meeting of the Bank of England. The BOE lived up to expectations, hiking interest rates by 25 bps to 0.75%, to take the cash rate to its highest level since the Global Financial Crisis. Given that the move from the BOE had been clearly flagged leading into the event, the uncertainty for traders surrounded what might be the bank’s position on future rate hikes. On balance, despite talking up the strength of the economy, BOE Governor Mark Carney expressed his belief that interest rates wouldn’t be moving up too quickly, particularly in the face of the numerous risks relating ongoing Brexit drama. The GBP/USD fell after the news, dropping nearly 1 per cent, and opening a serious test of key psychological support at 1.30.
US NFP: The data calendar remains full today, with the week’s biggest pure data event coming tonight in the form of US Non-Farm Payrolls. The figures are forecast to show an economy running piping hot, and a labour market that continues to tighten. Unemployment is forecast to have dropped back below 4 per cent last month, courtesy of another 191k jobs added to the economy. Once more, the point of real interest from the data will be wage growth figures, which are tipped to reveal a solid 0.3 per cent pick-up last month. Interest rate markets have so far avoided pricing in more than the 2 hikes flagged by the US federal Reserve before the end of 2018. Markets must at some point begin to adjust pricing to account for likely hikes from the Fed in 2019: a markedly stronger Non-Farm Payrolls figure tonight could be the impetus to cause that.
US Bonds and the Greenback: The asset to watch tonight on the back of the news be will US Government Bonds, the yields on which have rallied in recent weeks amid higher long-term growth and inflation expectations, as well as the expectation of bigger long term fiscal deficits in the US. A sustained push in the yield of US 10 Year Treasuries above 3 per cent could weigh on equity markets and support another drive higher in the value of the USD. Considering its relevance and sensitivity to trade war fears, the AUD/USD could be one to watch tonight: the local unit has traded sideways for the better part of a month, despite fundamentals pointing to a trend lower. If Non-Farm Pay Rolls are significantly stronger than forecast, keep wary of the strength of support levels at 0.7330 followed by 0.7310.
Retail Sales: Australia will also see the release of significant domestic data during the local session, with Retail Sales figures schedules to drop at 11.30AM. There are more and more warning signals from economic data that the state of the Australian consumer is rapidly deteriorating – bogged down by a slack employment market, high levels of debt, and the recent falls in property prices. It is a set of circumstances that will weigh heavily on the economy if it continues and will almost certainly keep the RBA to sidelines into the near future. This morning’s figures are expected to reveal a 0.3 per cent increase in Retail Sales in the month of June: look for volatility in consumer stocks and the Australian Dollar if the data surprises to the upside or downside.