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Global Tensions Stress Equities

Market Overview:

Twas a week dominated by Equity movement. Stocks rebounded off lows Friday with markets posting gains of over 1%. While the Friday gains were a good way to end the week we must remember that overall all US based indices are still down over 4% which marks the third biggest weekly loss this year. The DOW had the largest falls, down over 5% and still shows downward momentum. Crude Oil ended a four week surge higher but has posted a 4.5% loss much the same as the indices. Holders of long equity positions never reacted with panic selling, instead markets corrected closing the week higher.  A major factor in the equity movement was the spike in US interest rates, in particularly the 10 Year treasury bond moving into lofty territory Thursday when it spiked at over 3.25% causing the sell off and damaging risk sentiment. Brexit negotiations continued over the weekend with Brexit secretary Dominic Raab travelling to Brussels to try and agree on final details of a transition deal in advance of the EU leaders meeting on Wednesday. No signs of an Irish border resolution has been agreed yet, the only major part of the deal still missing in what turned out to be a tense stalemate. Both parties the UK and EU will more than likely miss this week’s meeting in Brussels on Wednesday. Both sides seem to have given up on a resolve this week with everyone now starting to become increasingly nervous with time running out before the UK’s exit in March 2019. Crude Oil jumped in value to 72.18 amid rising tensions between the Saudi Arabia and the US over missing journalist Jamal Khashoggi after he walked into the Saudi Arabia’s consulate in Turkey to get some documentation sorted for his upcoming wedding. So far the US has stayed clear of the controversy but this may have changed after President Trump said “severe punishment” against the Kingdom if leaders are found responsible for the killing of the Washington post columnist. This week we have key market data announcements, UK and Canadian CPI and US and UK Retail Sales along with Australian Unemployment.

Australia

The Australian Dollar was a top performer last week closing higher against the US Dollar at 0.7120 after rising to 0.7140 earlier in the week. The overall bearish momentum is still firmly locked in based on the recent trend patterns and global risk themes. Australian Unemployment prints Thursday, the only key indicator of note on the docket this week and will be viewed with investor interest. 5.3% is the market forecast with just over 15,000 people expected to be added to the workforce. Markets will be expecting a decent number after the huge 44,000 last month beating expectation by over 25,000. The Australian voting public is quietly warming to the August 2018 newly appointed Scott Morrison, Australia’s current liberal party Prime Minister. With Australia’s next national election in May 2019 pols still indicating the ruling Liberal-National coalition is still trailing the Labour party 46% to 54% indicating Labour’s lead could be widening out. Offshore risks and sentiment will still play a part this week.

New Zealand

The New Zealand Dollar was the strongest performing currency last week against the group of majors, only weaker than the Japanese Yen with a turnaround in risk sentiment investors snapped up the Yen. The kiwi closed the week around 0.6500 against the big dollar after starting the week at 0.6440, perilously close to a 3 year low and looking like support of 0.6350 was going to be tested. With the kiwi easing off its highs its likely to resume downward momentum this week unless quarterly CPI publishes well. News update: CPI has come in at 0.9% beating predictions of 0.7% pushing the kiwi significantly higher through 0.6590 against the USD. ASB have printed suggestions the NZ OCR cash rate could be cut with current dormant inflation. The question is when will the NZ economy pick up the slack in growth to absorb the excess capacity in the economy. The remaining week’s price action will be driven by offshore global risk sentiment.

United States

The main talking point of the week was the decline of US Equities.  The DOW and S&P were down over 4.00% and the Nasdaq over 4.5% sparked by the 10 Year Govt Bond price lifting further to 3.261% the highest level since 2011, which comes as a direct link to the US Govt raising the cash rates to tighten policy. President Trump voiced his opinion every day last week to everyone except the Fed Chair Jerome Powell how filthy he was with the Federal Reserve raising rates calling its latest decision to hike “crazy” and “out of control”. Markets are rapidly pricing in a hike for December 14th it what will be the ninth increase since 2015 in the cycle. With Equities down last week the fed will most likely not going to persuade the fed to alter from its current tightening program. Core Retail Sales is the main point of interest on the economic docket this week.

Europe

On the weekly open the Euro initially dropped to 1.1540 against the US Dollar but has since reached 1.1600, up a quarter percent.  US Retail Sales has come in at 0.1% m/m against 0.7% markets were expecting putting pressure on the big dollar. The week ended positively with the Euro after German inflation climbed 2.3% in September, its strongest gain since November 2011. Eurozone inflation has been moving higher recently closing closer to the ECB’s target of 2%. Stronger inflation has reinforced the possibility the ECB could raise rates sooner over later which would be the first time in many years. Recent minutes from the ECB’s September meeting saw debate from policymakers whether to lower their risk forecasts as they become increasingly concerned with global trade tensions could dampen the Eurozone growth. The outcome was that recent growth was enough to allow the ECB to continue with their “steady” pace of tightening policy. Sitting around the 1.16 area against the greenback we think risks lie to the downside with medium level US economic data still to release this week.

United Kingdom

The British Pound traded all over the park last week with continued Brexit concerns weighing on potential outcome and overall sentiment. Weekend negotiations continued with EU’s Dominic Raab travelling to Brussels in an attempt to piece something together. No sign of a breakthrough surfaced via media with the Irish Border the major deal breaker still unresolved. An agreement was meant to be nailed down and released this Wednesday at the EU leaders meeting but looks increasingly unlikely due to the stalemate situation between the two negotiating parties. The British Pound has gaped lower on the Monday open based on weekend headlines and could retest early October levels into the 1.29’s against the USD if this week extends more of the same recent disaster. Yearly UK CPI Wednesday and Thursdays Retail Sales are the key data releases of the week and could hold key momentum in the Pound to hold recent support levels- certainly 1.3000 vs the Dollar.

Japan

The Japanese Yen continues to make gains over every currency outperforming across the board. Japanese Yen demand has been the key as investors and markets climb into risk safe investments. US Equity movement last week with all indices losing over 4% of their value and negative shocks to the global economy are taking its toll. Bank of Japan’s governor spoke from Bali over the weekend saying the BoJ is taking longer to achieve its 2% inflation target, which is currency 1% and will continue the current yield curve control at the current level of interest. When they finally exit their massive monetary stimulus we should see a shift in the target rate. For now policy will stay as is. Japanese Trade Balance is Wednesday.

Canada

The Canadian Dollar was the weeks worst performing currency. Recent fundamental indicators have not really had much impact instead the Canadian Dollar has deferred to wider price action in particularly from the recent fallout from the collapse in US Equities. Crude Oil has also been dragging it down coming off a high of over 75.00 back down to 71.60 Tuesday. The Bank of Canada released its Business Outlook Survey indicating companies are expecting sales growth to improve with reports suggesting labour shortages are a good sign of things to come. A hike is widely expected on October 24th to 1.75% the data confirming we should get a hawkish statement with the possibility of further hikes in December or January. The Loonie is trading at 1.2980 against the greenback stronger from the weekly open of 1.3020. Canadian monthly CPI prints Friday with -.01% growth expected.

Major Announcements last week:

  • US CPI prints at 0.1% down from 0.2% expected
  • US Retail Sales prints at -0.1% down from th 0.4% expected.
  • NZ quarterly CPI releases at 0.9%, higher than 0.7%, y/y 1.9%
  • Equities go lower- the Nasdaq down 1% making markets increasingly nervous.
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