Market Briefing: Oil slick
The October edition of our Event Radar & Views In A Nutshell pack is here.
Mixed markets. Equities rose with the S&P500 powering to another record high. USD a bit firmer at the start of the week. AUD a touch softer.
Oil drop. Brent crude prices shed ~4% with a dip this morning generated by reports Israel isn't looking to target Iran's oil & nuclear facilities.
Upcoming events. Later this week AU jobs report due. US retail sales are out, as is China GDP. ECB meets. CPI from CA, UK, & NZ scheduled.
Recent underlying trends continued at the start of the new week. Equities powered ahead with the US S&P500 (+0.8%) extending its record-breaking run during light public holiday trade. Earnings updates are set to be a key driver of near-term US equity market performance. The S&P500 is now over 34% higher compared to a year ago with ‘soft landing’ expectations and outperformance by megacap stocks underpinning sentiment. Elsewhere, the US bond market was closed while in Europe yields generally nudged up ~1-3bps. More broadly market reaction to China’s fiscal policy update over the weekend which contained few specifics was mixed and well contained. Equities in China rose on the prospect of more support flowing down the track (CSI300 +1.9%), yet copper (-2%) and iron ore (-0.3%) lost a bit of ground.
Oil has also fallen with brent crude shedding ~4% (now ~US$75.60/brl) from where it closed last week. News from the Middle East triggered a dip this morning with reports indicating Israel has informed the US it is looking to strike military targets in Iran but doesn’t plan on striking oil or nuclear facilities. In FX, the USD has ticked higher with EUR (now ~$1.0907) slipping back and USD/JPY (now ~149.73) a touch stronger. NZD (now ~$0.6095) is treading water, while AUD (now ~$0.6725) is a little lower than where it was trading this time yesterday.
Looking ahead, on top of the gyrations in China’s asset markets and Middle East geopolitical developments there are various economic events for participants to contend with over coming days. The UK labour market data is released today (5pm AEDT), as is the ECB lending survey (7pm AEDT) and Canadian CPI inflation (11:30pm AEDT). Further out, US retail sales are due (Thurs night AEDT), China GDP is scheduled (Fri AEDT), and the European Central Bank is predicted to cut interest rates by another 25bps (Thurs night AEDT). On net, we continue to think that as US interest rate expectations are now broadly on par with the US Fed’s ‘dot plot’ projections, barring significant surprises in the US data and/or a sharp deterioration in risk appetite, further upside in the USD may be limited. Indeed, given the US’ position as a net energy exporter and the USD’s positive correlation with oil, the decline in prices, if sustained, might create an added headwind, in our opinion.
Global event radar: US Retail Sales (Thurs), ECB Meeting (Thurs), China GDP (Fri), Global PMIs (24th Oct), BoC Meeting (24th Oct), US GDP (30th Oct), BoJ Meeting (31st Oct), China PMIs (31st Oct), EZ CPI (31st Oct), US PCE Deflator (31st Oct)
AUD corner
The AUD has drifted a little lower over the past 24hrs to be down near ~$0.6725. A modestly firmer USD coupled with lackluster trade figures out of China (imports rose just 0.3% from a year ago and export growth slowed) and lack of detail in China’s weekend fiscal policy update exerted a bit of downward pressure. That said, the AUD has been more mixed on the crosses. AUD/EUR, AUD/CNH, and AUD/CAD have consolidated, AUD/JPY ticked higher (now ~100.70), while the AUD eased ~0.2% versus GBP and NZD.
As outlined yesterday, we thought the AUD may start the week on the backfoot given the vague guidance fiscal authorities in China provided over the weekend. But on balance, we don’t believe this should be a catalyst for the AUD to lose much ground given broader fundamentals suggest it is currently undervalued. The average across our ‘fair value’ models indicates the AUD should be slightly north of ~$0.69.
We continue to think that the factors behind the AUD’s early-October weakness, such as the upward repricing in US yields, may have played out. As discussed over the past week, US interest rate expectations are now similar to the US Fed’s ‘dot plot’ forecasts. From our perspective this means that without more upside US data surprises and/or a sharp deterioration in risk sentiment a ceiling on the USD may be in place. At the same time, more stimulus measures out of China look to be a matter of when, not if. Domestically, we also remain of the view that the combination of fiscal support, sticky services prices, lower starting point, and solid labour market should see the RBA lag its peers in terms of when it starts and how far it goes during the global easing cycle. Another positive Australian labour market report is anticipated on Thursday. As our chart shows, the employment to population ratio remains near record levels, a sign outright job losses have been minimal, a different story to previous downturns.
The adjustment in relative expectations in Australia’s favour should be AUD supportive, in our opinion, particularly against currencies like the EUR, CAD, GBP, NZD, and USD (albeit to a lesser extent) where their respective central banks have begun to reduce rates. The ECB is predicted to cut rates again this Thursday, while a moderation in Canadian (11:30pm AEDT), NZ, and UK inflation (both Weds) should solidify calls looking for more cuts by the Bank of Canada, RBNZ, and Bank of England.
AUD event radar: AU Jobs (Thurs), US Retail Sales (Thurs), ECB Meeting (Thurs), China GDP (Fri), Global PMIs (24th Oct), BoC Meeting (24th Oct), AU CPI (30th Oct), US GDP (30th Oct), BoJ Meeting (31st Oct), China PMIs (31st Oct), EZ CPI (31st Oct), US PCE Deflator (31st Oct)
AUD levels to watch (support / resistance): 0.6660, 0.6690 / 0.6760, 0.6790
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
TUESDAY (15th October)
GBP Jobs Report (Aug/Sep) (5pm)
EUR ECB Lending Survey (7pm)
EUR Germany ZEW Survey (Oct) (8pm)
CAD CPI Inflation (Sep) (11:30pm)
USD Empire Manufacturing (Oct) (11:30pm)
WEDNESDAY (16th October)
USD Fed’s Daly Speaks (2:30am)
USD Fed’s Kugler Speaks (4am)
NZD CPI Inflation (Q3) (8:45am)
AUD RBA’s Hunter Speaks (9am)
NZD RBNZ’s Silk Speaks (9:45am)
JPY BoJ’s Adachi Speaks (12:30pm)
GBP CPI Inflation (Sep) (5pm)
THURSDAY (17th October)
AUD Jobs Report (Sep) (11:30am)
EUR CPI Inflation (Sep F) (8pm)
EUR ECB Decision (11:15pm)
USD Retail Sales (Sep) (11:30pm)
USD Philly Fed Survey (Oct) (11:30pm)
USD Initial Jobless Claims (11:30pm)
EUR ECB President Lagarde Speaks (11:45pm)
FRIDAY (18th October)
USD Industrial Production (Sep) (12:15am)
USD NAHB Housing Index (Oct) (1am)
USD Fed’s Goolsbee Speaks (2am)
GBP BoE’s Woods Speaks (7am)
JPY CPI Inflation (Sep) (10:30am)
CNY GDP (Q3) (1pm)
CNY Monthly Activity Data (Sep) (1pm)
GBP Retail Sales (Sep) (5pm)
USD Housing Starts/Building Permits (Sep) (11:30pm)
SATURDAY (19th October)
USD Fed’s Kashkari Speaks (1am)
USD Fed’s Waller Speaks (3am)
*Note, all times/dates provided are AEDT