On the first day of the new week, we see signs of a more upbeat feel to risk appetite, with Asian equities finding buyers, while S&P 500 and FTSE futures have followed suit.
There has been a decent discussion around the incredible numbers Alibaba (NYSE:BABA) has taken through the tills in Singles Day, and traders want to see how this play into top line sales. Despite the huge drawdown in domestic assets (equity and housing) in 2018, it seems the Chinese consumer is certainly not scared to put their hand in their pocket, and that may alleviate some stress in markets. That said, the market is keen to focus on domestic credit metrics this week, with new yuan loans and M2 money due (no set day), ahead of monthly industrial production, retail sales and fixed asset investment on Wednesday.
All of this coming at a time when we have seen banks given a formal target to lend to private institutions, which is interesting as authorities didn’t even go down this path during the fiscal stimulus in 2008. As China’s central bank detailed on Friday (at the quarterly monetary policy report), the world is seeing ‘profound changes’, and they will do what is needed.
Of course, the big kicker for China, and EM more broadly, is the G20 meeting in Argentina, and whether a platform can be put in place for far more constructive dialogue and perhaps even a resolution on trade. Vice President Mike Pence heads to Singapore this week to meet with leaders of various Asian countries, including Chinese Premier Li Keqiang, and Indian PM Modi, but markets won’t get too excited without Trump at the table.
Oil prices have been sold for ten consecutive days, but it seems the elastic band had been pulled back a touch too far and the natural circuit break, in the form of production cuts, are now being widely discussed. We are likely staring at a re-run of the December 2016 OPEC meeting, where the market had gone a long way to discount production cuts from OPEC and non-OPEC nations before actually getting the facts. Interestingly, while the Saudi’s are leading the charge here the market isn’t getting too excited, and we can see US and Brent crude up by 1.1% and 1.3% respectively, and we see the ASX 200 energy sector up 0.9%, while USD/CAD is down 0.2%. This could manifest into a more significant move through Europe as shorts cover - so something to watch and trade.
Brexit has been another key talking point, but the conversation is confined to GBP and EUR traders, and there is only modest interest from traders outside of this circle. Perhaps this is a reflection of it being such a hard concept to price, and the news flow requires constant attention, where blink and you miss a headline that could show Theresa May has lost the support of any number of key players. One has to be impressed that in a three-way negotiation, where we should, in theory, see British Eurosceptic MPs enthused at the EU's rejection of May’s plan, we see all parties involved move further away from Theresa May. From the safety of Melbourne, it all seems a genuine shambles, although I still sit in the camp that a deal is more likely than not. Although, any relief rally forged on a last minute deal gives me a gift to short GBP, as an agreement will struggle to get through the Commons – at least in the initial roll of the dice.
One hopes we do see a deal this week, and it’s interesting that despite the weekend news flow we see GBP/USD down 0.3%, while FTSE futures have pushed up 0.7%. The moves in FTSE futures, likely getting a two-way boost from S&P 500 futures, as well as modest GBP weakness.
EUR/USD eyeing 1.1301
EUR/USD is a must-watch this week with the August lows of 1.1301 a whisker away. There is event risk on both sides of the EUR/USD equation, with the Italian budget getting attention and all eyes on BTP/German bund spreads. Italy aside, we have the small issue of German releasing Q3 GDP (Wednesday at 18:00 AEDT), where on a seasonally-adjusted basis the market expects a 10-basis point (bp) contraction in growth. It is feasible that the powerhouse of Europe is even eyeing a technical recession should we see a second decline in Q4. We also get the German ZEW business confidence report (Tuesday), and with expectations of a -26 print, this tells you so much about semantics as this reading would be the lowest since January 2011.
A break in 1.1301 would be a big development, even more so should we see a weekly close through here, and this should drive the USD index through the August/October double-top. Of course, for those looking at gold then a break of 1.1301 (in EURUSD) should allow gold sellers the natural excuse to fade the re-test we are currently seeing of the 31 October pivot low at $1212, which would take the metal into $1200. One to watch, especially with US CPI and retail sales also due this week, while Fed chair Jerome Powell speaks at 10:00AEDT on Thursday. Mr Powell’s speech is key because there seems little doubt that the pick-up in equity and credit volatility through October started because of a clear change in Fed communication and the idea that they will allow the fed funds rate to head higher in conjunction with a decline in the balance sheet (effectively double tightening), while interest-sensitive areas of the economy, such as housing and auto’s show clear evidence of late cycle economic behaviour.
The Fed Chair’s words matter as grey clouds are moving over markets for 2019, and a sustained pick-up in volatility seems unlikely to be driven by a political event, but by the Federal Reserve. The backdrop for strong appreciation in gold is forming nicely, with the investment case being the anti-USD, anti-EUR trade. A break through $1238 would be a green light to start accumulating gold in my opinion.
The AUD has opened relatively flat, and it will be a big week for the AUD, with Q3 wage price index due Wednesday and October employment data due Thursday. Both of these are key releases for the RBA, and notably, we go into the wage data expecting a 20bp lift to 2.3%, which would certainly please those calling for hikes in 2019. This, of course, is still a very brave call and one I can’t share myself, not just because of the emerging vulnerability in Aussie housing, but because the US economy could be a major issue in 2019 if the Fed continues to hike in a softening economy. For what its worth, the Aussie 30-day rates market is pricing in two basis points of hikes by May 2019, and there seems no reason to deviate from this view with any conviction.
I see a risk we head for a re-test of 73c in AUD/USD, but for those bullish AUD, EUR/AUD shorts have worked well. That said, there are signs bearish momentum in EUR/AUD has, and we could see a short-covering rally into 1.5740 play out, and I will be watching slow stochastics on the daily chart for the trigger here. A close through 1.5633 is needed for the bear move to continue in earnest, but I do like this pair as when it trends it does so with strength and with good duration.