It has been a risk off session to start the week, with various items contributing to the US stocks falling by 1.2%-1.5%, while sending Gold up another 1% on the back of increasing safe haven demand, to a new 14 month high, as US and EU yields headed lower. Note that the US 30-year bond yield fell to the lowest level since 2016 in trading down to 2.119%, and the spread between to 30Y and the 10Y (1.649%) is currently at -0.301%. From the look of the longer term charts, the yield curve is heading into even more negative territory, which does not bode well for the global economy.
The US$ has ended mixed; higher against the commodity currencies but lower against the Chf and the Jpy but pretty much unchanged against the Euro and Sterling, although Cable did trade down to a new 2 ½ year low earlier in the session. The Euro is pretty much acting as a funding currency and so is seeing decent support on dips, but as usual, the economic situation in the EU remains dire, while political concerns are growing.
Lack of progress in the US/China trade negotiation remains a principal reason for the negative risk tone, as traders fret about future economic growth, but there were plenty of other contributors for exiting risk associated assets on Monday. Firstly, in terms of economic data, the German IFO World Economic Climate Indicator dropped from -2.4 to -10.1 in Q1, while the Current Situation Indicator dropped from 1.4 to -5.4 and the Expectations Indicator dropped from -6.1 to -14.7.
From the US, the consumer inflation outlook declined as Fed weighed rate cuts and added to the downbeat tone.
On top the soft data, politics intervened, notably in Argentina, where the stock market fell by 35% (!) and the currency shed 25% of its value against the US dollar after a surprise primary election result and ensured a nervous tone to other emerging markets. The election result leaves investors fearing that a populist govenment could replace the country’s current, business-friendly government. In other emerging markets, keep an eye on the chaos in HK as the situation seems set to escalate, especially if China decides to step in directly in order to control the situation.
Elsewhere, the announcement on Friday by the Italian deputy PM, Salvini, that he would submit a no-confidence motion against Prime Minister Giuseppe Conte has meant the collapse of the M5S- League coalition government. This leaves the possibility of either a snap election in Italy or a technocrat government, which complicates the fact that that Italy is expected to submit the 2020 budget draft by October 15. Without an effective government, this looks unlikely to be successfully completed and October looks like being a busy month, with Brexit due on the 31st.
Looking ahead, Tuesday will b e a busy day and will begin with the NZ Food Price Index (exp 0.4%), a speech from the RBA’s Kent and the Australian NAB Business Conditions/Confidence data for July (exp 1/3 respectively). From the EU comes the German CPI (CPI, exp 0.5%mm, 1.7%yy; HICP, exp 0.1%mm, 1.1%yy), the ZEW Economic Sentiment Survey and the UK Unemployment report for June (exp 3.8%, Claimant Count Change +22.8K). The US inflation figures for July will then be released with expectations of 0.3%mm/1.7%yy, with the ex F/E numbers expected to be at 0.2%mm/2.1%yy. Have a good day.
Economic data highlights will include:
Tue: NZ Food Price Index, RBA’s Kent Speech, NAB Business Conditions/Confidence, Japan Tertiary Industry Index, Corporate Goods Price Index, German CPI/HICP, UK Unemployment, German/EU ZEW Economic Sentiment Survey, US CPI, API Weekly Crude Oil Stock Inventory
Market moves, in brief:
FX: DXY 97.41 (+0.39%)
Bonds: US10Y; 1.642% (-6.16%), German 10Y; -0.593% (-2.86%), UK 10Y; 0.488% (+0.35%), Australian 10Y; 0.973% (+2.16%), NZ 10Y; 1.100% (+0.92 %), China 10Y; 3.012% (-0.35%)
Stock Indices: DJI; -1.49%, S+P; -1.23%, NASDAQ; -1.20%, EUStoxx50; -0.22%, FTSE100; -0.37%, Shanghai Composite; +1.45%
Metals: Gold $1512 oz (+1.02%), Silver $17.06 oz (+0.62%), Copper $2.585 lb (-0.15%), Iron Ore $95.01 per tonne (NYMEX) (+1.50%),
Oil: WTI $54.80 pb (+1.05%)
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