It has been a fully “risk-on” Thursday after the US and China confirmed that trade negotiations will resume with a high-level meeting in October. This headline boosted confidence early in the session and it was underpinned later in the day by the realization that Brexit is likely to be delayed beyond October 31 and a “no-deal” will therefore be avoided. From Italy, the new coalition was sworn in on Thursday, and with a new, pro-EU economy minister, this hints at a more positive relationship with EU.
The end result has been a 1.5% rally in the US stock indices while Treasury yields also closed strongly higher on the prospect of the improving economic outlook. The US$ has been very choppy, but at the end of the session the DXY is more or less unchanged at 98.40. The Jpy and the Chf are both weaker as safe haven demands diminish, while the commodity currencies (Aud/Nzd) liked the idea of renewed trade talks and are retaining a firm bias. The Euro is unchanged from yesterday after a choppy ride, while Sterling is higher, underpinned by the hopes that a no-deal Brexit will be avoided.
In the commodities markets, the metals are sharply lower on reduced safe haven demand while WTI ended flat, but not before rallying 2% on strong US crude draw numbers and optimism over the impending restart of the trade talks, before settling almost flat on profit-taking. The EIA reported that crude inventories fell by 4.8 million barrels for the week ended Aug 30, almost double the predicted 2.5 million drawdown.
In terms of Thursday’s data, US services sector activity accelerated in August while private employers boosted hiring, suggesting the economy continued to grow at a moderate pace despite trade tensions which have stoked financial market fears of a recession. The ISM non-manufacturing activity index increased to a reading of 56.4 in August from 53.7 in July, while the ADP report showed 195k growth in private sector jobs in August, well above expectation of 140k. The US weekly initial jobless claims rose 1k, to 217k, slightly above expectation of 215k. Earlier in the session, the German factory orders tumbled -2.7% mm in July, way below expectation of -1.1% mm.
Looking ahead, Friday will start slowly, with just the Australian AIG Performance of Construction Index and the Japanese Leading Economic Index and Coincident Index due in Asian trade. Things will liven up in Europe where the UK Consumer Inflation Expectation is due, along with the main focus, the EU UQ2 GDP (exp 0.2%qq, 1.1%yy). Most traders will stand aside though until the US session when we get the US employment report, where expectations are for Employment (exp 3.7%)/NFP (exp +158K%)/Average Hourly Earnings (exp 0.3%) and Average weekly hours (exp 34.4). Have a good weekend.
Economic data highlights will include:
Fri: Australian AIG Performance of Construction Index, Japan Coincident Index, Leading Economic Index, German Industrial Production, UK Consumer Inflation Expectation, EU Q2 GDP, Unemployment, SNB’s Jordan Speech, US Jobs/NFP/Average Hourly Earnings data,
Market moves, in brief:
FX: DXY 98.40 (0.00%)
Bonds: US10Y; 1.568% (+6.49%), German 10Y; -0.592% (+12.34%), UK 10Y; +0.527% (+23.13%), Australian 10Y; 0.981% (+3.69%), NZ 10Y; 1.070% (+3.38 %), China 10Y; 3.076% (+0.05%)
Stock Indices: DJI; +1.41%, S+P; +1.30%, NASDAQ; +1.75%, EUStoxx50; +0.98%, FTSE100; -0.55%, Shanghai Composite; +0.96%,
Metals: Gold $1518 oz (-2.21%), Silver $18.63 oz (-4.86%), Copper $2.6315 lb (+1.41%), Iron Ore $90.72 per tonne (NYMEX) (-0.93%),
Oil: WTI $56.16 pb (+0.36%)
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