Prepared by Jeff Halley, Senior Market Analyst
It’s all about China
As the stock market rally continued unabated overnight and bond yields rose in lock-step, perhaps the one lesson to heed is the importance of China in the great macro-economic game of chess. Weak US retail data, yet another miss on German manufacturing data and a low print (again) on Eurozone inflation, were all put in the too-hard box as the equity markets basked in the warm after-glow of a rebound in China manufacturing yesterday.
To be fair, purchasing manager indices (PMIs) across Asia and even the US overnight all showed a rebound. The Eurozone is quickly becoming the new English Patient just as it’s about to get an economic slap from Brexit, or not. Meanwhile, the US and especially Asia appear to be showing some green shoots, a term I personally hate as they are also easily eaten by pests. The lesson to take from the overnight session is that China matters and the US-China trade talks remain the only game in town for 2019.
Following Asia’s rally, Europe’s Eurofirst 300 rallied 1.10%; the S&P rose 1.16%, the Nasdaq was up 1.29%, and the Dow Jones jumped 1.27%. Oil also bought into the China recovery story in a big way with Brent leaping 2.31% and WTI 2.61%. US 10-year bonds gave back some of their recent gains with yields rising to just under the psychological 2.50%.
Trade talks recommence tomorrow in Washington DC but for Asia, today’s main event will be the Reserve Bank of Australia (RBA) rate decision at 11.30 Singapore time followed by the Federal Budget this afternoon. Whether the Australian budget will be full of pre-election goodies is likely a moot point, as the markets will be concentrating on the RBA. Having been on hold forever in a do-nothing, wait-and-see mode, will the RBA hint today that they too will release the doves? It’s likely a 50/50 call at this stage. Rates will remain unchanged for this meeting, but any hints of dovishness could see the Australian (AUD) marked sharply lower.
The pound gave up most of its pre-vote gains late in New York as the UK Parliament released its second album in as many weeks, Welcome To Your Delusion II. Parliament failed for the second time to agree if any one of their eight alternate Brexit visions could command an indicative majority. The question remains will the speaker be consistent and refuse to allow the third vote? A customs union came closest, but the votes are not binding, and no one has asked the Government or the European Union. Keep up the good work chaps.
The US dollar was mixed overnight, rising against a struggling euro (EUR) and Japanese yen (JPY) while falling against the GBP and AUD initially. The Aussie dollar rose sharply yesterday following China’s manufacturing data but gave back most of those gains to finish at 0.7110 as a potentially dovish RBA slides into view this morning. GBP rose to 1.3150 ahead of the votes but slipped just as quickly to 1.3070 after as the street repriced higher on the odds of a hard Brexit.
Regional currencies should continue to perform well today following the excellent performance of Wall Street overnight.
With a lighter data calendar in Asia today, the focus should be on the performance of stock markets overnight. Given the sea of green continued through Europe and US sessions, it implies a positive start to Asia trading. The China recovery story has enough legs for another day at least suggesting Asia stock markets are in for a positive day overall.
Oil raced higher overnight on the China recovery story, with both Brent and WTI posting around 2.50% gains to USD69.10 and USD61.70 a barrel, respectively. The positive outlook, combined with OPEC+ cuts, should keep sentiment positive and see plenty of buyers on any dips today. The technical picture is starting to look very overbought in the short-term, however, and with official inventories in the US tonight, traders should perhaps be a little circumspect at these levels.
Gold sank USD4 to USD1,287.00 overnight as investors rotated aggressively out of safe-haven plays. This is largely due to the China and global economic recovery stories, and gold will just have to weather the storm in the absence of any other supportive factors. The USD1,275.00 to USD1,280.00 an ounce level remains the key longer-term support.