Markets Today: Breaking up is hard to do

Brent oil rose back above the $52 mark punching through its 200MDA and now is almost 10% up month to date.

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Whether Trump and his advisers are fans of Neil Sedaka we probably will never know, but with the Q2 US GDP underwhelming on Friday and seemingly unable to break up into a higher range, Sedaka’s number one hit could be one of those stress songs that keeps playing in your head. The task of getting the US economy growing up towards 3% amid internal turmoil and a Republican Congress that doesn’t want to play ball appears to be getting harder and harder.

On Friday disappointing US data releases provided the excuse to sell the USD and buy UST while earnings results from Amazon weighted on tech stocks. Meanwhile Brent oil rose back above the $52 mark punching through its 200MDA and now is almost 10% up month to date. CHF was the biggest G10 loser, bucking the USD selloff trend.

Weekend news of a successful ICBM test by North Korea seemingly capable of reaching the entire US territory may support the USD and a bid for safe haven assets when Asia open’s on Monday (very little reaction so far), but important data releases later on the week are going the be the real test with both DXY and BBDXY approaching key support levels (DXY 92 and BBDXY 1151).

The advance US Q2 GDP reading came at 2.6%, just under the official market estimate of 2.7%, but after last week’s new trade and inventory data, market expectations were for a number closer to 3%. Revisions to the Q1 estimate also disappointed coming in at 1.2% vs 1.4% previously, core PCE was revised up in Q1 to 1.8% from 1.7% prev., but in Q2 the estimate declined to 1.5%. So Q2 growth was marginally above the 2% trend, but Q1 was well below. The pace of growth should keep downward pressure on the unemployment rate, but the prospect of higher inflation remains elusive. Meanwhile amid internal turmoil and Washington paralysis the prospect of fiscal policy boosting growth above 3% is looking like an almost impossible objective.

Against a back drop of healthy but unexciting US data releases, the DJ managed to edge a little bit higher on Friday (0.15%) while the broader S&P (-0.13%) and tech-heavy NASDAQ (-0.12%) closed marginally in negative territory. The DJ ended 1.16% up for the week while S&P (2,472.10) and NASDAQ (6,374.68) lost -0,2% and -0.2% over the same period. Disappointing earnings from Amazon, ExxonMobil and Starbucks were the main company news weighing on US shares on Friday. In Europe the Stoxx 600 and FTSE 100 fell 1% on Friday to be -0.48% and -1.13% on the week respectively. Concerns over US tobacco regulation weighed on the FTSE on Friday.

Amid broad USD weakness, DXY fell 0.64%, BBDXY was -0.46%, but ADXY was essentially unchanged at -0.05%, suggesting USD weakness did not broadly extend into EM currencies. On the day, SEK and CAD were the biggest G10 winners, up 1.18% and 0.97% respectively both boosted by better than expected GDP prints. The Euro gained 0.63% and closed the week at 1.1751, AUD and NZD also joined the party gaining 0.36% and 0.25% respectively. NZD/USD ended the week just above the 75c mark (0.7514), AUD/USD closed just below 80c (0.7987); both currencies continue to benefit from the softer USD environment ending the week up 0.80% and 0.85% respectively. Buoyant commodity prices and benign risk environment have also been supporting factors, however both are showing tentative signs of fatigue. Excluding oil, other commodities have struggled to perform in recent days. Meanwhile US equities were mixed on Friday and the VIX rose, albeit marginally, for a second consecutive day. Our fair value models suggest both AUD and NZD are expensive and approaching extreme levels, but with the USD still under pressure, the richness in both AUD and NZD can still persist for bit a longer. US data outcomes this week are going to be important in this regard.

Meanwhile CHF was the exception down, 0.29% against the USD and 1.02% against the Euro. A move towards 1.15 in EURCHF and possibly beyond now looks to be only a matter of time.

Ahead of the US GDP data release, 10 UST yields were trending higher following the move higher in 10y Bunds which were boosted by higher German CPI (1.7% vs 1.5% exp.). 10y UST reached an overnight high of 2.335%, but with the data underwhelming a rally ensued helping them close at 2.889%, 2.1bps lower on the day. Overall there was a flattening bias on the curve with the 2y yield down 0.7 bps to 1.349%.

Barring the positive moves in oil prices noted above, commodities as a complex were softer with LMEX -0.47%. Copper had another range trading day, iron ore fell 2.10% and gold climbed 0.67% to $1268.

In other new: President Trump signs legislation to impose new sanctions on Russia – US Fed Kashkari (dove) favours shrinking balance sheet in the background “over the next several years” and suggests to wait and see more data – ECB Lautenschlaeger said that she sees no trend toward inflation goal yet. Noting that the ECB Council should address the issue of how and when to return to “normal monetary policy.

Coming Up

We have busy week with important data releases Locally, while Tuesday’s RBA Board meeting statement may not throw up too many surprises, Friday’s Monetary Policy Statement will contain some new insights and refreshed forecasts, though we expect these to be little changed.  We look for flat June Retail Trade (Friday), with downside risk. It’s back to US growth and inflation watch with the June PCE deflators and Manuf. ISM on Tuesday and non-manuf. on Thursday, followed by payrolls on Friday.  But can earnings growth surprise on the high side?  This morning we get China’s manufacturing PMI and is expected to moderate slightly, in which event will dovetail with the view that growth has peaked in Q2. Eurozone GDP and inflation are also out tonight.

See our What to Watch publication for more details.

Overnight

On global stock markets, the S&P 500 was -0.13%. Bond markets saw US 10-years -2.14bp to 2.29%. In commodities, Brent crude oil +2.00% to $52.52, gold+0.7% to $1,268, iron ore -2.1% to $68.73, steam coal +0.8% to $87.20, met. coal +0.0% to $165.00. AUD is at 0.7987 and the range since Friday 5pm Sydney time is 0.7937 to 0.8007.

For full analysis, download the report

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