Today’s podcast

Overview: Keep pushin on

• US equities edge higher despite increase in US-China tensions
• US orders abrupt closure of China’s Consulate in Houston
• Amid a stalemate in negotiations White House floats a short-term extension to the unemployment insurance
• USD records fourth day of decline. AUD and NZD make new highs
• Today’s highlights: AU economic and fiscal update, NAB Quarterly Business Survey, Germany’s GfK consumer confidence and US Jobless claims

Keep pushin on, Things are going to get better

It won’t take long ,Keep-on pushin to the top

Keep on movin, movin, Keep on pushin-pushin to the top – Boris Dlugosch

Well as it has been the case for quite some time, the resilience of US equities remains unabated no matter what you throw at them.  All major US equity indices have ended the day higher, notwithstanding an increase in US-China tensions and  another daily record of virus infections in California. The USD has extended its decline with AUD and NZD making fresh new highs. Movement in core yields remain subdued, although the rally in Italian BTPS continues.

US-China relationship continues to deteriorate

In a move with huge diplomatic consequences, early in the overnight the US gave China three days to close its  Houston Consulate. The US State Department said it ordered the consulate shut “to protect American intellectual property and Americans’ private information,” without giving more details. When asked about the decision at a briefing later in the day, US Secretary of State Michael Pompeo said “We are setting out clear expectations for how the Chinese Communist Party is going to behave and when they don’t we’re going to take actions that protect the American people,”.

Unsurprisingly China has vowed to retaliate

The US has consulates in Shenyang, Shanghai, Chengdu, Guangzhou and Wuhan, so it seems like a good bet that one of them will be asked to shut.

The Houston news triggered a mini collapse in the S&P 500 futures during the European session (-0.86%) and a small rally in UST (2bps decline in 10y UST to 0.5807%). All major European equity indices ended the day with losses between 0.5% and 1.40% with mixed earnings reports. Quarterly losses for major energy companies saw the BBG Europe 500 energy sector end the day down by 2.75%. Meanwhile and as it been the case since the Fed began its huge stimulus late in March, US stocks rebounded during the US session with the S&P 500, NASDAQ and Dow all closing in the green.

Moving on to the FX markets

The USD continues to find no loving, recording its fourth consecutive day of decline in index terms. Both BBDXY and DXY indices are down ~0.15% and technically they still have room to decline a little bit more. For instance, BBDXY now trades at 1193 with key  support is seen around the 1183 area.

Looking at G10

Similar to US equities, the increase in US-China tension has not had a lasting impact.  For instance, although the Houston news contributed to the recording of overnight lows for both the AUD ( 0.7112) and NZD (0.6633), as US equities rebounded both antipodean currencies regained their mojo and ended the day stronger. AUD now trades at 0.7142, up 0.17% over the past 24 hours and NZD is at 0.6653 (+0.3%).

Notwithstanding the weakness in EU equities

The euro has also had a good overnight session. The break of previous range high along with momentum from the EU recovery fund agreement helped the euro briefly trade to an overnight high of 1.1601, before easing to 1.1569 where it currently trades. In our latest Global FX strategist publication published on Tuesday we noted that now we see the euro moving into a higher trading range from 1.10-1.15 to 1.12-1.18.

Looking at other currencies

The broad USD weakness has had some exceptions. In G10 JPY -0.33%) has underperformed the USD with USD/JPY now trading at ¥107.18. Moves in USD/JPY remain dominated by equities direction and calmness in 10y UST yields. The other notable underperformer has been CNH, after making another excursion below 7, the increase in US-China tensions see USD/CNH back above the mark at 7.016.

The rebound in US equities has helped 10y UST yields head back towards 0.60% and the UST curve has ended the day with a mild flattening bias. Front end yields a little bit higher while longer dated yields are little bit lower. Of note Italian BTPS are still enjoying the EU funding news with the 10y tenor down another 5.7 bps to 1.035%.

Moving to US politics

Senate Republicans and the White House are struggling to reach a consensus on another stimulus plan but Bloomberg and the WSJ report that there has been some discussion of a short-term extension of unemployment insurance to provide some cover after payments expire at the end of this month. News of a potential extension played into the recovery in US equity sentiment late in the session.

In overnight economic news

US existing home sales broke a declining trend, jumping more than 20% and with leading indicators pointing to a further increase, while Canadian CPI data were stronger than expected, and ignored by the market.

And finally COVID-19 news remain mixed

US hotspots Arizona and Florida showed decreasing growth in infection rates, but California recorded a new daily record of infection. The US has agreed to pay Pfizer and BioNTech nearly $2b to secure 100m doses of their experimental COVID19 vaccine should it be cleared to regulators and the option to acquire an additional 500m doses.  The vaccine would be provided to Americans free of charge. So while the US continues to secure doses, the prospect for vaccines to countries in most needs remain uncertain.

Coming up

• Today the Australian government will provide an economic and fiscal update and the NAB Quarterly Business survey is released at 11:30 AEST. Germany’s August GfK consumer confidence is out this afternoon (16:00 AEST) and the UK gets CBI Trends and Optimism readings at 20:00 (AEST). Later tonight the US gets US Jobless claims (22:30 AEST) and the Euro Area advance July consumer confidence along with the July Kansas City Fed Manf. Activity reading (01:00) are published early tomorrow morning.
• This morning the government will provide an economic and fiscal update. This should include an estimate for the final budget outcome for FY20 and its forecast for the budget in FY21. Following the extensions of the JobKeeper and JobSeeker supplements announced on Tuesday, our economists estimate the JobKeeper to cost $16.6bn on top of the $70bn currently budgeted for the program. Including the JobSeeker extension, the total cost to the budget is an extra $20.4bn which is likely to increase the deficit to $230bn in FY21, up from our estimate of $210bn. NAB also expects a budget deficit of around $85b in FY20 (4.5% of GDP).
• The government will also update its economic forecasts for the next two years. We expect the unemployment rate should peak at a lower level of around 8% instead of 10% and GDP will only recover pre-virus levels at the end of 2021/early 2020.
• The market is looking for US Initial Jobless Claims to print at 1300k, unchanged relative to last week, but given the increase in Covid-19 infections and containment measures, the risk is that we may see an increase in claims for the first time since late March.
• BoE Haskel speaks on the economy and COVID19 at 21:00 AEST and US and EU earnings report highlights include: Intel, AT&T and Twitter

Market prices

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