Below trend growth to continue
Markets are a little wary of the implications of China’s devaluation yesterday, combine that with uncertainty around the Fed’s upcoming interest rate hike and mix in Northern Hemisphere summer liquidity and you have a slightly uneasy, conflicting set of market moves overnight.
Markets are a little wary of the implications of China’s devaluation yesterday, combine that with uncertainty around the Fed’s upcoming interest rate hike and mix in Northern Hemisphere summer liquidity and you have a slightly uneasy, conflicting set of market moves overnight. A day does not make a trend and doesn’t always have to make sense; particularly at turning points. All will be revealed in good time.
Equities did not like the possibility of a currency war, ending the day lower pretty much across the board- except in China. Bond yields were generally lower as they mulled the possibility of the Fed postponing its rate hike, given the China news. Commodities were soft, with oil down sharply and the metals following. Gold was steady.
But, the currency markets were more mixed and not displaying a wholesale risk off move. Asian FX was weaker and dragged the AUD with it, but much of that move was seen in the Asian session, without follow through overnight in the AUD’s case. The G10 FX group was relatively steady, while EUR outperformed as news of a Greek bailout deal is coming together and despite poor ZEW data. The USD was flat and domestic data was ok, not spectacular (see below).
So, do we get a currency war? What’s happening? China surprised markets by devaluing its currency by 1.9% and changing the way the currency is ‘fixed’ or set each day to allow for slightly more market orientation. (Please see Christy Tan’s report for details). This represents an easing of China’s economic policy but also generated a round of depreciation of regional currencies; including the AUD. Markets are watching to see if the CNY continues to depreciate from here. Officials have noted that the move does not represent a trend, but if the new fix methodology is adhered to, as noted, then we should see further weakness today. All eyes on today’s fix (or setting of the mid-point for the allowable trading band). The FX market is worried that, despite China’s real appreciation this year, that CNY weakness from here would lead to competitive depreciation in trade competing countries. In that case, some countries would inevitably have relatively stronger currencies – and tighter financial conditions. The last thing markets need is a race to the bottom for their currencies, it is destabilising. This is why there is a sense of unease after yesterday’s move. It may not come to that, and indeed rarely does. But, it’s summer, this is new, China is a big influence and the Fed is at a turning point. Markets are inevitably wary. We can expect a degree of nervousness.
The AUD is typically used as an Asian proxy, and as such it was not a surprise to see AUD sell off on the day. Over time, China’s move may be seen as the monetary easing measure it represents, which is growth positive and good for demand for what Australia provides to China. But it might be too soon for markets to take that optimistic view right now.
The softer NAB business survey also added to the weakness. Business conditions dropped to +6 from +11 and confidence dropped to +4 from +10. However, on a trend basis, both are “suggesting a turn-around in the non-mining economy” according to NAB’s economics team.
Today may prove a modestly busy local session, with hopefully fewer surprises. We do get the Australian consumer confidence, which has been running at relatively less than happy levels. Domestic wages are expected to have risen, so hopefully that feeds through to confidence. The RBA’s deputy governor, Philip Low speaks on wealth, land value and monetary policy. That should get a lot of attention with regards to property prices; it is late in the day so local markets will miss the response.
But the main focus for markets, although maybe less so after yesterday’s moves from China, is the suite of domestic data including: retail sales and industrial production. The data is expected to be flat or lower on a year-on-year basis, and thus could use a little policy easing to restore confidence.
The US data might take a backseat, although the JOLTS job openings survey has had more attention of late. Given the Fed have spoken about why not to hike, this data may be less likely to be influential at this point. The Fed’s Dudley (voter, dove) is speaking on the local economy. With markets under 50% priced for September after yesterday’s moves, all speeches will be monitored with interest.
On global stock markets, the S&P 500 was -0.90%. Bond markets saw US 10-years -8.78bp to 2.14%. On commodity markets, Brent crude oil -1.94% to $49.43, gold+0.3% to $1,108, iron ore -0.3% to $56.22. AUD is at 0.73 and the range was 0.7283 to 0.744.
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