Today’s podcast

https://soundcloud.com/user-291029717/turkey-concerns-ease-the-lowdown-on-the-nab-business-survey

Overview: Breathe

• USD trades to a new 14 month high, DXY eyeing 97
• EM currencies stabilise and TRY recovers some ground
• AUD remains under pressure despite improvement in risk sentiment
• Weak night for commodities amid disappointing Chinese data not helping the AUD
• EUR woes continue with EU banks index making a new 18 month low
• AU wage price index is today’s highlight, US retail sales the focus tonight

Breathe the pressure, Come play my game I’ll test ya – The Prodigy

The stabilisation in the Turkish lira has helped risk sentiment overnight with the S&P500 recording its first positive day in five, but European equities have remained under pressure with the Bloomberg EU banks index closing at a new 18 month low. The USD is broadly stronger with EUR, AUD and GBP still under pressure while CAD is the outperformer. Higher UST yields have supported the USD while softer commodities have not helped the AUD.

TRY is up over 7% in the past 24 hours providing a bit of a breather to EM markets and easing concerns of contagion risk. News that the Turkish central bank had been making liquidity available to banks at 19.25% over the past two days, higher than the benchmark 17.75% repo rate supported the recovery in the lira overnight, but President Erdogan on the other hand has kept up the antagonism against the US calling for a consumer boycott iPhones and other US consumer electronics and blaming what he called an “explicit economic attack” for the lira currency crisis. Meanwhile the White House said “At the Turkish ambassador’s request, Ambassador John Bolton met with Ambassador Serdar Kilic of Turkey in the White House, feedback from the meeting has been that that there will be no negotiations or ease in pressure from the US, until Pastor Brunson is released.

So overall we see the overnight TRY price action as a temporary reprieve and it is hard not to see the lira remaining under pressure until we see a material fiscal restraint to cool down the economy , along with a measurable lift in rates by the central bank and a diplomatic resolution to US tensions.

Currencies

It has been a solid night for the USD with major USD indices edging higher over the past 24 hours. The narrower DXY index has been the stand out, up 0.32%, the index currently trades at 96.682, a level not seen since late June last year. Looking at the main index component, the euro and GBP and JPY have all come under pressure for difference reasons with CAD the only pair that has been able to outperform the USD.

The union currency initially rose from 1.14 to 1.1420 after German Q2 GDP beat expectations and the Turkish lira rallied, but with EU banks under pressure amid concerns over some banks exposure to Turkey, the Euro traded to an overnight low of  1.130 overnight, before settling at 1.3444.Techincals have also not helped the Euro, with the break below the 1.15 opening the door for a move below 1.13 before any material support can be found.

GBP  is down 0.45% and now trades at 1.2723. The GBP reacted negatively to a mixed UK labour market report that showed a surprise fall in the unemployment rate but lower than expected job growth.  Wage growth excluding bonuses was in line with expectations. Meanwhile Brexit news remain a thorn on the side for the pound, British foreign minister Jeremy Hunt saying on Tuesday that Risk of no-deal Brexit rising, ‘everyone needs to prepare’. British politician have increased the scare tactic, but for now this strategy has had little effect on the EU negotiation stand.

The improvement in sentiment and move higher in UST yields has seen JPY climb back above the ¥111 mark with CHF also easing a little bit, down 0.10% over the past 24hrs. The lift in risk appetite however didn’t  help the AUD, yesterday’s soft Chinese activity data  didn’t really elicit  a negative reaction, however the softness in commodities overnight along with lingering EM concerns, in spite of a temporary TRY reprieve, has seemingly been the overriding negative force. AUD now trades at 0.7242, after trading to an overnight low of 0.7225 ( a level not seen since January 2017). Similar to the euro, technicals are not helping the AUD either, the break below the support area of 0.7320/50 now means the aussie has a fair bit of room to move sub 72c before some material support is found.

Breaks in the AUD crosses are also a negative factor for the AUD. AUDNZD has continued to drift lower, after rejecting a move above 1.11 ( now trading at 1.1014), AUDJPY still looks like it wants to move sub the ¥80 mark and now we can add AUDCAD to the mix with a break sub 0.95 overnight, a level not seen since June 2016. AUDCAD has now broken below the downward channel evident since the start of June, chartist will probably start eyeing the 0.9326 low of in May 16 as the next key support for the pair.

Equities

The S&P 500 Index rose for the first time in five days, closing the day at  0.69%, financial and consumer discretionary shares where the winner in the session. Asia closed broadly higher , although Chinese indices ended the day flat and European indices were flat to lower with bank shares still under pressure.

Bonds

Core bond yields drifted a bit higher overnight and the UST curve flattened a smidgen with the 2y rate leading the rise in the UST curve. the 10y UST yield now trades at 2.8985% and the 2y rate is at 2.631%

Commodities

Despite improvement in risk appetite overnight, commodities have come under pressure against a stronger USD environment and global growth concerns amid a slowdown in Chinese economic activity. Copper is one of the big movers overnight down 1.61% and is threatening to make a break below the year to date lows of $266.95.

Economics

The US NFIB Small Business Optimism Index rose 0.7 to 107.9 for July, just 0.1 short of the July 1983’s highest reading in the survey’s 45-year history. The report included record highs in percentages of owners reporting job creation plans (23%) and job openings (37%), but 52% cited few or no qualified applicants for their positions. The availability of workers was cited by 37% as their number one business problem, one point under the record high.

• GE: GDP (q/q%), Q2: 0.5% vs. 0.4% exp.
• UK: Unemployment Rate, Jun: 4%  vs. 4.2% exp.
• UK: Employment Chg. (3m/3m%), Jun: 42k  vs. 93k exp.
• UK: Weekly Earnings ex-Bonuses (3m/3m%), Jun: 2.7&  vs. 2.7% exp.
• EC: GDP (q/q%), Q2: 0.4% vs. 0.3% exp.
• GE: ZEW Survey Expectations, Aug: -13.7 vs. -21.3 exp.
• US: NFIB Small Business Optimism, Jul: 108 vs. 107 exp

Coming up

• This morning Australia gets the Q2 wage Price index and the monthly Consumer Confidence reading. Inflation data is out in the UK and the US gets retail sales and industrial production for July along with the August empire manufacturing survey.
• We don’t expect a major surprise from the Wage price index today. Our economists have pencilled in a wage growth print of 0.5% q/q (2% y/y), a tenth below the market consensus (0.6% q/q / 2.1% y/y) and suggest the risk is that we get a number closer to 0.4% rather than 0.6%.
• Based on Bloomberg’s surveys, both US retails sales (ex- auto) and industrial production are expected to have eased in July, 0.3% vs 0.4% previously for retail sales and 0.3% vs 0.6% for IP.

Market prices

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets