Today’s podcast

Overview: Up in the air

• Negative lead from Asia sees EU and US Equities lower on Friday and weaker on the week
• USD ends Friday broadly softer and records its fourth consecutive weekly decline
• Gold trades above $1900 for the first time since 2011
• Republicans struggle to reach consensus, Senate bill now expected on Monday
• Global COVID 19 cases now over 16m, Victoria infections spike again on Sunday
• Coming up:

• • RBA Kent, AU COVID-19 H/Hold survey and German IFO today’s highlights
  • This week: AU CPI and Payrolls, China PMIs, US stimulus, FOMC & US GDP

I’ve been up in the air, Out of my head

Stuck in a moment of emotion I’ve destroyed

Is this the end I feel? – Thirty Seconds to Mars

The negative lead from Asia, following China’s decision to close the US consulate in Chengdu, was compounded on Friday night amid mounting COVID-19 cases in the US and other parts of the world. EU and US Equities end lower on Friday and weaker on the week, the USD still can’t find any loving, underperforming against both safe haven and risk sensitive currencies. Gold on the other hand continues to shine trading above $1900, for the first time since 2011. AUD opens the new week softer (@ 0.793) as Victoria COVID-19 infections spike again on Sunday.

It wasn’t a good end to the week for equity markets

China’s announcement, during our Friday session, that it would close the US consulate in Chengdu in response to the US decision to shut China’s Consulate in Houston, weighed on sentiment and triggered a big sell-off in China’s equity market with the CSI 300 index falling 4.4% on the day. COVID-19 cases remain elevated in the US (more below) and despite some progress, Republican were unable to present a stimulus proposal on Friday.

So a negative lead from Asia, alongside rising concern over a stalling US recovery and lack of agreement  by Senate Republican was too much for equity markets. IT shares also came under added downward pressure following a collapse in Intel shares (-16%) after the company warned about another production delay to its new chipmaking process, saying that it was mulling outsourcing chip production.

The Stoxx Europe 600 Index fell 1.7%, the most since June 24, with all the sub-sectors losing ground while technology (-3.8%) shares were the big underperformer.  Major US equity indices also ended the day with negative returns, the S&P fell 0.62% to 3,215.63 and the NASDAQ fell 0.94% to 10,363.18 . For the week the S&P eased 0.28% and the NASDAQ fell 1.33%.

Unlike recent spikes in risk aversion, this time the USD did not benefit from safe haven demand with both safe haven pairs such as JPY and CHF and risk sensitive currencies such as the AUD and NZD gaining ground on the big dollar on Friday. JPY was the big mover during our session on Friday breaking through key support around £106.70 on the China news and then overnight as 10y UST yields traded to an intraday low of 0.5545% (more below), USD/JPY briefly traded to a low of ¥105.69, before ending the week at ¥106.13.

The euro currency continued its recent strong run on Friday

Rising 0.5% to above 1.1650, its highest level since September 2018.  The union currency gained 2% over the week, with markets reacting positively to the agreement on the €750b EU Recovery Fund. On Friday night, the flash PMIs added to the positive sentiment, with both services and manufacturing sectors returning to growth in July.  The services PMIs in Germany and the Eurozone were much stronger-than-expected, although this part of the economy was hit much harder than manufacturing during the lockdowns.

AUD and NZD traded lower during our Friday session

AUD to a low of 0.7064 and NZD 0.6615 reacting to the decline in China’s equity market and move up in USD/CNY over 7, closing the week at 7.0184. Antipodean selling pressure abated during Friday’s overnight session with the USD broadly weaker, notwithstanding declines in equity markets. The AUD recovered lost ground and close the week at 0.7105 (+0.10%) while NZD ended the week at 0.6641 (0.09%).

Looking at the week

The FX theme was the broad USD weakness and ongoing EUR recovery. The Bloomberg USD index fell 0.4%, bringing its cumulative decline over the week to 1.3%.  It is near a 12-month low.  The resurgence in positivity towards the EUR is one factor behind the recent fall in the USD, although declining interest rate differentials (especially for real, i.e. inflation-adjusted, interest rates) have also weighed on the USD.

A look at the daily changes in UST yields don’t tell the full story

During Friday night’s session 10y UST yields traded to a 3 month low of 0.55%, before climbing back to 0.59%, closing the day 1bps higher. The 30y bond also traded down to a 3 month low of 1.20% before recovering to 1.23%. Looking at the week the action in UST yields has been focused on the longer end of the curve with 10y UST yields down 4bps while the 30y bond is down 9bps. The move lower in longer dated UST yields reflecting heightening concerns over the US economic outlook.

In addition to heightened US-China tensions and concerns over a stalling US economic recovery

The market is also concern over the inability of US politician to find an agreement on the next round of stimulus ahead of the expiry of US unemployment benefits this Friday. Republican senators are set to reveal their draft fiscal stimulus bill today, with US Treasury Secretary Mnuchin saying that they would propose a cap on unemployment benefits of 70% of prior wage income (compared to a flat $600 extra payment).  The new fiscal stimulus bill, which needs agreement from Democrats, will include a proposed new round of cheques for $1,200 sent directly to certain households according to the FT.

Mnuchin also noted that  he expected Republicans could move very quickly with the Democrats to reach an agreement. But bipartisan talks can only begin once the Senate Bill is put forward, sounding optimistic Mnuchin added, “If there are issues that take longer, we’ll deal with those as well.”. But as the WSJ quotes, Senate Majority Leader Mitch McConnell (R., Ky.) sounded less optimistic, “Hopefully, we can come together behind some package we can agree on in the next few weeks,” Mr. McConnell said Friday

There was little reaction to the US PMIs

Which showed more modest improvements than expected, with the services sector remaining in contractionary territory.  The market tends to put more weight on the ISM surveys in the US, although the smaller-than-expected bounce in the services PMI is consistent with other high frequency indicators (including weekly jobless claims) that suggest the US recovery is showing signs of stalling amidst the resurgence in COVID-19 across multiple southern and western US states.

On COVID-19

US new cases remain very high (new daily cases haven’t been below 60,000 in a fortnight) but are showing tentative signs of stabilising.  There are also concerns about a second wave in Spain, particularly in the region of Catalonia.  Catalonia’s regional government announced it would close all nightclubs for two weeks while the UK said it would require all visitors to Spain to self-isolate for 14 days on return.  Meanwhile, the Australian state of Victoria reported 459 new cases of COVID-19 on Saturday, its second-highest daily total.  Melbourne is almost half way through its 6-week lockdown.

Finally a word on commodities

It has been a glittering week for gold with the pressures metal outperforming on Friday and on the week. Gold traded ato an overnight high as 1,905 and closed at 1.900 ( 0.66%). It was Gold’s seventh weekly gain the highest weekly close ever andnext stop ios the all-time high at 1,920.

Coming up

• It a quiet start to a busy week with important data releases in Australia and offshore markets. Domestic highlights include Q2 CPI on Wednesday with NAB expecting Headline CPI to fall a sharp 2.0% q/q to -0.4% y/y (Mkt -2% q/q) and Core 0.0% q/q and 1.3% y/y (Mkt 0.1%q/q). The Payrolls Survey, out Tuesday, is likely to garner more focus than usual given the last release showed tentative signs of employment dropping again and in addition to a series of regular data releases, two speeches round out the busy week with the RBA’s Kent on Monday and the AOFM’s CEO Nicholl on Thursday.
• In offshore markets, attention is likely to be centred around developments in the US as lawmakers continue to negotiate another fiscal package hopefully before the expiry of the current support. Around 30m Americans are receiving an additional $600 a week under the CARES ACT with payments due to end on July 31. The US calendar also includes FOMC meeting on Wednesday, Q2 GDP on Thursday, and key earnings reports from the tech sector (Facebook on Wednesday, Alphabet, Amazon and Apple all on Thursday).
• Friday is also a busy day with China’s official PMI for July along with Europe’s Q2 GDP flash Core CPI (July) with consensus at 0.7% y/y. Germany’s GDP is release on Thursday.
• RBA Assistant Governor (Financial Markets), Christopher Kent speaks at the Kanga News webinar (10.00 am AEST) and Australia’s COVID-19 Household Survey is out at 11:30 (AEST). Also, at 11:30 China releases industrial Profits for June and later in the day the German Ifo survey is published at 18:00 AEST. The Dallas Fed Manf. Activity is out early tomorrow morning (00:30 AEST).

Market prices

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