The Dollar Remains on the Defensive

June WTI is firm and holding above $65. The supply disruption is key, but iron ore prices soared 10% on strong Chinese demand. More broadly, the CRB Index settled last week at six-year highs. Led by South Korea, Asia Pacific equities markets moved higher, and Australia’s ASX rose to a new record high. Europe’s Dow Jones Stoxx 600 is up fractionally but sufficient to also set a new record high.

US futures are narrowly mixed, with the NASDAQ trailing. The US 10-year yield recovered smartly after the sharp and quick drop on the back of the weak jobs data. It is steady today near 1.58%. European yields are narrowly mixed. The UK Gilt yield is up a couple of basis points, while Australia and New Zealand saw their 10-year yield rose three basis points.

The dollar is mostly softer. Sterling and the dollar bloc are leading the majors, while the yen is softer. The South Korean won is leading emerging market currencies higher. The eastern and central European currencies are laggards, though the Hungarian forint is more resilient. The JP Morgan Emerging Market Currency Index is advancing for the fourth consecutive session. Last week’s 1.7% gain was the most since last November. Gold is firm but below the pre-weekend high (~$1843.50). The yellow metal may be pausing ahead other $1850 area, which is where the 200-day moving average is found.

Asia Pacific

The yen rose to two-week highs at the end of last week but has come back offered today. The exchange rate remains hyper-sensitive to US rates. Meanwhile, the formal state of emergency for Tokyo and three other prefectures was extended at the end of last week through the end of the month. The emergency declaration was broadened to the industrial regions in Aichi and the prefecture of Fukuoka. It now covers around 40% of the economy and most major urban centers.

The latest poll (JNN) found support for Prime Minister Suga fell to its lowest level of his eight-month tenure. His support was at 40%, down from 44.4% last month. Nearly 2/3 of the respondents (63%) said there disapproved of the government’s handling of the pandemic, a 13 percentage point rise. A separate poll (Yomiuri) found 60% want the Olympic games canceled. Suga will face a leadership contest within the LDP in September ahead of the national election, which must be held by the end of October.

The PBOC set the dollar’s reference rate weaker than expected, and the gap between the fix and the market expectations (e.g., median projection in Bloomberg’s survey of bank models) was particularly wide. Bloomberg calculates it was the widest since January (CNY6.4425 vs. forecast for CNY6.4370). As we detected in the pre-weekend fix as well, Chinese officials appear to be trying to slow the yuan’s rise. The yuan is at a three-year high today, with the greenback approaching CNY6.4100.

Tomorrow Australia’s government will announce its budget. In many respects, it will look like the Us approach with strong infrastructure measures, social spending, and extended tax income-tax breaks for low and middle-income households. The faster-than-expected growth and the surge in iron ore prices boost the government’s revenues, allowing it to record a smaller than expected budget deficit. Meanwhile, Australia’s vaccine rollout out so far has been slow, and before the weekend, the Trade Minister warned international visitors may remain restricted well into H2.

The dollar is within the pre-weekend range against the Japanese yen (~JPY108.35-JPY109.30). The stabilization of the US 10-year yield appears to have helped. The JPY109 area is the halfway point of last week’s range, and the greenback stalled a little above there. The next retracement target (61.8%) is near JPY109.20. The dollar looks poised to snap a three-day slide today.

It finished last week near JPY108.60. The Australian dollar is extending its gains for the fourth consecutive session. Around $0.7870, it is at its best level since the end of February. There is an option for roughly A$640 mln at $0.7900 that expires today. The multi-year high was set on February 25, a little above $0.8005. Since April 9, the Chinese yuan has only fallen in two sessions.

However, the pace of its ascent has quickened. Since returning from the May Day holidays last Thursday, the dollar has fallen by nearly 1%. It took almost two and half weeks to fall by the last 1%. The offshore yuan is a bit stronger than the onshore yuan. Official protests may escalate, and among the measures it has adopted before, it can make it easier to invest abroad.

Europe

The UK government did well in last week’s local elections, and it is set to ease social restrictions further in about a week’s time. Last week, the Bank of England announced it will slow its weekly bond purchases and looks to complete them by the end of the year. The opposition Labour is in a bit of disarray after losing some traditional strongholds, and party leader Starmer’s initial reaction to downgrade his deputy did not boost confidence and was ridiculed by other Labour leaders. The SNP did not secure an outright majority in Scotland, but with the Greens, a clear majority favor independence. Still, the public health crisis is the first order of business, and the SNP does not envision a referendum until toward the middle of the five-year term.

Support for Germany’s CDU/CSU slipped to 23% from 24% in the latest polls. Support for the Greens eased a percentage point as well to 26%. The SPD lag behind in third place. It formally endorsed Scholz, the current Finance Minister as its candidate over the weekend. However, he tacked left with a call for more progressive taxes to pay for expanded social programs in his acceptance speech. The SPD challenge is to distinguish itself after being the junior coalition partner to the CDU/CSU since 2013.

The euro rose by nearly 0.85% ahead of the weekend to reach about $1.2170, its highest level since the end of February. It was the largest gain of the year. It made a marginal new high today but is really consolidating after a strong advance. Recall that in the middle of last week, it briefly traded at two-and-a-half week lows near $1.1985. Resistance is seen near $1.22 now, and the late February high was near $1.2245. Initial support is pegged near $1.2130 and then $1.2100.

Sterling rose to almost $1.41 today after testing $1.38 at the start of last week. It peaked a little above $1.4235 on February 24. The $1.4100 area offers nearby resistance, and the intraday technical readings are stretched. Support is seen by $1.4050. The euro stalled near GBP0.8700 last week, the upper end of its recent range, and appears poised to test support in the GBP0.8590-GBP0.8600 area.

America

The disappointing April employment data spurred a debate about the nature of the problem. Tomorrow’s Job Opening and Labor Turnover Survey (JOLTS) will be looked up to shed some fresh light on the issue, but the issue has been terribly partisan. Some, including the Chamber of Commerce, see the main culprit being the government’s income support and the federal unemployment insurance supplement. Others, including the Biden administration, argue that the main challenge is the partial re-opening of the economy and that many have not been able to return to work because they are taking care of family members (children and seniors).

There is a secondary argument the suggests if the modest bump in unemployment insurance coverage is sufficient to deter the return of employees, it says something about the low pay, below what is called a “living wage.” In the public health crisis, poverty itself was seen as a comorbidity. Initial industry-level analysis suggests that there does not seem to be an obvious relationship between the slow job gain and the relative wage.

Hiring in some high and mid-wage sectors slowed while others quickened. Leisure and hospitality reported a 331k increase in employment, mostly associated with lower-wage positions. Personal and laundry services grew 14k positions. On the other hand, employment by couriers and messengers fell by 77k.

The knee-jerk reaction to the jobs report saw the 10-year yield dropped 10 basis points to 1.46%, but it snapped back completely in less time it took to make a cup of coffee. Net-net, the 10-year yield closed higher (albeit slightly) ahead of the weekend. The market concluded after the employment data that the Fed was less likely to raise rates next year and that inflation is likely to result. As a result, the 10-year break-even rate rose to a fresh eight-year high, a little above 2.50%.

With this backdrop, the US Treasury will sell $126 bln at its quarterly refunding this week, and projections suggest as $40-$45 bln of US investment-grade corporate bonds. At the same time, the US is expected to report a surge in April CPI as the base effect peaks. Recall that in April 2020, headline CPI fell by 0.7%. It is expected to be replaced with a 0.2% gain last month.

In May last year, CPI slipped by 0.1%. Core CPI fell by 0.4% in April 2020. It is expected to have risen by 0.3% last month. It took fell by 0.1% last May. The bottom line is that the year-over-year headline rate will soar well above 3% to reach its highest level in a decade, while the core rate will likely approach pre-pandemic levels (2.4% in February 2020).

The busy week begins off slowly with light economic calendars today in North America. The Canadian dollar has appreciated for the last five consecutive weeks against the US dollar. It has extended its gains today. The greenback slipped below CAD1.2100 today for the first time since September 2017 but has stabilized in the European morning. There is a $320 mln option struck there that expires today. There is little chart support until closer to CAD1.20. The CAD1.2150-level, which holds an expiring option for $425 mln, may offer initial resistance.

The US dollar slumped by 1% against the Mexican peso before the weekend, its largest drop in over a month. It had begun the week around MXN20.24 and ended it below MXN19.92. So far today, the dollar is consolidating in a narrow range above the pre-weekend low (~MXN19.86). Last month’s low was set close to MXN19.7850, while the year’s low was set in late January by MXN19.55. The highlight for the week is Thursday’s central bank meeting. With inflation above 6%, Banxico cannot afford to resume the easing cycle that looks to have ended in February before price pressures accelerated.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

Australia Central Bank Keeps Rates Near Zero as Economy Picks up Speed

By Swati Pandey

The Reserve Bank of Australia (RBA) reiterated its commitment to keep the cash rate at the record-low of 0.1% for as long as is needed to pull down unemployment and push inflation higher.

The RBA’s as-expected decision comes as it painted a rosy picture of the A$2 trillion ($1.55 trillion) economy, and upgraded the growth forecast to 4.75% over 2021, from its February forecast of 3.5%.

The jobless rate is seen declining to be around 5% at the end of this year and 4.5% at Dec-2022. In February, the RBA’s forecast had unemployment at 5.5% by end-2022.

“The economic recovery in Australia has been stronger than expected and is forecast to continue,” RBA Governor Philip Lowe said in a short post-meeting statement.

“A pick-up in business investment is expected and household spending will be supported by the strengthening in balance sheets over the past year,” Lowe said.

Still, the RBA signalled it’s not ready to raise rates until 2024 at the earliest, falling in line with major central banks who are willing to run their economies hot to fire up inflation, which has been elusive for years.

“The RBA…remains fearful of tightening monetary policy too soon, due to concerns about stifling the economic recovery,” said Anthony Doyle, cross asset specialist at Fidelity.

The central bank, which said it places a high priority on a return to full employment, will release detailed economic forecasts on Friday at 0130 GMT.

HOUSING BOOM

In a bid to blunt the economic shock from the coronavirus pandemic last year, the RBA cut interest rates three times, announced a yield curve control (YCC) programme to keep three-year government bond yields at 10 basis points and launched a massive quantitative easing programme targeting longer term bonds.

Its current A$100 billion ($77.40 billion) quantitative easing programme ends in September and the board will consider future bond purchases at its July board meeting.

The RBA’s efforts are being supplemented by Australia’s federal government which has ditched its long-held obsession with creating budget surpluses and has promised to not take “any sharp pivots towards austerity” in its Budget update on May 11.

Solid monetary and fiscal stimulus have lit a fire in Australia’s property market where prices are hitting record highs, largely led by demand from owner-occupiers and first-home buyers.

But official data on loan approvals out on Tuesday showed investors too were rushing back in to the market.

“Should investor activity further lift, that would add to the potential for macro-prudential regulation in the sector given prior comments that strong investor activity has the potential to amplify the housing cycle,” said Tapas Strickland, Sydney-based economist for National Australia Bank.

The RBA noted the price rise and said it was carefully monitoring trends in housing borrowing.

(Reporting by Swati Pandey; Editing by Shri Navaratnam)

Asia Shares Extend Gains on Supportive Fed, Biden’s Stimulus

By Kane Wu

European and U.S. markets were set to open higher as well, with FTSE futures up 0.15%. E-mini futures for the S&P 500 index rose 0.53% and Nasdaq futures advanced 0.87%.

Biden proposed the sweeping new $1.8 trillion plan in a speech to a joint session of Congress on Wednesday, pleading with Republican lawmakers to work with him on divisive issues and to meet the stiff competition posed by China.

He also made an impassioned plea to raise taxes on corporations and rich Americans to help pay for what he called the “American Families Plan” in his maiden speech to Congress. He has also proposed nearly doubling the tax on investment income, which knocked stock markets last week.

Stephen Dover, Franklin Templeton’s chief market strategist in California, said the effect of the tax package on markets is hard to measure for now.

“If it passes, I think it will have an impact on individual stocks that will pay a higher rate of tax or companies with founders that will pay capital gains and could sell stocks,” he said. “I think investors are going to think about whether they want take their gains now and that creates the possibility of short-term volatility now.”

MSCI’s broadest index of Asia-Pacific shares outside Japan built on early gains and was up 0.46% by mid-afternoon.

Australia’s S&P/ASX 200 edged up 0.24%, as strong oil prices lifted energy stocks.

China’s blue-chip CSI300 index was 0.45% higher, while Hong Kong’s Hang Seng index rose half a percentage point. Seoul’s KOSPI was flat while Taiwan shares rose 0.17%.

Markets in Japan were closed for a holiday but Nikkei futures rose 0.35% to 29,055 points.

For the rest of the day, investors will focus on the first estimate of U.S. GDP for the first quarter, which is expected at 13:30 GMT.

Fed Chair Jerome Powell said on Wednesday that “it is not time yet” to begin discussing any change in policy after the U.S. central bank left interest rates and its bond-buying programme unchanged, despite taking a more optimistic view of the country’s economic recovery.

Excerpts of Biden’s speech released in advance by the White House “hit the high points – big infra(structure) spend, talking climate action and vaccines,” said John Milroy, investment adviser at Ord Minnett. “The Fed remains dovish, all very supportive.”

Tech shares got a boost after Apple Inc on Wednesday posted sales and profits ahead of Wall Street expectations, though it warned a global chip shortage could dent iPad and Mac sales by several billion dollars.

Wall Street ended lower on Wednesday. The Dow Jones Industrial Average fell 0.48% to end at 33,820.38 points, while the S&P 500 lost 0.08% to 4,183.18.

The dollar pared up early losses against the yen to 108.61 and the euro gained 0.07% to 1.2132 following the Fed’s decision to maintain supportive policies.

Oil prices extended gains on Thursday after rising 1% in the previous session as bullish forecasts for a demand recovery this summer offset concerns of rising COVID-19 cases in India, Japan and Brazil.

Brent crude for June rose 0.27% to $67.45 a barrel, while U.S. West Texas Intermediate crude for June was at $64.02 a barrel, up 0.25%.

Spot gold added 0.14% to $1,783.85 an ounce.

(Reporting by Kane Wu in Hong Kong; additional reporting by Andrew Galbraith in Shanghai and Scott Murdoch in Hong Kong; Editing by Jacqueline Wong and Kim Coghill)

BHP Shares Gain on Strong Profit and Record Dividend; Target Price GBX 2,560

BHP Group, one of the largest diversified natural resource companies in the world, delivered a strong profit in the first half of the 2021 financial year and declared record half-year dividend of $1.01 per share and ROCE up to 24%, helping its shares soar over 5% on Monday.

The Anglo-Australian multinational mining, metals and petroleum dual-listed public company said its profit from operations rose 17% to $9.8 billion, up. Attributable profit came in at $3.9 billion, which included an exceptional loss of $2.2 billion predominantly related to the impairments of New South Wales Energy Coal and associated deferred tax assets, and Cerrejón.

The world’s largest listed miner said its underlying attributable profit rose 16% to $6.0 billion.

The London-listed BHP‘s shares, which surged over 8% in 2020, had risen about 16% so far this year. The stock closed 5.22% higher at GBX 2,228 on Monday.

“Our analysis shows that the fair value estimate for BHP is between a bear case of GBX 1,200 per share and a bull case of GBX 2,950 per share, leading to our high fair value uncertainty rating,” said Mathew Hodge, director at Morningstar.

“The bulk of our BHP Billiton fair value estimate derives from just three commodities: iron ore, copper, and petroleum, in broadly equal contributions of approximately one third apiece. Coking coal is a minor contributor.  As commodity prices tend to move in unison, our valuation scenario uses high, low, and baseline prices. We don’t split individual commodities out.  Our price scenarios also factor in currency, operating, and capital cost adjustments.”

The dual-listed company forecasts to make an investment decision soon on its $5.3-$5.7 billion Jansen potash project in Canada and the Scarborough natural gas project off Western Australia, in which BHP will invest $1.4-1.9 billion, Reuters reported.

BHP Stock Price Forecast

Fourteen analysts who offered stock ratings for BHP in the last three months forecast the average price in 12 months of GBX 2,146.43 with a high forecast of GBX 2,560 and a low forecast of GBX 1,610.

The average price target represents a -3.66% decrease from the last price of GBX 2,228. From those 14 analysts, seven rated “Buy”, six rated “Hold”, one rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of GBX1,950 with a high of GBX4,380 under a bull scenario and GBX680 under the worst-case scenario. The firm gave an “Overweight” rating on the natural resource company’s stock.

“We value BHP based on a simple average of our EV/EBITDA and P/NAV methodologies. This allows us to reflect both the shorter-term earnings power and longer-term value of the company. We apply an EV/EBITDA multiple of 6.7x, in line with its historical average. We apply a 1.0x multiple to our NPV estimate, which is based on a blended WACC of 9% and terminal growth rate of 2.0% from 2035,” said Alain Gabriel, equity analyst at Morgan Stanley.

Several other analysts have also upgraded the stock outlook. Citigroup raised the price target to GBX 2,100 from GBX 2,000. Berenberg initiated the coverage with hold rating and GBX 2,000 price target. Credit Suisse cuts to neutral from outperform; raises target price to GBX 2,100 from GBX 1,900.

In addition, UBS upped the target price to GBX 2,200 from GBX 2100. Independent Research increased the target price to GBX 2,100 from GBX 1,660 and rated hold. RBC cuts target price to GBX 2,500 from GBX 2,600. Liberum cuts price target to GBX 1,880 from GBX 2,400.

Analyst Comments

BHP declared a solid dividend of USc101/sh, exceeding our and cons. estimates of USc84-85/sh. Underlying EBITDA was in-line with cons. and within 1% of MSe but EPS missed by 2-5% on higher depreciation. Net Debt was broadly in-line and opex guidance was unchanged but is still based on favourable FX,” Morgan Stanley’s Gabriel added.

BHP‘s portfolio mix and quality stand out among peers. The low-cost position of its assets enables the company to generate FCF yield even in a stress scenario. It maintains a strong B/S, giving flexibility to pursue growth and/or increase cash shareholder returns, in particular given the company’s net debt target of US$12-17bn (post IFRS16 adjustment) vs FY20 levels of US$12.5bn. Spot FCF yields are comparable to peers, even without contributions from the Petroleum division, thus implying long-term optionality to a potential oil price recovery. We prefer BHP on a relative basis, given its attractive commodity mix ex-Iron Ore and free optionality on a potential oil price recovery.”

Upside and Downside Risks

Risks to Upside: Growth projects (Jansen potash, Escondida growth, Spence hypogene, Olympic Dam) successfully executed. Better operating performance, lower costs and capital expenditure. Higher commodity prices – highlighted by Morgan Stanley.

Risks to Downside: Execution issues at growth projects (Jansen potash, Escondida growth, Spence hypogene, Olympic Dam). Weak operating performance, higher costs and capital expenditure. Lower commodity prices.

Check out FX Empire’s earnings calendar

Asia-Pacific Stocks Finish Mostly Higher as Alibaba Shares Soar in Hong Kong

Most of the focus was on Hong Kong where listed shares of Chinese tech juggernaut Alibaba surged following the reappearance of founder Jack Ma.

Asian shares were supported early as U.S. Treasury Secretary nominee Janet Yellen advocated for a hefty fiscal relief package to help the world’s largest economy ride out a pandemic-driven slump. At her confirmation hearing on Tuesday, she said the benefits of a big stimulus package to help the world’s largest economy ride out a pandemic-driven slump.

Cash Market Performance

In the cash market on Wednesday, Japan’s Nikkei 225 Index settled at 28523.26, down 110.20 or -0.38%. Hong Kong’s Hang Seng Index finished at 29962.47, up 320.19 or +1.08% and South Korea’s KOSPI Index closed at 3114.55, up 21.89 or +0.71%.

China’s Shanghai Index settled at 3583.09, up 16.71 or +0.47% and Australia’s S&P/ASX 200 Index finished at 6770.40, up 27.80 or +0.41%.

Hong Kong Shares End at Over 20-Month High on Tech Boost

Hong Kong shares ended at their highest level in more than 20 months on Wednesday, extending gains for the fifth straight session boosted by gains in tech stocks. The IT sector sub-index led the gains by rising 5.47%, with the heavyweight Alibaba Group recorded the best intraday gain in more than six months.

Alibaba’s founder Jack Ma made his first public appearance since October, as he spoke to a group of teachers by video, easing concerns about his unusual absence from public life and boosting shares in the e-commerce giant.

South Korea’s Kia Says Looking at Electric Car Projects with Multiple Firms after Apple Report

In corporate developments, shares of South Korean automaker Kia Motors surged 5.04% after the firm said it is looking at electric car projects with multiple firms, Reuters reported citing a regulatory filing.

That development came after a local online publication reported that Kia’s parent Hyundai Motor Group had decided Kia would be in charge of the proposed cooperation with Cupertino-based tech giant Apple on electric cars, according to Reuters.

Australian Shares at Near 11-Month High as Yellen Backs More US Stimulus

Australian shares ended firmer on Wednesday, taking cues from overnight gains in Wall Street, on expectations that a $1.9 trillion U.S. stimulus package would come through, while optimism over domestic corporate earnings also lent support.

Auto parts seller RPM Automotive Group, not an index constituent, advanced as much as 35.9% after raising its 2021 revenue forecast by 44%, while Ansell also rose after the glove maker forecast exceeding its earlier sales outlook.

Morgan Stanley recently said the upgrade cycle for ASX200 stocks in calendar year 2021 was underway and saw some signs of an earnings revival to come through in the upcoming February earnings season, estimating high-single-digit earnings growth in fiscal 2021.

Link Shares Jump 27% on Pacific Equity, Carlyle Group Takeover Proposal

Link Administration Holdings Ltd, an Australia-based provider of services in superannuation administration industry, said it has received a conditional A$2.76 billion proposal from a consortium comprising Pacific Equity Partners, Carlyle Group to acquire 100% of the stake, sending its shares up 27% to A$5.1 on Monday.

The non-binding offer of A$5.20 a share is at a 30.3% premium to the shareholder registry firm’s last closing price and has the support of Perpetual Ltd, which owns 9.7% of the company, Reuters reported.

The Link Group Board will consider the Proposal, including obtaining advice from its financial and legal advisers. Shareholders do not need to take any action in relation to the Proposal. It should be noted that there is no certainty that the discussions with the Consortium will result in any transaction, the company said.

Link Group has appointed Macquarie Capital and UBS as its financial advisers and Herbert Smith Freehills as its legal adviser.

At the time of writing, Link Administration’s shares traded 24.56% higher at A$4.97 on Monday; however, the stock is down over 15% so far this year.

Link Administration stock forecast and Analyst views

The seven analysts offering 12-month price targets for Link Administration Holdings Ltd have a median target of A$4.38, with a high estimate of A$5.10 and a low estimate of A$3.40, according to FT.

Morgan Stanley target price is A$3.55 with a high of A$5.35 under a bull scenario and A$1.5 under the worst-case scenario. Morgan Stanley said DCF weighted 10% bull, 60% base, 30% bear – skew reflects headwinds in Super business, risks of further margin and operational headwinds in Fund Admin, PES not building sufficient scale in the near term. Key assumptions: 11.5% cost of equity, 3% terminal growth.

“The offer values Link Administration (LNK) at 30% premium to last close and implies 24.5x / 19.3x P/E on FY21E / FY22E on our forecasts. The offer is a ~20% discount to LNK’s IPO price of A$6.37 and a ~15% discount to LNK’s ~A$6 share price just prior to the 1H20 result and pre COVID. Perpetual holds ~9.65% of LNK and has stated it intends to vote in favour of the offer of at least A$5.20. We currently value LNK at A$3.40 in our blended price target. In our SOTP valuation, we value LNK’s stake in PEXA at A$1.54 EV per share. Our bull case valuation for LNK is A$5.35. We note LNK has a new CEO assuming the role on November 2, 2020. LNK is also in the process of acquiring the PES loan management business, with that deal under review by the Irish regulator,” said Andrei Stadnik, equity analysts at Morgan Stanley.

“We think the consensus is missing the multi-year headwinds in Super. Valuation looks too high vs peers. Gearing is above the target, though PEXA distribution proceeds could help. Fund admin growth is likely to take longer but retains potential. UK mortgage servicing is slower than the U.S. Asset and non-performing loan servicing remain a longer-term growth option,” Stadnik added.

Upside and Downside Risks

Upside: 1) Share gain in Super admin market or benefits from fund consolidation. 2) Stronger growth in UK mortgage servicing/EU asset servicing. 3) Earlier or larger than expected PEXA distribution proceeds. – highlighted by Morgan Stanley.

Downside: 1) Major fund admin client contracts not renewed or outsourcing scope is narrowed. 2) Acceleration of Super account consolidation. 3) ERS results in significant account inactivation. 4) Adverse FCA findings re Woodford.

Scentre Group Posts AU$3.6 Billion Loss in H1 as COVID-19 Pandemic Bites

Scentre Group, the owner of Westfield-branded shopping malls in Australia and New Zealand, reported an interim loss of AU$3.6 billion in the first half of 2020 amid rising concerns given the negative effects of COVID-19 crisis and the impact on tenants’ ability to pay rent.

The owner of over 40 Westfield malls said it also took AU$232.1 million credit charge relating to COVID-19. Overall revenue slumped 16% to AU$1.1 billion and funds from operations plunged 46% to AU$361.9 million.

Scentre reported a net loss for the six months to June 30 from a net profit of AU$740 million in the year-ago period, due to AU$4.1 billion downward revaluation of its assets.

For the six-month period, the Group collected 70% of gross rental billings and for the months of June and July 2020, gross rental billings collections were over 80%. In-store sales, Scentre’s retail partners were impacted by the pandemic and the associated restrictions on people movement.

In-store sales for the retail partners that traded throughout the six-month period were 8.1% lower compared to the previous corresponding six-month period in 2019. Speciality in-store sales were 12.1% lower for the six-month period compared to the previous corresponding period.

Scentre Group’s shares gained about 4% to AU$2.09 on Tuesday. However, the stock is down over 40% so far this year.

Executive comments

“As customers are returning to our centres, more than 93% of retail stores are open across the portfolio (excluding our Victorian centres). Portfolio occupancy was 98.8% at the end of June 2020. We launched Westfield Plus, our membership customer engagement platform, at Westfield Newmarket in New Zealand in late 2019 and recently introduced the program in Australia. We now have more than 500,000 members on Westfield Plus and this continues to grow,” Scentre Group CEO Peter Allen said.

“The shopping centre industry has provided over AU$1.6 billion of support for retailers during the pandemic. Our industry is unique in that it has provided, and self-funded, a level of financial support beyond any other industry as well as most government pandemic support packages. We have agreed arrangements with 2,438 of our 3,600 retail partners, including 1,624 SME retail partners,” Allen added.

Scentre stock forecast

Morgan Stanley target price is AU$2.71 with a high of AU$3.95 under a bull-case scenario and AU$1.70 under the worst-case scenario. Other equity analysts also recently updated their stock outlook. Jefferies lowered their price target to $2.00 from $2.28; retained ‘Hold’ rating.

We think it is good to hold for now as 50-day Moving Average and 100-200-day MACD Oscillator signals a selling opportunity.

Analyst view

“We believe Scentre Group is better placed to recover from a COVID-19 world than other retail-dominant REITs. Across its portfolio, its malls are located in wealthier areas (by house price), with stronger incomes, and among the highest median population densities in surrounding areas,” said Simon Chan, equity analyst at Morgan Stanley.

“Its discretionary bias means that it is more leveraged to the well-being of consumers than other portfolios. However, we have factored for this by assuming that rent after COVID-19 will be reset to 15% lower, allowing for an economic decline. In our view, what’s priced in is worse than we think our analysis justifies,” he added.

Upside and Downside risks

Upside: 1) A sustained recovery in speciality retail sales, to 3-4% p.a. 2) A pickup in development activities, including third-party activity. 3) Strong recovery trajectory after COVID-19 issues – highlighted by Morgan Stanley.

Downside: 1) Rise in Interest rates at both at the short and long end of the curve. 2) Further deterioration in the shopping habits of consumers – towards omni-channels. 3) Retailers continuing to rationalise store networks. 4) Prolonged COVID-19 impact.

BHP Posts 4% Decline in Annual Profit Amid COVID-19 Slowdown; Warns Slow Growth Recovery Outside China

BHP Group, an Anglo-Australian multinational mining, metals and petroleum dual-listed public company, reported a decline in annual profit of nearly 4% to $9.06 billion in the second quarter and said except China, all other major economies will contract this year as a result of the COVID-19 pandemic.

The largest diversified natural resource company reported an attributable profit of $8.0 billion and underlying attributable profit of $9.1 billion broadly in line with the prior year. The company posted a profit from operations of $14.4 billion and underlying EBITDA of $22.1 billion at a margin of 53%, with unit costs reduced by 9%.

BHP Group also declared a final dividend of 55 cents per share, down from 78 cents a year earlier, or US$2.8 billion, which includes an additional amount of 17 US cents per share (equivalent to US$0.9 billion) above the 50% minimum payout policy. Total dividends announced US$1.20 per share, equivalent to a 67% payout ratio.

BHP Group expects that China and the OECD will return to their pre-COVID-19 trend growth rates from around 2023. Developing economies outside East Asia may take longer. Inflation trends and exchange rates have been volatile.

Executive comments

“We expect most major economies will contract heavily in 2020, China being the exception. Recovery will vary considerably by country. Our diversified portfolio and high-quality assets position us to continue to generate returns in the face of near-term uncertainty, even as we secure and create the options in future-facing commodities that will allow us to sustainably grow value in the long-term,” Chief Executive Mike Henry said in a statement.

“BHP’s operations generated robust free cash flow and our balance sheet remained strong, with net debt finishing the year at the low end of our target range. We have announced a final dividend of 55 US cents per share, bringing shareholder returns to US$6.1 billion for the full year,” Henry added.

BHP Group stock forecast

Eleven analysts forecast the average price in 12 months at GBX 1,820 with a high forecast of GBX 2,130 and a low forecast of GBX 1,450. The average price target represents a -1.15% decrease from the last price of GBX 1,841.20. From those 11, seven analysts rated “Buy”, four rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley target price is GBX 1,680 with a high of GBX 2,450 under a bull scenario and GBX 720 under the worst-case scenario. BHP Group had its price objective lowered by analysts at Royal Bank of Canada to GBX 1,900 from GBX 1,950. The firm currently has an “outperform” rating on the stock.

Other equity analysts also recently updated their stock outlook. UBS Group upped their price objective to GBX 1,850 from GBX 1,700 and gave the company a “buy” rating. Goldman Sachs Group upped their price target to GBX 1,850 from GBX 1,780 and gave the company a “buy” rating. Bank of America raised shares of BHP Group to a “buy” rating and set a GBX 2,050 target price.

Analyst view

“BHP’s portfolio mix and quality stand out among peers. The low-cost position of its assets enables the company to generate FCF yield even in a stress scenario. It maintains a strong B/S, giving the flexibility to pursue growth and/or increase cash shareholder returns, in particular given the company’s net debt target of $12-17 billion (post-IFRS16 adjustment) vs 1HFY20 levels of $12.5 billion,” said Alain Gabriel, equity analyst at Morgan Stanley.

“Spot FCF yields are comparable to peers, even without contributions from the Petroleum division, thus implying long-term optionality to a potential oil price recovery. We prefer BHP on a relative basis, given its attractive commodity mix ex-Iron Ore and free optionality on a potential oil price recovery,” Gabriel added.

Upside and Downside risks

Upside: 1) Growth projects (Jansen potash, Escondida growth, Spence hypogene, Olympic Dam) successfully executed. 2) Better operating performance, lower costs and capital expenditure. 3) Higher commodity prices – highlighted by Morgan Stanley.

Downside: 1) Execution issues at growth projects (Jansen potash, Escondida growth, Spence hypogene, Olympic Dam). 2) Weak operating performance, higher costs and capital expenditure. 3) Lower commodity prices.

Ampol Shares Fall over 4% as Company Eyes 49% Stake Sale in Convenience Stores Property Trust

Ampol Ltd, formerly known as Caltex Australia, said it would sell a 49% stake in the property trust for A$682 million that owns convenience retail sites, sending its shares down over 4% to AU$28.61 on Monday.

Australia’s largest publicly listed refiner said the deal values the entire property trust at AU$1.4 billion and the minority stake was in a newly formed property trust which would own more than 200 convenience retail sites throughout the country, Reuters reported.

However, the petrol company said it would retain a majority, 51%, stake in the convenience retail sites, maintaining operational and strategic control.

“Following the completion of our retail network review in 2019, we identified the opportunity to unlock the value of our high-quality retail property assets through a transaction that would demonstrate value, whilst importantly allowing Ampol to retain strategic and operational control over our core convenience retail network.” Ampol CEO Matt Haliday said in a statement.

Ampol said in the first year it would pay A$77 million in rental to the property trust and it is planning to utilize AU$612 million from the deal to cut its debt amid global uncertainty in the time of the coronavirus pandemic.

At the time of writing, Ampol shares traded 3.99% lower at AU$28.65 on Monday. The stock is up over 15% so far this year.

Ampol stock forecast

Morgan Stanley target price is AU$30.7 with a high of AU$41.7 under a bull scenario and AU$18 under the worst-case scenario. MarketGrader rated Ampol Limited SELL, based on an overall grade of 42.60 (out of 100) and said the company’s growth record is very poor across its top and bottom lines, suggesting it may need to consider strategic initiative. However, MarketGrader said the company’s shares look attractive relative to the stock’s current fundamentals.

The one listed on the U.S. stock exchange, three analysts forecast the average price in 12 months at $21.21 with a high forecast of $22.19 and a low forecast of $20.08. The average price target represents a 76.75% increase from the last price of $12.00. From those three, two analysts rated ‘Buy’, one rated ‘Hold’ and none rated ‘Sell’, according to Tipranks.

Analyst view

“Ampol had a volatile 2019 in terms of stock performance, which has continued into early 2020 as a result of the oil and energy stock market sell-off given the risks arising from COVID-19. We see a turnaround from Q2 as retail margins improve,” said Adam Martin equity analyst at Morgan Stanley.

“Other considerations include: the effectiveness of Ampol’s operational and capital initiatives in response to weak economic demand from COVID-19; whether the favourable retail margins will continue and offset volume declines; evidence of continued improvement in its retail division; and as with Viva, a better refining outlook.”

Upside and Downside risks

Upside: 1) Higher refiner margins. 2) Higher retail fuel margins. 3) Delivery on cost-out and property. 4) Buybacks or capital management. 5) Stronger USD highlighted by Morgan Stanley.

Downside: 1) Lower retail fuel margins. 2) Lower commercial profits. 3) Softening fuel volumes.

Trading the EUR as Markets Re-Focus on Economics

S&P500 futures now reside 0.8% lower, with June WTI -1.5% and this should weigh on broader Asian equity indices, even if the moves should be less dramatic than opens gone by.

Keep an eye on the ASX 200 as price action is certainly looking less favorable for bullish upside and after a solid run, we’re seeing the daily ranges contract and indecision to push price higher. A rising wedge in the mix for the pattern traders out there, married with a stochastic shift in momentum.

Can the Aussie market lead a potential reversal?

So, one to put on the radar, even if the lead from Wall Street continues to be positive, with the S&P500 closing +2.7% and the Russell 2000 +4.3%. despite a 2% closing decline in June crude.  US equity indices aside, we saw a largely unchanged move across the US Treasury curve, while breakevens (inflation expectations) fell 4bp, resulting in 5- and 10-year ‘real’ yields gaining 4 and 5bp respectively.

Gold was hit hard, with a downside move of 2% and the weekly chart closed with a rather ominous looking candle, with spot -0.3% on open today. One to watch for a kick lower that may resonate with price action traders, even if the fundamentals for gold are solid, and perhaps the Fed announcing it was halving the daily pace of bond-buying to $15b is playing into the move – recall, this is one-fifth of the initial size of Fed asset purchases.

Gold bulls will say $15b is still a huge number and ultimately the Fed’s balance sheet has moved to $6.36t, taking excess reserves to $2.64t and these actions should support gold.

Copper is 0.2% lower on open, after gaining 2.2% on Friday and is another that hasn’t gone unnoticed and the daily shows how ‘The Doc’ is at a very delicate stage in the run. I am compelled to sell this move, especially when you look at the 20-year chart and how price is pushing on the former trend.

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Is copper just following the S&P500 or did the market price in too much bad news for 2020/21?

Personally, I fail to see economics lifting the fortunes of the metal and I know many are looking at 2021 and suggesting better times are ahead. However, we are coming into the eye of the storm and as the market starts to focus less on virus headlines, or at least will be less sensitive to better news, we will focus more on the lasting effects on the economy and solvency. US earnings season should go some way to highlighting this as well.

There is little doubt that last week saw an accelerant in the debate around the disconnect between the financial markets and the real economy. Awful Chinese Q1 GDP, US retail sales, NY manufacturing, and Aussie business and consumer confidence – to name a few – and this week that view will be pushed further with traders eyeing German ZEW, EU consumer confidence, EU PMI’s, weekly US jobless claims and German ifo.

That’s ahead of US ISM and NFP’s on 2 and 8 May respectively, where I am already seeing calls for as many as 28 million job losses in April.

It’s hard not to think this week’s data will be ugly though, and with so much data out of Europe this week, it’s fitting that we also get a Eurozone Head of State meeting (23 April). Expectations for this meeting to be a volatility event are low, with a focus on near-term clues around debt mutualisation. There is also speculation (source: FT) that the ECB is pushing for a so-called bad bank, which would ring-fence the bad loans on the balance sheets of EU banks. Whether this gets much airplay at this meeting is yet to be seen, but with the EU Stoxx bank index at such precarious levels, it is something EUR traders will be keen to watch.

As will be the case for Italian debt, with a new fiscal stimulus expected from the Italian govt, and narrative from the credit rating agencies, with S&P and Moody’s due to review on Friday and 8 May respectively. Few expect a sovereign ratings downgrade at this juncture, but any widening of the BTP-German bund yield spread could weigh on the EUR.

Trading the EUR this week

Trading the EUR will be interesting this week then, especially when taken into context of the debate being had as to where to for the USD. Funding markets aside, you still pay carry to be short the USD and that often gets overlooked.

Options markets often give good insight, and I see EURUSD 1-week risk reversals (1-week call volatility minus 1 week put vol) headed into -0.84. This shows a slight increase in put vol buying, which offers sentiment that traders are seeing modest downside risks. 1-month RR sit at -0.94 and shows a rising belief in downside potential. Spot EURUSD has found sellers into the 20-day MA and the bears need EURUSD to clear 1.0816 for a test of the 1.0766 swing. It’s a tough pair to trade now, and EURCHF is perhaps the cleaner trade – that is, if bearish EU assets.

Certainly, we’re seeing that in risk reversals (white line), where options traders are big relative buyers of EURCHF downside volatility. The moves in spot into the low 1.05 shows the momentum here and options traders are betting on greater downside…the question is whether this is too much of a consensus trade. Price will tell, of course, although I have no position at this stage, but a number of savvy traders have told me they are expecting a bullish reversal this week.

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Chris Weston, Head of Global Research at Pepperstone.

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Australian Earning Results: 17th February 2020

Sectors performance was mixed, with Information Technology, Energy and Real Estate leading gains of more than 0.5%, while significant losses were seen in the Consumer Discretionary and Communication Services sectors.

Brambles Ltd, Regis Resources Limited and QBE Insurance were among the best performers of the ASX200 today, following the release of the earnings reports.

Brambles Limited (BXB) widely recognised as a leading sustainable logistics business rose by more than 4% to $13.18 on an upbeat profit outlook, despite a drop of 9% in the first half net profit. The company manages to deliver sales and earnings growth in the first half in a challenging economic environment.

  • Sales growth +7% at the high end of the Group’s mid-single-digit revenue growth objective
  • Underlying Profit +5% includes +3pt benefit from AASB 16; sales contribution to profit, efficiency gains and lower lumber and transport inflation offset higher operating costs and asset charges across the Group
  • Net finance costs decreased 12% despite US$14m of lease interest recognised due to AASB 16. The decrease reflected interest income from Australian dollar deposits and lower debt funded by IFCO sale proceeds
  • Profit after tax (incl. discontinued operations) down (9)% due to inclusion of US$51.4m of IFCO earnings in 1H19. IFCO was divested in 2H19
  • Underlying effective tax rate decreased to 29.9% reflecting a change in mix of global earnings
  • Underlying EPS of 17.8 US cents up 1.0 US cent reflecting higher earnings and 0.3 US cent benefit from the share buy-back

Regis Resources Limited (RRL) reported a strong half-year net profit after tax of $93.4million. The Australian gold miner’s revenue was boosted by the sales price rather than quantity. For the 2020 outlook, the Duketon operations continue to be on track to deliver the annual production guidance. Its share price ended more than 3% higher

  • Record Net Profit of $93.4 million which represents a 17% increase in the prior corresponding period
  • Revenue of $371.4 million with 182,807 ounces of gold sold at an average price of $2,063 per ounce
  • EBITDA of $185.6 million with a strong EBITDA margin of 50%
  • Cash flows from operating activities of $147.2 million
  • A fully franked interim dividend of 8 cents per share declared
  • Production on track to meet full-year guidance 340,000-370,000 oz

QBE Insurance Group (QBE) announced an FY19 statutory net profit after tax of $550M, up 41% from $390M in the prior year. Its share price jumped by 4.24% to $14.75.

  • Adjusted net cash profit after tax was $733M, up 6% from $692M in the prior year
  • Adjusted cash profit return on equity was 8.9%, up from 8.0%2 in the prior year
  • Group-wide renewal rate increases averaged 6.3% compared with 5.0% in the prior year
  • Premium rate momentum accelerated across all divisions over the course of FY19, especially in International (particularly Europe) and North America
  • Group-wide renewal rate increases averaged 8.3%3,4 during 2H19

GWA Group Limited, the leading supplier of building fixtures and fittings to household and commercial premises performed strongly despite the struggling residential housing conditions. Tim Salt, the Managing Director highlighted the resilience of the business in the face of challenging market conditions.

  • Net Profit of $23.6 million
  • A fully-franked interim dividend of $0.08 per share
  • 1HFY20 revenue of $206.3 million and EBIT of $37.5 million

The Company’s share price rose by 2.05% to finish the day at $3.98 from $3.90.

Index Limited (IMD) share price traded in the red before lunch despite strong earnings reports. The mining tech company edged higher to close at 1.34% higher at $1.51.

  • Strongest half-yearly revenue of $127.9m – up 2% on 1H19 ($125.0m)
  • Underlying EBITDA of $28.1m1 – up 12% on 1H19 ($25.2m)
  • A robust balance sheet with a strong net cash position of $25.5m2 – up 24% on 1H19
  • A fully-franked interim dividend of 1cps declared – up 25% on 1H19 (0.8cps)

Bendigo and Adelaide Bank (BEN) issued its interim-results which a dividend cut and lower profits while announcing a $300 million capital raise and a trading halt.

  • Statutory net profit: $145.8 million, down 28.2 per cent, including a pre-tax software impairment of $87.1 million and accelerated amortisation of $19.0 million
  • Cash earnings after tax: $215.4 million, down 2 per cent
  • Net interest margin: 37 per cent, up 2 basis points (bps)

This week will be the busiest week for February’s earnings. We will see more companies reporting on Wednesday and Thursday. Stay tune for more updates by GO Markets!

Deepta Bolaky, Market Analyst at GO Markets.

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About GO Markets

GO Markets was established in Australia in 2006 as a provider of online CFD trading services. For over a decade we have positioned ourselves as a firmly trusted and leading global regulated CFD provider. Traders can access more than 250 tradeable CFD instruments including Forex, Shares, Indices and Commodities.


Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice

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2020 Kicks off with US-Iran and Climate Change Crisis

The start of the year was marred by the escalating tensions between the US and Iran while extreme weather conditions across the global triggered fierce debates about climate change.

What do we know so far about the tensions between Iran and the US?

  • Iranian-backed militia killed an American Defense Contractor
  • The US retaliated with missile strikes
  • The American Embassy in Baghdad was attacked
  • US airstrikes killed top Iranian military official, General Qassem Soleimani
  • Iran responded by launching missile strikes at two bases hosting U.S. forces in Iraq

As the world witnesses the rising tensions between the US and Iran, and a uniting Iran over the assassination of one of the most influential and powerful men, the downing of Ukraine International Airlines flight PS752 has caused an international outrage and brought internal division within Iran.

Beyond Economic War

The existential conflict between the US and Iran moved beyond an economic war. In 2019, the US announced further economic sanctions on Iran which brought the latter into a deeper recession. As a significant buyer of crude from Iran, China sees the situation as an impediment that can hurt its economy. The Iran risks may therefore overshadow the trade deal.

Investors have already pricedin some extent of the risks associated with Iran since President Trump pulled out of the 2015 nuclear deal and started to impose sanctions. Even though the headlines brought Iran back on the geopolitical risks radar and caused a spike in volatility, we do not see the conflict changing the investment landscape at this stage.

Climate Change

2020 is set to be the confirmation of a new era for climate change. As we entered a new decade, the extreme weather conditions around the world have forced leaders of many countries to reassess their actions over climate change and transform the global energy system.

In Australia, the unprecedented and raging bushfires across the country act as a warning to the world and has even challenged a reluctant Prime Minister to take more action

Energy Sector

Oil prices experienced their largest weekly drop since July 2019 despite the tensions in the Middle East. Coincidently, markets were hit by two contradictory themes for the oil and gas industry: Iran Risks and Climate Change.

Source: Bloomberg Terminal

It should be highlighted that the energy sector emerged as the worst-performing sector of S&P500 in the last decade. Investors are stepping into 2020 being accustomed to the global oil glut and the gradual shift in the oil and gas industry.

Iran risks fuelled expectations of a reduction in supply while the “green” shift lowers demand expectations.

Eyes are now on the US-China trade deal!

Stock Markets

Despite an erratic few weeks of trading, global stock markets have performed quite well:

  • Major equity benchmarks traded at a record high
  • US stock indices are trading higher by 1% and above
  • Most European Bourses are also experiencing similar gains
  • Australian benchmark outshines its peers with more than 4% gain
  • FTSE100 is lagging slightly behind with 1% gain

Brexit will remain the dominant factor for the UK markets. Despite the volatile year 2019, the FTSE100 posted two-digit gains. The Tory win had pushed the index above the 7,500 mark. Looking ahead, the Footsie is expected to rebound and investors are eyeing the next target at 8,000 level for 2020.

However, given that a large amount of earnings of the index is derived from overseas, an appreciation of the Sterling may hinder the performance of the FTSE100 to play catch up with its global peers.

Source: Bloomberg

Are Re-Pricing Risks Required?

The killing of the Iranian key commander took the markets by surprise. Heightened geopolitical risks have somehow become the new normal and unless there is any serious escalation, medium to long-term effect on the markets would be limited. In a new world of higher tariffs, de-globalisation, and historic low levels of interest rates, the most significant risks for 2020 are:

  • Trade deal outcome.
  • Central Banks.

Deepta Bolaky, Market Analyst at GO Markets.

Read Our GO Markets Review

About GO Markets

GO Markets was established in Australia in 2006 as a provider of online CFD trading services. For over a decade we have positioned ourselves as a firmly trusted and leading global regulated CFD provider. Traders can access more than 250 tradeable CFD instruments including Forex, Shares, Indices and Commodities.


Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice.

Brexit Update – As Britain Gears up for 12th December, Where are we on Brexit?

The Latest

Since the EU approved Britain’s Brexit extension to 31st January 2020, Brexit has been put on ice.

For Juncker and EU member states, the call for a general election on 12th December gave some hope that Britain’s decision to leave the EU could be undone.

MPs failed to deliver on a democratic vote over a period of 3-years of political wrangling.

Not only did the EU Referendum cut short the political careers of two prime ministers but also delivered the keys of Number 10 to the Brexiteer of all Brexiteers.

As the UK General Election rapidly approaches, the chances of Britain’s departure from the EU remains elevated.

Not only has Boris Johnson managed to put back together a Tory Party disarray but has also gained support from the electorate. That is if the opinion polls are anything to go by…

Brexit Manifesto

With just 19 days remaining until the General Election, the Tories look set to finally deliver on Brexit.

Boris Johnson, with an anticipated parliamentary majority, is expected to reintroduce his Brexit deal to Parliament before Christmas.

Electoral Calculus predicts the Tories to gain 43 seats on 12th December, which would give a majority of 72 seats.

The Tories manifesto is Johnson’s Brexit deal, with Johnson stating that the agreement is oven-ready.

On immigration, Johnson is also looking to end freedom of movement for EU citizens. The Tories plan to bring into effect an Australian-style points-based system.

Immigration had been a key contributor to Britain’s decision to leave the EU and continues to drive support for populous governments.

So, while Labour Party leader Corbyn sits on the Brexit fence, the upcoming General Election is and has always been a 2nd Brexit vote.

Johnson will deliver should he win with the projected majority. Corbyn, however, would give voters yet another visit to polling stations to decide on Britain’s membership. A 2nd vote in favor of departing the EU would then result in an attempt to renegotiate an already approved Brexit deal.

More uncertainty for Britain, the economy, the EU and, more importantly, the electorate…

The Pound

The Pound fell by 0.49% to $1.2834 in the week ending 22nd November. Having found support from the opinion polls and predictors going into the week, the televised debate on Tuesday and Q&A with political party leaders on Friday contributed to the Pound’s pullback.

Volatility will continue to build in the run-up to Election Day. Expect Brexit chatter and heated televised debates to also focus primarily on Brexit.

What Lies Ahead?

As Election Day gets ever nearer, we can expect Brexit chatter to build. While Johnson will continue to beat the Brexit Drum, the opposition party and the SNP, the Liberal Democrats will attempt to drum up support from the Remainers. There’s also the fence-sitters to convince…

Live televised debates on Sky News on Thursday and Question Time on Friday will garner plenty of interest.

Voters will have an opportunity to digest views from each of the main political parties.

Brexit fatigue has and will likely continue to contribute to the Tory Party’s upside in the opinion polls.

The Election could deliver a different outcome, however. Theresa May discovered this the hard way in her snap election that led to a minority government and a Brexit standoff.

If Johnson fails to win with a majority, a hung parliament would hand the keys of Number 10 to Corbyn. The SNP has already been clear that they would side with Labour as long as Corbyn allows another Scottish Referendum.

It would certainly be a testy time for Britain. Voters would not only have to vote on membership with the EU. The Scots would also have to also decide on whether to go it alone…

We sat down with Michael Stark, an author with Exness, and asked his opinion on the political situation in the UK and how it could affect Brexit and the economy.

Why do the financial markets prefer a Johnson victory and an orderly departure from the EU?

Companies and, by extension, markets, like stability. Although any form of Brexit is certain to stunt economic growth over the next few years, no deal is clearly the worst possible outcome for the economy. Businesses in general can handle a worse outlook, but they usually can’t handle extended periods of uncertainty very well.

Big and small businesses across the UK are understandably very reluctant to make significant investments or hire many new employees when nobody knows what form Brexit is going to take. We’ve basically been in this situation for three years now, starting when no deal was first seriously considered as an option in late 2016.

Mr Johnson has a workable and reasonably popular deal that might stop the seemingly endless debate and allow the UK and its inhabitants to plan for the future with a degree of sureness. After such a long wait, this is what markets crave.

A Tory Party loss would suggest that voters are in favor of Britain remaining within the EU. Such an outcome should lead to a vote in favor of remaining in a 2nd referendum. Isn’t that a better outcome for the Pound and the UK economy?

Probably but not necessarily. The real question here is what would constitute a ‘loss’ and what would happen in such a situation. Jo Swinson has repeatedly ruled out a coalition with Labour. Equally a coalition between Labour and the Scottish National Party if the Conservatives lose is by no means guaranteed. For either of these to happen, though, there’d need to be a fairly big swing away from the Conservatives across most of the country; this isn’t looking likely.

As far as many voters are concerned, Labour’s policy on Brexit just isn’t realistic. The party would renegotiate Mr Johnson’s deal and put it to a public vote against remain. The problem is that Labour wouldn’t take a side and campaign until later, so their promise to ‘get Brexit sorted’ within six months if they won the election looks a lot like a pipe dream.

Markets have basically priced in a workable majority for the Conservatives next month. Anything else would probably mean a sharp drop for the pound in the short term. Ultimately, a majority for Labour (which almost certainly won’t happen) would indeed be a better outcome for the pound in the further future despite the prospect of even more instability in 2020.

Both the Tories and the opposition party have thrown in pledges in a bid to woo Brexit fence-sitters. On the face of it, whose proposed policies would be more favorable for the Pound, Brexit aside?

Most likely Labour’s, but that’s mainly because the Conservatives don’t really have many policies other than getting Brexit done. Policies in Labour’s manifesto aimed at boosting investment would probably be very positive for the pound if implemented. That last bit is key: a number of British economists, while praising Labour’s intentions, have questioned how practical they are.

Labour’s proposed hike to corporation tax would certainly be bad for shares, but the proceeds of this being used for investment could spur the pound upward, Brexit aside. More investment by government would mean more jobs, and more jobs would mean more spending, boosting Britain’s economy and giving fundamental support to the pound.

The big issue though is that nobody can really put Brexit aside now: this election is basically about Brexit. With the deadline currently 31st January, most other policies are sideshows. Tinkering with corporation tax and targeting investment better don’t matter much when a country’s about to leave the biggest trade bloc in the world.


Disclaimer

Opinions are personal to the author and do not reflect those of Exness.

RBA: “QE is not on our Agenda!”

In a year that saw the RBA cutting interest rates three times, the speech around “Unconventional Monetary Policy: Some Lessons From Overseas” fueled speculations that the RBA is to tap into the unchartered territory of unconventional monetary policy: Asset purchases/Quantitative easing

What is Quantitative Easing (QE)?

QE is a process of creating new money which involves a central bank to buy mortgage-backed securities and Treasuries from its member banks to inject liquidity directly into its economy. There is no actual exchange of funds but the central bank issues a credit to the banks’ reserves as it buys the securities.

Therefore, QE increases the amount of money in the system and lowers interest rate. This particular method is usually used when inflation is very low or there is deflation, and conventional monetary policy has become ineffective.

RBA killed off the idea of QE in Australia

In reviewing the conditions from overseas that pushed major central banks to undertake QE, Governor Lowe outlines several observations why the current state of the economy will not require a QE intervention.

Above all, the Governor highlights that despite the weakness in the economy, the growth prospects, banking system, demographic profile and inflation level have not reached the same levels seen in Europe and Japan that have triggered QE.

Two More Rate Cuts?

The RBA sees QE becoming an option to be considered when the cash rate would be 0.25% and not before that. The Governor acknowledges that there are circumstances that QE will help but investors take note that the RBA is cautious with QE and it would only be used as a last resort if needed.

“…if – and it is important to emphasise the word if – the Reserve Bank were to undertake a program of quantitative easing, we would purchase government bonds, and we would do so in the secondary market.”

The RBA did not close the door to QE completely but has shrugged off the idea in the near term.

The Australian Dollar

The local currency rose higher after the RBA hosed down the prospects of QE anytime soon. However, the momentum was shortlived as market participants now expect two more rate cuts in 2020. During the Asian session on Wednesday, the Aussie dollar underperformed against its counterparts especially after Westpac’s dovish RBA expectations for 2020.

Source: Bloomberg Terminal

Australian Share Market

A combination of positive trade news and rate cut expectations have triggered a rally in the Australian share market. The ASX200 was up by 6.9% and closed at a record high of 6,851 on Wednesday.

Source: Bloomberg Terminal

On Thursday, the rally has tamed down as President Trump signed the Human Rights and Democracy Act into law which could potentially strain the trade negotiations. However, the ASX200 held onto gains despite trade risks and weak business investment data to close at another record high at 6,864.

The RBA has toned down the expectations of unconventional monetary policies in the near term but failed to rule out further rate cuts.

Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice.

Deepta Bolaky, Market Analyst at GO Markets.

Read Our GO Markets Review

About GO Markets

GO Markets was established in Australia in 2006 as a provider of online CFD trading services. For over a decade we have positioned ourselves as a firmly trusted and leading global regulated CFD provider. Traders can access more than 250 tradeable CFD instruments including Forex, Shares, Indices and Commodities.


Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice.

Daily FX -GBP Crowned as The Wild West of FX Again

Where, it feels as though volumes will track just below the 30-day average, with volumes through the S&P500 some 18% below this average.

The S&P500 closed +0.7% higher, where we can also see a +0.3% net change in the S&P500 futures from 16:10aest (the official ASX200 close). So, while Aussie SPI futures are down 6p from the cash close (hence the flat ASX200 call), we can look to the US and see the index giving us some belief of support at the open. Although, I am really clutching at straws here and would obviously want to see price looking more constructive before hitching a ride. It’s also positive that we’ve seen US small caps outperform with the Russell 2000 closing up 1.2%, and breadth has been pretty good, with 82% of stocks (in the S&P500) closing higher, with the only sector lower being utilities (-0.3%).

Yield curves suggest a sustained bullish move in risk is limited

There have been limited moves in the fixed income world, although we’ve seen a slight outperformance from the front-end, with 2-year US treasury’s closing -2bp at 1.50%. This has created a slight steepening of the 2s vs 10s US Treasury curve, but when this is still inverted by 2.6bp, the message we continue to hear from the yield curve is hardly one that suggests the S&P 500 is going to see a topside break of the 2943 to 2822 range, where price is currently in the 53rd percentile.

As I have suggested before, perhaps the best curve to focus on is the US 3-month vs US 5Y5Y forward rate. Why? Because the 3m Treasury is close enough to the fed funds effective rate, while the forward rate is the market’s interpretation of the longer-term neutral rate. That being, the implied policy setting in fed funds future for the anticipated levels of inflation and growth. With the 3m Treasury yield now 58bp higher than the forward rate, it quantifies how the market sees Fed policy as being too tight, and the Fed needs to cut by 50bp just to get to the neutral setting, that is neither stimulatory nor restrictive. Again, it’s hard to see equities rallying too intently in this environment.

Inflation expectations will keep the Fed from getting ahead of the curve

What we have seen moving is crude, with WTI closing up 1.6%, Brent +1.5% and gasoline +2.7%, driven by a monster 10m barrel in crude and 2.09m in gasoline draw seen in the weekly DoE inventory report. This was somewhat reflected in the price, given we saw an 11.1m barrel draw in the private API survey yesterday. This has helped push US 5-year inflation expectations (swaps) up another 7bp, and at 1.98%, it seems unlikely the Fed will do anything other than a further insurance 25bp cut, when the FOMC next meet on the 18th September.

The US data certainly doesn’t give the Fed scope to ease by 50bp, and the 8% probability of a 50bp cut, implied in rates markets, reflects that. Certainly, if we look at yesterday’s US consumer confidence print, we are yet to see the consumer feeling the world is a darkening place, even if business investment, trade volumes and manufacturing have been a red flag. Consider then, that the next ISM manufacturing report comes next week, ahead of the August retail sales report on the 13th, and that could be a market volatility event.

FX intervention unlikely… for now

In FX markets, the USD has rallied against all G10 currencies and had some bullish moves against EM FX too. The USD index is into the top of its range and would be higher if it weren’t for the fact EURUSD closed the session down a mere 12pips at 1.1078. It’s interesting that Treasury Secretary Mnuchin has said the department doesn’t intend to intervene in the USD for now.

With USD intervention such a hot topic, and the smoking gun for those calling for a future currency war, the use of ‘for now’ will be debated on the floors. We’ve got a decent idea of how intervention looks like, but what are the triggers that change ‘for now’, to ‘right now’. Is it a trade-weighted USD some 3-5% higher, the USD index pushing towards 103, with EURUSD into 105, or USDCNY moving markedly higher? Perhaps its these factors married with a higher rate of change…However, a market which feels US FX invention is coming is a market one step closer to buying FX vol in size as their play on currency wars and gold will be above $1600 in a flash.

GBP – the wild west of FX

GBPUSD has been the talk of the town though, with the price falling from 1.2286 to 1.2157 with Boris Johnson requesting to prorogue (suspend) parliament, something which was later approved by Her Majesty the Queen. The betting markets now have a no-deal Brexit at 45%, although a general election, perhaps after a short A50 extension, still seems the base case for now. However, one thing is for certain; we are in for a lively period of headline risk for GBP traders to navigate, when parliament comes back from recess on 3 September through to when they go back on recess on 9 September.

GBPUSD 3-month implied volatility

As many have commented, this is an incredibly tight window to pass new legalisation from the Remainer camp and a no-confidence vote, therefore, seems incredibly elevated to be enacted through this period. Of course, if neither play out then when parliament comes back on 14 October, with the Queen due to address the nation, then given the limited time until the Brexit deadline on 31 October, the risk of a no-deal Brexit will become the markets base-case. GBP is the wild west of G10 FX from here…consider your position size and risk tolerance above all when trading the quid.

Also, keep an eye on the AUD with private CAPEX data out at 11:30aest. Weak number in the planned spend could push AUDUSD for a further test of 67c, which has acted as huge support of late.

 

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Chris Weston, Head of Research at Pepperstone.

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Asian Equities: The FED and Geopolitics Drive the Majors

The Key Drivers

In spite of last month’s 25 basis point rate cut, the dollar found support off the back of minutes release and clung on to Wednesday’s gains. At the time of writing, the Greenback was up by just 0.01% off the back of a 0.11% rise from Wednesday.

U.S Treasury yields also held relatively steady suggesting that the FED’s unlikely to be delivering a series of rate cuts, despite the U.S President’s demands.

The FOMC meeting minutes failed to point to further rate cuts down the road. The rate cut was described as a recalibration of the stance of policy or mid-cycle adjustment. The first rate cut since 2008 was delivered to better position the overall stance of policy to help counter the effects of weak global growth, trade policy uncertainty and to promote faster inflation.

While the FED delivered on the rate cut, members had noted that there had been some improvement in economic conditions.

In spite of the more optimistic sentiment towards the economy, 2-year and 10-year Treasury yields had briefly inverted before reversing.

The FED may not have delivered what markets had been in search of, but, the minutes did suggest a more adaptable stance towards the economic environment.

It wasn’t just the minutes that influenced through the early part of the session, however. A reiteration of Tump’s lack of interest in reaching a trade deal with China also influenced. There was also talk of further U.S tax reforms to support the U.S economy.

The Stats

On the data front, prelim August Private Sector Composite PMI out of Japan provided direction early on.

The Manufacturing PMI disappointed, in spite of a marginally slower rate of contraction in August. A more material fall in new export orders weighed on the Nikkei. The Nikkei had been up by as much as 0.55% ahead of the numbers.

If anything, the fall in new export orders was a reminder of the effects of the ongoing trade war.

It wasn’t all doom and gloom, however. Service sector activity picked up midway through the 3rd quarter.

The Majors

The ASX200 index and Nikkei index closed out the day in positive territory, with gains of 0.29% and 0.05% respectively.

The prospects of an extended U.S – China trade war, the addition of Huawei affiliates to the blacklist and political unrest in HK continued to weigh on the Hang Seng.

From the bond markets, spreads between 10-yr and 2-yr Treasury yields failed to widen. The lack of movement also tested the market’s resolve.

At the time of writing, the Hang Seng was down by 0.89%, while the CSI300 was up by  0.29%. Stocks with revenue derived primarily from HK weighed on the Hang Seng on the day.

The article was written by Bharat Gohri, Chief Market Analyst at easyMarkets

Classic Make or Break Session

The cause of the recent move

The cause of the vol spike seems clear, but we have to revisit the ebb and flow of the market structure on Wednesday. Here we can see that the market dynamic centered on signs of better data in the US, and enough to confine the Fed to a 25bp cut. A US-China trade truce that had seemingly filtered into the background, sufficient that investors were happy to pay up for the historically higher earnings, supported by the lack of alternatives, low ‘real’ (inflation-adjusted) bond yields and subdued implied volatility.

Fast-forward a couple of days and are hit with the toxic-combination of Trump’s 10% tariffs on $300b of consumer-focused goods, China’s subsequent rebuttal with the halting the purchases of US ag products, and the symbolic gesture of China being labelled a currency manipulator. This series of events was absolutely not in the script, and we have been treated to a genuine shock to the system, that needed to be discounted rapidly. The spike in implied volatility saw volatility-targeting funds dumping risk, and we’ve had a solid shake out.

The politics of tariffs

The market has clearly formed a view that this saga has far more to play out, with a number of investment houses saying we will not see a deal between Xi and Trump until after the 2020 US presidential elections. Trump wants to lean on the Fed to support his hawkish plans to use trade as a policy initiative, designed to galvanise his base and elevate his election chances. However, the Fed currently sees a US economy lacking a need for aggressive stimulus, at this juncture, and the issue of independence has become so great that we saw the unprecedented step of all four prior Fed chairs putting an op-ed piece out to the world.

Just take St Louis Fed President James Bullard comments (in US trade), who has become a reasonable proxy of the Fed collective, with comments that “trade has been tit-for-tat since the spring or even earlier than that,” And, “I’ve already taken into account that trade uncertainty is high and going to remain high.

China, on the other hand, will be hoping the US economy weakens sufficiently that the Democrat candidates can leverage off any economic fragility as a policy miscalculation. With hope, they can forge a far more compelling deal with a less hawkish government. Although, the near-term risk is that China may have to withstand Trump lifting the 10% tariff to 25% or higher, which will no doubt be offset, somewhat ironically, by a weaker yuan. Trump knows the politics involved but understands that he needs the Fed as his offset should the economy deteriorate.

Lower rates will have limited effect on the economics

That’s all well and good, but if the clarity for US businesses under this tariff regime is so poor, it’s hard to see any spike in demand for credit, even if the Fed is making capital far cheaper. It is a dangerous game played by Trump, and the markets know it.

We had some relief yesterday, and as mentioned yesterday, when the PBoC refrained from lifting the mid-point of the USDCNY its daily ‘fix’ anywhere near as high as the models suggested, the market rallied. While a 30b RMB bill sale stabilised helped breath some life into the CNH on the perception that liquidity would be sucked from the system. The PBoC has been out reassuring corporates that the yuan won’t keep falling, but they haven’t seen that today with the bank fixing the USDCNY 313 points higher at 6.9996. This was just above the consensus view of 6.9977, which is close enough, but USDCNH buyers are now making their case, and this is again proving central to moves across markets in Asia.

If USDCNH is going higher, risk assets are going lower, and traders unwind carry structures in earnest, which is why the EUR, the ultimate funding currency (for the carry trade), has been working so well. S&P 500 futures are now -0.7%, and we watch to see if we get a re-test of the 200-day MA in S&P 500 and NASDAQ futures, which is where the buying kicked in yesterday. A break here and thing turn ugly again.

Asia agrees that we are not out of the woods here, and despite the S&P 500 closing 1.3% higher, we see the ASX 200 up 0.4%, however, China, Japan and Hong Kong are trading lower. The China A50 index (CN50) found a strong bid off horizontal support yesterday, and if traders were happy to defend into 12,329 a closing break on the next attempt will be taken poorly.

Big moves in FX markets

In FX, it’s been a huge day for the NZD, with the RBNZ cutting 50bp and showing once again, if you want to get ahead of the curve then the RBNZ does this better than most, and is not one to mess around. One questions if this is a message that if they are genuinely worried, and if so, we should be too? The moves in NZD have resonated in the AUD and AUDUSD has traded below the December flash crash low…all rallies are to be sold here, it seems.

White – NZDUSD Yellow – AUDUSD

USDJPY saw a huge turnaround yesterday, but traders are flipping back to short exposures today and we are seeing the pair through 106.00. The pair taking its direction from US Treasury futures, where we can see yields 3bp lower across the curve on the day, driven by some incredible buying in Kiwi bonds. Its real Treasury yields that interest most here, as US Treasury 10-year ‘real’ (i.e. inflation-adjusted) yields are now just six basis points from turning negative. We see the 2s vs 10s Treasury curve testing 10bp, where a break of 10bp and we talk inversion here and that is certainly not telling me we the world is fine and suggests the rally yesterday was a relief rally – nothing more.

We have seen gold futures traded above $1500 today, although, we watch for spot gold to move to the figure too. If real rates are turning negative, then gold is only going one way. Oil is flat on the day, but flip to the four-hour chart, and if this kicks lower I am jumping on board.

White – gold futures, Yellow – spot gold

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Chris Weston, Head of Research at Pepperstone.

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Pre-Positioning Ahead of The Biggest Event Risk This Year

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It was the day before the biggest central bank meeting for years, and all is (fairly) well. Risk is a little lower, where we can see the Nikkei 225, Hang Seng and CSI 300 down 1.0%, 0.8% and 1% respectively.

The ASX 200 is outperforming, with a 0.2% decline. Most have attributed this decline to Trump’s critique of China and its lack of bean buying. We’ve also got the end of month flows underway, but even then, the feel is one of calm and most have prepositioned portfolios ahead of the impending event risk.

China PMI and Aussie Q2 CPI in play

Of course, it’s all about the FOMC meeting, but traders have had to deal with Aussie Q2 CPI and China’s July PMI data through Asia today. The China data is a small risk positive, but only in so much that it wasn’t worse than last month. At this juncture, there has been no impact on markets, and to say these numbers inspire is a stretch. Manufacturing PMI contracted at a slower pace at to 49.7 (vs 49.6 eyed), although, if we look at the sub-components, we saw improvements in new orders, new export orders and output.

Bloomberg

The Aussie Q2 CPI came out 30 minutes after the China data, with AUDUSD spiking 25-pips into .6890 and as we can see from the inter-day chart, there seems to be a supply barrier here.

The fact core CPI remained unchanged at 1.6% (vs 1.5% expectations), doesn’t change the view we should get another rate cut this year, but it certainly fails to provide the RBA scope to go twice this year, and we have seen a slight re-pricing in rate cut expectations for 2019. Given the moves, its clear traders went into the data very long Aussie Treasury’s and short AUD into the release.

(Rate cut probability in Australia)

The calm before the storm?

One way I can look at traders anticipated price moves is through FX implied volatility (IV). Take USDJPY one-day IV; this sits at 11.38%, which to put context on this level, 11.38% is the 53 percentile of the 12-month range. So, given we’re talking about an event that so many have talked about for weeks, if not months, it probably seems a tad low.

We can apply this IV into the Black-Scholes model (with other variables) to understand the market sees, with a 68.2% degree of confidence, a 50-pip move on the session (higher or lower) from the current spot price of 108.5. I can increase this confidence factor to 90%, and see the market feels moves will not exceed 70-pips. We can effectively use this as a guide for risk and position sizing.

Levels to watch in USDJPY

I am not one to advocate trading over this sort of event risk; the variance in the playbook is just too diverse that a high probability trade is unclear. However, in G10 FX USDJPY is probably the purest play on the Fed meeting, as it tracks 2- and 5-year US Treasury’s the closest.

With the sort of move expected, it feels like fading rallies into 109.10/20, or buying pullbacks into 108.00/107.90, is the more compelling trade and adopting a mean reversion strategy. Of course, we will be watching gold, US equities and USD pairs more broadly, not to mention EM assets which will be very sensitive to the language.

Maybe the market is wrong with its view that the Fed meeting won’t cause too great a stir, but this is why traders buy volatility. However, it feels as though everyone is positioned for a 25bp cut, and this will be sold as an insurance cut, predominantly to meet the market and to keep the dream alive.

Of course, we may see 50bp, and subsequently, we may see a short, sharp burst of USD selling, with the yield curve steepening, and gold and equities going on a bullish run, but for a sustained reaction the Fed would need to offer insight that they plan to go again.

A more simplistic approach

Don’t underestimate the fact that fed fund futures are pricing in 66bp of cuts by December – so two cuts and a 65% chance of a third. So, at a very simplistic level for the Fed to get ahead of market pricing, they would need to go 50bp, and offer a view they are prepared, if needed, to go again this year. Anything less, will not meet the market.

The disaster situation

Of course, they could leave the fed funds rate unchanged, a fate some 11 of 86 economists (polled by Bloomberg) feel is possible. And, of course, there is logic here given US GDP is growing around trend, consumption is rosy, with the consumer is feeling fairly content. We can even see housing is fine and the labour market is in rude health, and we saw a slight uptick in core PCE, although it’s still too low at 1.6%. However, it’s the supply side which is concerning; it’s the notion that falling business investment is going to feed into hard data, at a time when global trade volumes are looking uninspiring.

The question of whether a 25bp cut actually achieves anything other than meeting market pricing and risk having the market throwing a wobbly should they not go at all has come up a few times today. Personally, I feel the answer is no, and this measure certainly doesn’t feed into Powell’s recent comment that “an ounce of prevention is worth a pound of cure”, where one would argue a 50bp cut is more suited to meet this statement, married with an outlook that gives us a belief we may see another cut in September.

Ex-NY fed president, Bill Dudley, caused a stir overnight, detailing in an op-ed piece (for Bloomberg) that he thinks it’s a one and done and that marries with the view of ex-Fed Chair Yellen.

After the wait, all the hype and speculation, we finally get a chance to hear the aggregated views of the central bank and to see if they are prepared to set policy as the markets have priced. While implied volatility is unsurprisingly elevated, the market is convinced it will hear what it wants to hear…that is no glaring surprises. Let us see.

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Chris Weston, Head of Research at Pepperstone.

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Private Sector PMIs, Corporate Earnings and Monetary Policy in Focus

Earlier in the Day:

After a quiet start to the week, the New Zealand Dollar was in action this morning. Economic data out during the Asian session was limited to New Zealand’s June trade figures.

For the Kiwi Dollar

Month-on-month, New Zealand’s trade surplus widened from a revised May’s N$175m to NZ$365m. Economists had forecast a narrowing to NZ$100m. Year-on-year, the trade deficit narrowed from a revised NZ$5,590m to NZ$4,940m in June. According to NZStats,

  • The value of all goods exports increased by NZ$136m (+2.8%) to NZ$5.0bn from June 2018.
    • Exports of logs and wood led the rise, up NZ$65m (+16%).
    • China had the largest increase in exports, up NZ$297m (+27%).
  • The value of all goods imports fell by NZ$515m (-10%) to NZ$4.6bn in June from June 2018.
    • A slide in the imports of fuel was attributed to the decline. Fuel imports fell by NZ$328m compared with June 2018.
    • The numbers were skewed, however, with the shutdown of Marden Point oil refinery back in the 2nd quarter of 2018 driving fuel imports back in 2018.

The Kiwi Dollar moved from $0.67015 to $0.67026 upon release of the figures. At the time of writing, the Kiwi Dollar was down by 0.12% to $0.6696.

Elsewhere

At the time of writing, the Japanese Yen was up by 0.02% to ¥108.21 against the U.S Dollar, while the Aussie Dollar was down by 0.34% to $0.6981.

In the Asian equity markets, the majors found support early on. The CSI and Hang Seng led the way, up by 0.95% and 0.89% at the time of writing. The ASX200 was up by 0.84%, whilst the Nikkei was up by just 0.57% early on.

Sentiment towards ECB and FED monetary policy, coupled with positive earnings results provided support to the broader market early on. For the Hang Seng and the CSI300, news of face to face trade talks commencing next week was also positive.

The Day Ahead:

For the EUR

It’s also a particularly busy day ahead. Key stats due out of the Eurozone include prelim private sector PMI numbers out of France, Germany, and the Eurozone.

While we can expect the focus to be on Germany’s manufacturing PMI, a better than forecasted Eurozone composite would offset any weak German numbers.

Outside of the stats, geopolitical risk will continue to be of influence, with corporate earnings also in focus on the day.

At the time of writing, the EUR was down by 0.06% to $1.1145.

For the Pound

There are no material stats due out of the UK. The lack of stats will leave the Pound in the hands of the next British PM and Brexit chatter.

At the time of writing, the Pound was down by 0.06% to $1.2432.

Across the Pond

It’s a relatively busy day ahead. Key stats due out of the U.S include July prelim private sector PMIs and June new home sales.

While we would expect the services PMI to be the key driver, the manufacturing sector will need to support. The devil will likely be in the details, with employment, productivity and new orders likely to be the main area of focus.

Outside of the numbers, expect any chatter from the Oval Office to also influence on the day.

At the time of writing, the Dollar Spot Index was up 0.03% to 97.739.

For the Loonie

It’s yet another quiet day ahead, with no material stats due out of Canada. A lack of stats leaves the Loonie in the hands of crude oil prices. While the U.S EIA weekly report will provide direction, sentiment towards trade and Iran will likely remain the key drivers.

The Loonie was flat at C$1.3136, against the U.S Dollar, at the time of writing.

The Race to the Bottom is On

The ‘dots plot’, or its fed fund projections on where each Fed member sees the fed funds rate by a set date have been a market mover when so many had said they were redundant. With seven Fed members now forecasting a 50bp cut this year, a movement has started. Powell even went one further, detailing that those members whose ‘dot’ call was unchanged for this year, felt “added accommodation may be necessary”. They just need a bit more convincing.

The removal of “patient” was mostly in the price, where we see new guidance, where “in light of these uncertainties and muted inflation pressures, the committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion”. Another highlight of Powell’s speech was the line, “in a world where you are closer to the zero-lower bound. It is wise to react to prevent a weakening from turning into a prolonged weakening. An ounce of prevention is worth a pound of cure.” Aside from the theatrics in his choice of words (my emphasis), it gives us a belief that when they ease, they could try and get ahead of the curve, and this appeals to the magnitude of easing.

The triggers for a 50bp cut 

The reaction in rates markets couldn’t be any clearer, and now we see a 100% probability of a cut at the July meeting and over 100bp (four cuts) over 12-months. The question of a 50bp cut in July has come up, and I guess that will be determined by the outcome of the G20 meeting later this month. But we have to consider the data too, and between now and 31 July, we look for core PCE (28 June)ISM manufacturing (2 July) and non-farm payrolls (5 July) as our guide. Specifically, if US non-farms come anywhere near the numbers, we saw in May then 50bp in a thing. In the market’s eyes, it’s on, it’s a race to the bottom, and this notion of currency wars is kicking fully into gear, and It feels like this week is genuinely significant, with powerful insight to what could lie ahead.

While we’ve seen Asian equity indices finding buyers, it’s the flow in our ASX 200 index that has been noticeable. Interestingly, the ASX 200 is just 2.8% from a test of the 1 November 2007 all-time high. Valuations are punchy here, and the forward price-to-book is at an all-time high, with the 12-month price-to-earnings ratio at 16.22x – the highest since December 2017. I am not sure valuations matter too much when we look at subdued realised and implied volatility and Aussie bonds yields, which are negative if we adjust for inflation expectations and the ‘real’ return. The market will generally be interested to pay up for those earnings in this dynamic, especially as the current earnings yield in the index is now some 427bp (or 4.27ppt) above what Aussie 10-year bonds yield.

And, it’s the moves in bonds that have reverberated, they are in beast mode right now. We can see when US 2-year Treasury’s smashed through 1.80% it just heightened the need to buy more, and the 50-week average at 1.59% beckons. US 10s have sailed through 2% through today, trading a further 5bp on the day to 1.97%, and while there is just so much love for bonds, this is a juggernaut that few sellers are going to get in the way of. If we adjust these bonds for inflation expectations, and look at 5- and 10-year Treasury’s on a ‘real’ basis, then at 17bp and 28bp, they are not too far from turning negative. In Aussie fixed income markets, we see the inflation-adjusted yields in Aussie 10-year bonds now -9.9bp – a record low.

Gold is the best house on a progressively awful neighborhood

If the loser from the moves in rates and bond yields is USDJPY, which we see at 0.3% lower at 107.73, the beneficiary of these moves in bond yields is gold, and our flow has lit up today. Mostly, we’ve seen the two-way flow in USD-denominated gold (XAUUSD), but we have seen good buying of AUD-denominated gold (XAUAUD), which has smashed through A$2000 and into new highs. The FX translation effect isn’t a huge issue at this point, as gold is rallying in every G10 currency, including NZD, which is the best-performing currency today after a slight hotter-than-forecast Q1 GDP (2.5%). And, when gold is rallying in every currency you know it’s hot, as traders see gold as a currency in its own right and the best house in an ever-deteriorating neighborhood. As long as real rates are headed lower, the pool of negative yielding bonds increases (currently $12.3t) then gold is only going one way.

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Chris Weston, Head of Research at Pepperstone