Calmer heads have prevailed once again in financial markets, with traders seemingly happy to cover short positions and add a touch of risk into their portfolios. Some have mentioned that the North Korean missile launch was firstly not directed at Guam, but also because Donald Trump produced a fairly measured response (in a statement rather than a tweet), and the view that “all options are on the table” suggests he is not ready to bring “fire and fury”.
This, of course, for the sake of humanity is a good thing, although headlines (source: Nikkei) detailing that the US and Japan are cutting off North Korea’s oil supply and increasing sanctions suggest a tougher stance here and won’t make life any easier for the North Korean public. These measures will be proposed and debated at the upcoming emergency U.N meeting, but one questions how this will actually impact sentiment within North Korea. It only galvanised the public sentiment towards Putin, when sanctions were brought against Russia.
The US dollar index is little changed on the session, but importantly the 2 May 2016 low of 91.93, which was breached (low of 91.38), has been defended with vigour by the market. I would be watching this pair like a hawk, as a higher high in the coming session and the USD index could rally into Friday’s US non-farm payrolls.
USD/CHF looks especially interesting from a price action perspective, and upside in today’s trade, if it materialises, and I am a willing buyer of this cross. USD/JPY has had a strong move and looks bullish, having traded into ¥108.26 and now sitting firmly above Mondays high at ¥109.78, in turn printing a strong bullish outside day reversal. Follow through again in today’s session and we could see ¥110.50 to ¥111.00 come into play.
In 95% of risk aversion moves traders flock to the JPY as the number one currency safe-haven. However, when the threat of a missile attacks has Japan at the heart of concerns, it seems the market is of the belief that Japan is perhaps not the location where Japanese investors will repatriate capital, but look for the deep liquidity of the US treasury and German bund markets instead. It’s no surprise to see EUR/JPY breaking out to the highest levels since May 2016 and remains a buy on a trend and momentum basis.
We can also see US treasuries well supported, with the 10-Year bond down a few basis points to 2.13%, with similar moves across the treasury curve. We can also see a modest widening of high yield credit spreads, but nothing that has caused too much to worry equity investors.
AUD/USD has held firm though and with price currently sitting at $0.7951 the pair has taken a backseat to some of the other more explosive USD pairs and cross rates. Still, the price has come off a touch from the session high of $0.7983 and the focus remains on 80c. The fact spot iron ore closed 1% lower at $76.36, while iron ore futures are over 3% lower hasn’t weighed.
After yesterday’s solid 0.9% gain in Australian Q2 construction work done it is all eyes on tomorrow’s private CAPEX figures at 11:30 aest. For Q2, the market expects a 20bp increase, so the outcome of this should feed into modest tweaks to analysts Q2 GDP calculations for next week data release. Perhaps the AUD will be more sensitive though, to Estimate 3 of the 2017/18 CAPEX intentions, with the market expecting a decent improving from Estimate 2 to $94 billion.
In equity land, we have seen some strong moves off the session lows in European equities, although the various indices closed lower on the session. Again, a bullish ‘hammer’ (showing the bulls supporting prices and picking the index off the low) has been seen on the EU stocks 50 index and that needs close attention for follow through buying here. S&P 500, Dow and NASDAQ futures were hit fairly hard on that the twilight zone, seen between the close of the US equity markets and the start of Asia, however, we can see S&P 500 futures some 13 handles (or 0.5%) higher now than the ASX 200 close at 16:10 aest. SPI futures have followed this lead, slightly underperforming, but up 19 points (or 0.3%) higher from 16:10 aest, suggesting a stronger open for the ASX 200.
Apple (NASDAQ:AAPL) has been a super star in the session, breaking to new highs and looking like a trend followers dream. Of course, this has helped the FANG basket higher, and tech has worked well. Gold miners are up a touch, with the GDX (NYSE:GDX) ETF (gold miner ETF) pushing up 0.7%, despite gold prices easing $18 off the session high of $1326. US crude has closed -0.4% at $46.39, although we see the API oil inventory data out shortly and that could impact price.
Analysts now looking closely at the impact Hurricane Harvey will have on the US economy. The general feel is we should see the devastation (where the full extent of the damage is still largely unknown) weighing on growth by around 10bp in Q3 GDP, but then will be a put upside risks into Q4 and Q1 GDP reads. The S&P 500 oil sector closed down 0.1%.
