Inter-Market Analysis And Macro Insights For September 7, 2018

Italian bonds have attracted good selling, with the Italy/German 10-year spread widening a chunky 15 basis points to 2.70%. EUR/USD seems unperturbed, tracking flat on the session and in a range of 1.1659 to 1.1606. EUR/AUD pushed into 1.6222, and above the March highs, but has pulled back – is this failed break meaningful?

US data was by and large upbeat, and while we saw the ADP private payrolls print 163,000 (vs 200,000 eyed), weekly jobless claims hit the lowest levels since 1969 at 203,000. We also saw August ISM non-manufacturing rising to 58.5. Within the sub-components, we saw new export orders pushing to 60.5, with new orders up at 60.4. Again, this data points to an economy running above 3% in Q3.

On a slightly more negative tone, factory orders declined 0.8%, with durable goods pulling back 1.7%

There was strong attention on NY Fed president John Williams speech, who detailed that Fed shouldn’t be afraid to invert the curve because "we need to make the right decision based on our analysis of where the economy is, and where it’s heading, in terms of our dual mandate goals." There was also more discussion around the neutral rate, but, by and large these comments are a direct contrast to some of the regional presidents, such as Kashkari and Bullard, and their concerns about hiking the fed funds into a flatter curve.

In fixed income and as mentioned, there have been some big moves in the Italian/German yield spread. Small selling has been seen in US Treasuries across the curve, with the 10-year closing 2bp lower at 2.87%, with the 2s vs 10s Treasury curve closing down a tick at 23bp.

The USD index closed out the session -0.2%, with the greenback gaining against the Skandies while losing ground versus the JPY and CHF. USD/CHF is eyeing a break of the April lows, and USD/CHF shorts look compelling.

USD/JPY was offered through the various US economic data points but dived further lower in late US trade into ¥110.52. Where narrative in the WSJ turned the attention on whether Trump will focus on Japan next. Watch for regional underperformance from the Nikkei 225 today.

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AUD/USD came off session lows of 0.7166 just after the ASX 200 close and pushed into the 72-handle. The pair will be focused on USDCNH through trade today, although economists will be watching for signs of greater vulnerabilities in Aussie July homes loans at 11:30aest

In commodities, US crude won’t inspire closing -1.4% at $67.77 and eyeing a test of the July uptrend seen at $66.50. On a more positive tone, iron ore futures closed up 1.9%, while copper pushed up 1%, although the call is for BHP and alike to open on a flat note.

Moves in Emerging Markets have been far more sanguine with the EEM ETF (MSCI EM ETF) closing +0.1%, while the ASHR EFT (China CSI 300 ETF) closed -0.1%. We also saw gains coming through against the USD in some of the beaten-up EM currencies such as the ARS (+2.8%), (BRL+2.2%) and MXN (+0.8%).

Leads for Asian equities are largely bearish, with the DAX, S&P 500 and NASDAQ closing lower by 0.7%, 0.4% and 0.9% respectively.

Eyes on US non-farm payrolls (due 22:30aest) and although the ADP private payrolls were weak, the consensus for the NFPs remains at 191,000 jobs created. The unemployment rate is expected to tick down to 3.8%, with wages increasing by 2.7% YoY.

So, on the whole, the leads will hardly inspire Asia into reversing some of this negative sentiment, where traders still really want to understand the finer details around Trump’s $200b in additional tariffs on China. We could hear more on this today or through the weekend, and one question whether we actually see a sell the rumour, buy the fact type scenario playing through markets. While trade dominates, Asia shouldn’t be too concerned about holding positions into the US non-farm payrolls print given last month was a fairly messy result and there was simply no move in markets. The view is really, show us a strong move in wages (from the prior month) and we’ll act on rates and the USD.

It’s a brave call, but I see signs early weakness in the S&P/ASX 200 as a buying opportunity, with the Aussie index looking to avoid the seventh day of losses. Stability in EM currencies and indices (as mentioned) could give us some inspiration, as will the gains that were seen in copper and iron ore futures. So, any moves in the ASX 200 into 6115 on open could be a tactical opportunity for a short-term trade into 6130/40. That said, I would be keeping stops tight, because if traders do decide to de-risk into the weekend and the view of limiting one's gapping risk, then we could see the ASX 200 feasibly pushing into 6100 through the session. A lot will be premised on trade in China and Japan and the impact on S&P 500 futures. Instinct tells me that buyers could support, but, as always price action needs to be respected and is our guide.