US equities edged north yesterday, with the S&P 500 hitting a new record high, as US President Trump said he expects to sign a significant part of a deal with China ahead of schedule. Now, equity investors may turn their attention to the FOMC decision, which is scheduled for tomorrow. In the UK, lawmakers rejected Boris Johnson’s call for new elections, with the Prime Minister saying that he will make another attempt.
The dollar traded lower against most of the other G10 currencies on Monday and during the Asian morning Tuesday. It gained only against NOK, SEK and JPY, while it underperformed the most versus AUD, NZD, and GBP.
Although not so clear by the performance in the FX sphere, the weakening of the yen and the strengthening of the commodity-linked Aussie and Kiwi suggest a risk-on trading environment. Indeed, most major EU indices ended their session in the green, with the US ones gaining even more. The S&P 500 hit a new all-time high, while Nasdaq Composite fell just short of its own record, hit back in July. (The Nasdaq 100 also hit a record peak). Today, during the Asian morning, China’s Shanghai Composite slid 0.87%, but Japan’s Nikkei 225 gained 0.47%.
The driver behind the rally in US equities may have been comments by US President Donald Trump, who said that he expects to sign a significant part of the trade deal with China ahead of schedule. However, he did not specify the timing. What’s more, the Office of the US Trade Representative said that it is considering extending tariff suspensions on some Chinese imports, which are set to expire on December 28th.
The market seems to be feeling even more optimistic with regards to a finalized and sealed deal between the world’s two largest economies, but we will stick to our guns and say that we would like to see handshakes and signatures before we start examining a long-lasting recovery in investors’ morale. For now, they are likely to pay more attention to the FOMC decision scheduled for Wednesday.
At its latest policy meeting, the FOMC decided to cut rates by 25bps, with the updated “dot plot” pointing to no more cuts this year and the next. That said, the slide in manufacturing activity to a 10-year low in September, combined with comments from Chair Powell that the Committee will “act as appropriate” and that policy is not on a pre-set course, allowed investors to stay well convinced that another cut will be delivered at this week’s gathering. Thus, a quarter-point cut by itself is unlikely to prove a major market mover. Investors are likely to pay attention to hints and clues on how officials intend to move forward.
The big question is how the market will react in case the Fed stays ready to ease further if needed. Will this be taken as a sign that the economy is performing worse than previously expected, which could result in lower equity indices, or will it be interpreted as a signal that the Fed is not giving up, which could prove positive? Judging by the recent rally in US indices amid elevated expectations for an October cut, we believe that the latter could be the case.
Last week, the Nasdaq 100 cash index tested its previous all-time high area, near the 8036 hurdle, but failed to close above it. The index started off this week well, by opening with a slight gap to the upside, breaking the previous all-time high and creating a new one. Yesterday, the price found resistance near the 8119 barrier and the cash index is now balancing slightly below it. Given the current “risk-on” environment, we may see another round of buying, which means, this could lead to a creation of a new all-time, hence why we will stay somewhat bullish.
Given the recent sharp uprise, there may be a chance for a small correction back down. If the price does decline a bit, but remains above the 8036 territory, which was the previous all-time high, this could result in another round of buying, potentially leading to the 8119 barrier again. If this time that barrier fails to keep the index down, its break may lead Nasdaq 100 into the uncharted territory.
On the other hand, if the price starts sliding below the psychological 8000 hurdle, or even the 7980 zone, which marks the highs of October 17th and 22nd, this may result in a selling activity that could bring Nasdaq 100 to the 7910 area. That area is marked by the low of October 25th and if it fails to withstand the bears, a break of it could send the index to the 7800 level, marked near the low of October 23rd.
Moving to the Brexit Land, yesterday, the EU agreed to a new extension of up to three months. If no member state opposes by today afternoon, the delay will formally take flesh. Hours later, the UK Parliament rejected PM Johnson’s call for new elections on December 12th. His bit gained only 299 votes, which is much less than 424, the two-thirds of the house needed. After the vote, the Prime Minister said he would make another attempt, following a legislative route, which would only require a simple majority.
The pound was found slightly higher against the dollar, which suggests that avoiding a no-deal Brexit on October 31st was largely priced in. Now, attention would fall on Johnson’s new bit, which could be closer to the one proposed by LibDem and SNP. The new bill may call for new elections on December 9th, before students break up for winter holiday. With the LibDem’s and SNP’s support, the new bill has more chances to pass, especially if it will only require simple majority in Parliament. However, despite polls pointing to a big lead for the Conservative party, due to the UK’s complicated voting system, it is hard to predict the outcome. Thus, we will stay neutral with regards to where the pound may be headed next. In order to start getting confident over the British currency, we would like to see headlines suggesting that the chances for Parliament approving and ratifying an exit deal have risen.
Overall, GBP/AUD is still trading above its medium-term upside support line drawn from the low of July 30th. But recently, after finding good resistance near the 1.9093 barrier, the pair started drifting lower, trading below a short-term tentative downside resistance line taken from the high of October 16th. We can see that the rate is still balancing above its 1.8715 hurdle, this way forming a possible descending triangle pattern, which according to TA textbooks, tends to break to the downside. That said, as long as the pair remains inside that formation, we will remain neutral and wait for a clear breakout, before examining a further short-term directional move.
A drop below the above-discussed 1.8715 hurdle, which marks the high of October 14th and the low of October 17th, could attract a few more sellers into the game, as GBP/AUD would confirm a forthcoming lower low on the shorter timeframe and the rate could then slide further. We will then target the support area between the 1.5820 and 1.8495 levels, which may initially hold the pair from moving lower. We could see a small correction back up, but if the rate is not able to climb back above the 1.8715 barrier, this might result in another leg of selling. If this time the above-mentioned support area fails to withhold, its break may send GBP/AUD a bit lower, to test the 1.8430 level, marked near the highs of October 3rd and October 10th.
Alternatively, if the pair breaks the aforementioned short-term downside line and pushes above the 1.8856 barrier, marked by yesterday’s high, this could lead to another round of buying, as more bulls may be entering the field. This is when we will aim for the 1.8935 obstacle, a break of which could set the stage for a move to the 1.9093 level, marked by the current highest point of October.
The only indicators worth mentioning on today’s agenda are the US Conference Board Consumer confidence index for October, the US pending home sales for September, and the API weekly report on crude oil inventories. The CB index is forecast to have risen to 128.0 from 125.1, while pending home sales are expected to have slowed to +0.9% mom from +1.6%. As it is always the case, no forecast is available for the API print.
As for tonight, during the Asian morning Wednesday, we get Australia’s CPIs for Q3. The headline rate is forecast to have ticked up to +1.7% yoy from +1.6%, but the trimmed mean rate is expected to have remained unchanged at +1.6% yoy. At its latest policy meeting, the RBA cut interest rates by 25bps and reiterated that they will continue to monitor developments, including in the labor market, and ease policy further if needed.
The employment report for September showed that the unemployment rate ticked down to 5.2% from 5.3%, which is certainly a move in the desired direction, but still distant from the 4.5% mark which the RBA believes it may start generating inflationary pressures. This allowed market participants to keep bets with regards to further easing well on the table, fully pricing in the next quarter-point decrease in May next year. With inflation staying below the lower end of the Bank’s target range of 2-3%, they may be tempted to bring that timing slightly forward.
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