Bank of Melbourne

Morning Report

Main Themes: Investor sentiment was mildly positive on Friday night. Investors were kept busy weighing up the positive impact of an upcoming meeting between the US and China to discuss trade against a further slump in the Turkish lira.
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Main Themes: Investor sentiment was mildly positive on Friday night. Investors were kept busy weighing up the positive impact of an upcoming meeting between the US and China to discuss trade against a further slump in the Turkish lira.

Share Markets: European stockmarkets were moderately lower as a further fall in the Turkish lira raised concerns about Emerging markets. Despite declines in European stocks earlier in the day, the US stockmarket recovered earlier losses, to finish stronger. The Dow rose 0.4%, the S&P 500 gained 0.3% and the Nasdaq lifted 0.1% for the session.

Interest Rates: Government bond yields edged lower, despite the lift in US equities. A further fall in the Turkish lira on concerns about further US tariffs boosted demand for safe haven US debt. A refusal by a local Turkish cout to release American pastor Brunson raised concerns about further tariffs. Turkey’s sovereign credit rating was cut by both S&P and Moody’s on Friday, to be futher into junk territory.  

The yield on the US 10-year government bond fell from 2.87% to 2.86%. The yield on the US 2-year government bond fell from 2.62% to 2.61%.

Foreign Exchange: The US dollar index (weighted against a basket of currencies) fell 0.5% from Friday morning. The Euro, Sterling and the Yen gained ground against the US  dollar.

The Australian dollar strengthened against the US dollar. AUD/USD rose from a low of 0.7253 early Friday morning, to a high of 0.7319 on Saturday morning. It is trading around 0.7313 at the time of writing. The Australian dollar gained against the major currencies and finished only marginally stronger against the New Zealand dollar.

The Turkish lira fell sharply against the US dollar on Friday, although it recovered some of those losses through the session. The move in the US dollar against the lira did not see the US dollar hit its highs of the past week or so, when USD/TRY jumped to 7.2362. Yesterday afternoon, USD/TRY jumped from 5.7539, to a high of 6.3468, before giving back some of the gain to trade around 5.9815 at the time of writing. There are concerns about further sharp moves in the currency, with Turkish markets (and others in the Middle East) closed this week.

Commodities: The oil price rose on Friday, although it was lower for the week amid concerns the trade war could weigh on demand. The WTI oil price edged up US$0.50 to US$65.90 per barrel.

Australia: RBA Governor Philip Lowe’s testimony once again provided a positive assessment on the economic outlook, and stated that the next move in official interest rates was likely to be higher. Lowe also took an optimistic view on wages growth noting a pickup in growth despite staying at a very slow pace. That said, the message remains that interest rates will be held steady for “a while yet”, as it will take some time before the RBA’s employment and inflation goals are met.

Europe: CPI inflation fell by 0.3% in July, which was in line with consensus expectations. The final reading on the annual pace of CPI inflation held at 2.1% for July, although this was up from 2.0% in June. The annual pace of core CPI inflation was 1.1% in July, which was unchanged from an earlier estimate for July but up from 0.9% in June.   

The current account surplus narrowed slightly to €23.5bn in June, from €24.4bn in May.

United States: Soren Skou, CEO of Maersk, the world’s largest shipping company, said tariffs will hurt the US economy more than the rest of the world. He said the tariffs could slow global annual trade growth by 0.1% to 0.3%, but for the US, the effect could be “perhaps 3 or 4 percent”.

Consumer sentiment slipped to 95.3 in August, from 97.9 in July, according to the University of Michigan measure. This was the lowest reading since September last year, although consumer sentiment still remains elevated. The current conditions component worsened in August, while the expectations component held steady.

The leading index of economic activity was stronger than expected, rising 0.6% in July, suggesting above trend growth in the coming year. The six-month annualised leading index held at 5.5% in July, which was unchanged from June, after having declined in the previous three months.

 

Today’s key data and events

 

EZ Construction Output Jun prev 0.3%  (7pm)

Times are AEST. All data forecasts are m/m or q/q and seasonally adjusted unless otherwise specified. Forecasts for Australian data are our forecasts and for other countries they are consensus forecasts.

 

Jo Horton, Senior Economist

Ph:02-8253-6696