Main Themes: Markets were once again roiled by trade and Brexit worries overnight. The US blacklisted a further 28 Chinese companies from operating in the US without a permit ahead of high level talks scheduled at the end of this week.
Share Markets: Major US and European equity indices fell overnight. In the US, the Dow Jones (-1.2%) and S&P 500 (-1.6%) both lost ground as tensions flared up between China and the US just a couple of days before scheduled high level trade negotiations.
The Euro Stoxx 50 lost 1.1% and London’s FTSE 100 lost 0.8% amid reports of further Brexit turmoil. Boris Johnson reportedly told Angela Merkel that it would be impossible to reach a Brexit deal with Northern Ireland still part of the EU’s trade bloc.
Interest Rates: Bond yields in the US fell as trade tensions flared up and Fed Chair Jerome Powell said that the Fed would be expanding its balance sheet in order to calm money markets. The US 10-year yield fell 2 basis points to 1.53% and the 2-year dropped 4 basis points to 1.42%.
Australian yields rose a little overnight. The 10-year bond rose for the first time this month by 3 basis points to 0.89% and the 3-year rose by the same amount to 0.6%.
Foreign Exchange: The US dollar rose slightly against most of its peers in a mixed session overnight. The dollar index started the session weaker as trade tensions dominated news flow and US economic data disappointed. It ended the session higher as Jerome Powell was non-committal about future rate cuts despite announcing a plan to expand the Fed’s balance sheet. The US dollar rose against the euro and pound but fell against the yen. Brexit concerns hit the pound, driving it lower to 1.21 US dollars. The yuan strengthened on the first day after the week-long Chinese national holiday.
The Australian dollar is broadly flat at around 67.30 US cents.
Commodities: Oil followed equities lower as the outlook for global growth took another hit due to deteriorating prospects for a US-China trade resolution. WTI crude is currently trading at US$52.60 per barrel.
Gold and other precious metals bounced back amid the increase in global risk.
Global: The new managing director of the IMF, Kristalina Georgieva, said that the global economy is experiencing a “synchronised slowdown”. In a preview of new research to be released next week, she said that the current trade tensions could cost the world economy as much as US$700 billion in GDP in 2020. The IMF is expecting growth to slow in 90% of countries in 2019.
Australia: ANZ job ads rose 0.3% in September, following a 2.8% decline in August. On an annual basis, job ads were down 10.4% and continue to suggest that the strong pace of job gains will ease.
The latest NAB Monthly Business Survey shows that business sentiment remained soft in September. Business confidence fell 1 point to 0, the lowest since March. Other parts of the survey suggested that the deteriorating trend in conditions could be steadying, with the business conditions index rising 1 point to +2. Both business conditions and business confidence however, are below their 10-year averages of +6 and +5, respectively. While some solace can be gleaned from September’s improvement, conditions remain soft.
China: The Caixin services PMI eased from 52.1 in August to 51.3 in September, its lowest since February. The index is continuing to indicate expansion, but the moderation in activity reinforces concerns about the growth outlook at a time when the industrial sector is struggling.
United Kingdom: Brexit concerns flared up again on reports that an early-morning phone call between UK prime minister Boris Johnson and German chancellor Angela Merkel did not go well. Merkel was reported as saying that the EU would insist that Northern Ireland remain in the EU trade bloc, while Johnson pushed back, saying a deal involving Northern Ireland remaining in the bloc would be impossible.
United States: The latest release of US economic data opened the door for further rate cuts. US producer prices surprised to the downside, falling 0.3% in September, leaving the annual rate of increase at 1.4% year-on-year. Core prices were down 0.4%, signalling a lack of inflationary pressure in the economy. The data feed into comments from Jerome Powell who reiterated last night that the Fed would “act as appropriate” and continue to make decisions on a meeting-by-meeting basis and respond to movements in data.
Speaking in Denver, Powell announced that the Fed would begin a formal bond-buying programme to prevent short-term rates from moving away from the target band. Last month there were several cases of liquidity shortages in the repo market which lead to spikes in the effective Fed funds rate, forcing the Fed to intervene on an ad hoc basis.
While no operational details were released (these will be released in the coming days), Powell was at pains to stress that this did not constitute a new round of quantitative easing (QE).
Aside from announcing measures to boost liquidity on an operational level, the Fed chair stuck with his current tone on monetary policy. He acknowledged the slowing prospects in the labour market and global risks, but characterised the outlook as “favourable” and did not commit to further cuts.
Ahead of high level trade talks which are scheduled for Thursday night, the US put visa restrictions on some Chinese official and blacklisted 28 Chinese companies from operating in the US. Officials cited human rights abuses towards Muslims as the reason. Meanwhile, separate reports suggested that the US was in fact exploring ways to restrict US capital flows into China, just one day after White House officials ruled out any such action.
Today’s key data and events:
AU WBC-MI Consumer Confidence Oct prev 98.2 (10.30am)
US Minutes of the FOMC Meeting Sep (5am)
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.
Nelson Aston, Economist Ph: 02-8254-1316