Bank of Melbourne

Morning Report

Main Themes: Traders’ screens flashed green as more positive news around deals emerged. There were reports of major inroads towards a partial US-China trade agreement, with US President Trump indicating that a “Phase 1” deal has been reached. Hopes of a last-minute Brexit deal also heightened on Friday, although some of that optimism has been tempered following talks over the weekend.
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Main Themes: Traders’ screens flashed green as more positive news around deals emerged. There were reports of major inroads towards a partial US-China trade agreement, with US President Trump indicating that a “Phase 1” deal has been reached. Hopes of a last-minute Brexit deal also heightened on Friday, although some of that optimism has been tempered following talks over the weekend.

Share Markets: Investors flocked to equities as a risk-on mood spread following the announcement of a partial US-China trade deal. The Dow Jones rose 320 points (or 1.2%) and the S&P500 notched a 32 point increase (or 1.1%). Following three consecutive increases, the S&P500 is now just 1.8% off its all-time high.

Interest Rates: The US yield curve steepened further, moving back to its “normal” shape on Friday, for the first time since July. The 10-year treasury yield rose 10 basis points to 1.75% while the 3-month bill shed 1 basis point to 1.68%. Yields firmed as optimism around a US-China trade deal emerged.

Foreign Exchange: The US dollar index was weaker on Friday, dropping to a 3-month low as safe-haven buying eased. Positive sentiment around Brexit and the partial US-China trade deal were the main catalysts. The pound was a major mover, increasing 1.8% on Friday following a 1.9% jump on Thursday, following the surprise announcement of a possible Brexit deal. Some of that optimism has faded this morning, although it has held most of its gains and is currently trading around US$1.2642.

The Australian dollar also gained on Friday, rising 0.5%. It is broadly flat in trade this morning at around 67.90 US cents.

Commodities: Oil prices rose sharply amid reports of an Iranian tanker attack and a slightly more positive global economic outlook. WTI oil futures rose US$1.2 (or 2.2%) to close at US$54.8 per barrel.

Gold prices lost further ground amid the scaling back of global uncertainty while copper prices rose as Ecuador’s only large scale copper mine was shut down.

Australia: No major data to report.

New Zealand: The BusinessNZ manufacturing survey showed that the manufacturing sector continued to do it tough in September. The index was unchanged at 48.4, below the 50 level that indicates contraction for the third straight month.

Other data showed that credit card spending rose more than expected at 0.4% over the month. The increase comes off the back of a strong 1.3% rise in August, suggesting that the RBNZ’s 50 basis point cut and rising house prices could be beginning to flow through to consumer spending.

Global: Trade tensions tempered between the US and China. The US suspended a threatened tariff increase of an additional 5% on US$250 billion worth of goods while China agreed to buy US$40-50 billion in US agricultural products.

President Trump, who has previously said that he would not be satisfied with a partial deal, announced on Friday that the first phase of a deal had been reached. There was no signed agreement, and no details released on the fundamental issues of technology and subsidies to state-owned enterprises. Despite the lack of detail, markets breathed a sigh of relief that a truce has been reached.

United Kingdom: Further progress was announced on a possible Brexit agreement on Friday, with European officials announcing that there was a possible path to a deal. Following talks over the weekend though, both sides agreed that there is still a lot of work to do.

There remain differences over customs arrangements and the key issue of the Irish border backstop. The ability of Johnson to convince Northern Ireland’s Democratic Unionist Party (DUP) to have Northern Ireland remain in the EU customs union has been a major hurdle.

The EU remains likely to grant the UK an extension, should it request one, although Boris Johnson is adamant that it will either negotiate a last-minute deal before the October 31 deadline or leave without any agreement. The EU is holding a summit this week and media reports are that Johnson will speak with German Chancellor Angela Merkel, French President Emmanuel Macron and European Commission head Jean-Claude Juncker tonight.

United States: On top of the positive news around the first phase of a trade deal, US economic data was relatively upbeat on Friday. The University of Michigan consumer sentiment survey unexpectedly rose in October. The main index rose to 96.0 in October from 23.2 in September, signalling that consumers are likely to remain the main driver of growth for the US economy. There was a fall in consumer inflation expectations though, bolstering the case for more rate cuts.

 

Today’s key data and events:

NZ Performance of Services Index Sep prev 54.6 (8.30am)

EZ ECB’s De Guindos, Hernandez de Cos Speak (6.15pm)

EZ Industrial Production Aug exp 0.3% prev -0.4% (8.00pm)

CH International Trade Sep (Mon 14 Oct)

   Trade balance exp US$35bn prev US$34.84bn

   Imports y/y exp -2.9% prev 1.0%

   Exports y/y exp -6.0% prev 5.6%

 

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