Main Themes: US stocks reached their all-time high overnight amid trade optimism and stronger than expected corporate earnings. There was little economic data released.
Share Markets: Tech stocks led US share markets to a new record. The S&P 500 reached its all-time high overnight, touching 3,044. The index closed 0.6% higher. The Dow was up 133 points (or 0.5%) while the tech-heavy NASDAQ rose 83 points (or 1%), led by a large gain in Spotify shares which reported strong earnings growth.
European equities had a more muted session. The Euro Stoxx 50 was broadly flat while London’s FTSE 100 edged up 0.1%.
Interest Rates: Sovereign interest rate yields edged higher amid a general shift away from safe haven assets. Investors favoured a risk on approach following reports that US President Donald Trump said he expected to sign the “Phase 1” trade deal ahead of schedule. He did not elaborate on what that schedule was, however he has commented previously that he had hoped to sign the deal next month at a summit in Chile.
The US yield curve steepened ahead of the Federal Reserve meeting on Wednesday night. Markets are now factoring in a 92% chance that the Fed Funds rate will be cut to 1.50-1.75%. The 3-month Treasury bill yield fell 3 basis points to 1.64. At the longer end, the 10 year yield rose 4 basis points to 1.84% while the 2 year bond rose 2 basis points to 1.64%. Australian bond yields ticked slightly higher at 1.10% for the 10 year bond and 0.74% for the 3 year.
Foreign Exchange: Scarce economic data releases and increased optimism around US-China trade and Brexit left demand for safe haven currencies lower. The US dollar index ended a range-bound session weaker. The yen fell against the US dollar and the euro gained. The Australian dollar gained 0.2% against the US dollar and is currently around the 0.6840 level. There has been little domestic data to drive the AUD which has led to a muted start to the week.
Commodities: Oil prices fell, ending four consecutive days of rises. Increased expectations that US oil stockpiles would rise outweighed the positive sentiment around the US-China trade tensions. Gold prices slipped lower amid the general risk-on mood.
Palladium hit a new record high of above US$1,800 per ounce. The precious metal has seen prices surge due to supply shortages and the introduction of stricter air quality rules. Palladium is used in vehicle pollution-control devices.
Australia: There was no major economic data published yesterday.
United Kingdom: As expected, the EU agreed to grant a Brexit extension, providing further solace that a “no-deal” Brexit will be avoided. The UK now has until January 31 next year to leave the EU. British Prime Minister Boris Johnson tried for the third time to call a snap election, but parliament once again struck down the proposal. Johnson said he would try again to call an election, but through the legislative route which will require fewer votes to pass.
United States: Donald Trump said that the US was close to signing a “Phase 1” deal with China. The deal was initially announced on October 11, but the two sides had not made a formal agreement. At the core of the partial deal, China wants the US to cancel tariff increases on around US$250 billion worth of Chinese goods while the US wants China to commit to buying more US agricultural products. As the trade war has progressed, there have been increasing signs that economic growth in both countries is being impacted.
The Dallas Fed manufacturing index fell to a 3-month low in October. New orders dropped to the lowest in 3 years, signalling that the outlook remains weak. Data from the Chicago Fed also suggests that conditions are worsening. The national index, which comprises a broad range of indicators aimed at tracking national economic activity, fell to -0.45 in September from a revised 0.15 in August.
US trade data showed that both exports and imports are being impacted by tariffs. Exports fell 3% over the year in September to the lowest in 18 months while imports were down 4.6% to the lowest since 2017. The trade deficit narrowed slightly to US$70.4 billion.
Today’s key data and events:
AU RBA Governor Lowe Speech in Canberra (5:45pm)
UK Nationwide House Prices Oct exp 0.3% prev 0.2% (6pm)
US CoreLogic 20-City Prices Aug exp -0.10% prev 0.02% (12am)
US CB Consumer Confidence Oct exp 127.7 prev 125.1 (1am)
US Pending Home Sales Sep exp 0.5% prev 1.6% (1am)
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