Australian dollar strong as stocks threaten unwind

See the latest Australian dollar analysis here:

Macro Afternoon

DXY was soft last night, EUR firm:

The Australian dollar still looks strong across the DM board:

Weirdly, EMs are rallying as risk diminishes:

Gold couldn’t capitalise:

Not sure what happened to WTI:

Base metals are bifurcating:

Miners are still solid:

EM stocks too:

Junk looks toppy:

US yields are pancaked:

US stocks have formed a very attractive head and shoulders top. The neckline is intact but lookout if it breaks:

Westpac has the data wrap:

Event Wrap

Robert Redfield, director of the Centers for Disease Control and Prevention, told a Senate committee that even if a vaccine were approved this year, it wouldn’t be ready to be widely distributed to Americans until next summer or fall.

US housing starts undershot estimates with a -5.1% fall in August to a still-elevated 1.416m pace. Building permits fell -0.9% to 1.470m pace, following three consecutive gains from a five-year low in April. The Philly Fed business activity index fell -2.2 points to a still-solid 15.0 reading, and well above the 40-year low of -56.6 in April. The components were stronger than the headline. Initial jobless claims of 860k in the latest week were close to estimates (850k), while continuing claims fell to 12,628k (vs 13,000k expected) in the first week of September. The report was fairly neutral overall.

The BoE’s MPC left the repo rate and QE settings unchanged, at 0.10% and GBP 745bn, as had been widely expected. The summary and minutes noted that the outlook is unusually uncertain, despite recent data being better than expected. Despite economic growth forecast to continue recovering, unemployment was expected to rise, consistent with spare capacity. The summary stated that “the Committee does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating the spare capacity and achieving the 2% inflation target.” The last paragraph in the minutes discussing negative rates was a surprise for markets: “The Committee had discussed its policy toolkit, and the effectiveness of negative policy rates in particular, in the August Monetary Policy Report, in light of the decline in global equilibrium interest rates over a number of years. Subsequently, the MPC had been briefed on the Bank of England’s plans to explore how a negative Bank Rate could be implemented effectively, should the outlook for inflation and output warrant it at some point during this period of low equilibrium rates. The Bank of England and the Prudential Regulation Authority will begin structured engagement on the operational considerations in 2020 Q4.”

Event Outlook

Japan: Annual CPI inflation is slowing, partly due to the travel promotion subsidy’s impact on accommodation prices (prior: 0.3%, market f/c: 0.2%).

UK: The recovery in retail sales is expected to moderate in August after a 3.6% gain to pre-pandemic levels in July (market f/c: 0.8%).

US: A slight improvement in September’s Uni. of Michigan consumer sentiment is anticipated following an uptick in August (prior: 74.1, market f/c: 75.0). The August leading index is expected to be little changed (prior: 1.4%, market f/c: 74.9). The FOMC’s Bullard will speak on the Covid Recovery Challenge (0:00 AEST).

Interesting price action. The bid into EMs is largely being sustained by a falling DXY even as risk comes off in stocks thanks to the first wave of stimulus tightening. That holds up the Australian dollar as well. A neat chart from UBS tells the tale:

At least until the election, I expect equity volatility (biased towards weakness) to persist. So, I don’t think it likely that the soft DXY can be sustained short term, especially so given how lopsided is positioning in the short trade.

It is more likely than not that we see a deeper correction short term for everything except DXY, including the Australian dollar.

David Llewellyn-Smith
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      • Since 2003 I have been mostly in cash, long bonds and gold………..I am well ahead of everything except a handful of unicorn stocks that pay no or miniscule dividends.. Cash is now mostly physical since cash equivalents don’t reward for the risk anymore. Long bonds are mainly older 4% coupons and gold is doing well over that time frame. Bond investing is obviously coming to and end and they are becoming a savings vehicle……I don’t know what i will do about this in the long term but will be sitting pat as the RBA is forced to buy up the long end.

        I fail to see where I have been wrong. I would be wary of taking long term or large positions in share markets now. Share markets are no longer places for companies to raise investment capital and have morphed into places for company insiders and their outside cohorts to raid the finances of public companies. Be careful out there…..there are sharks in the water.

        • Even just investing in an SPY index would have tripled since 2003, plus dividends
          So it’s far out performed cash certainly

          MB and you have been declaring an imminent deflationary crisis
          MB especially has called the latest stock market ramp temporary while I said late March was the time to buy

  1. If Trump wins – stocks rally
    If Biden wins – stocks rally

    If election is disputed – more volatility

      • On the one hand, potentially higher taxes (bad for stocks)
        On the other — trillions of free money for all. Stimulus for as far as the eye can see (good for revenues/profits etc)
        In my experience it boils down to certainty vs uncertainty that is the determining factor.

        However, I think in 2021 there could be a big correction – it’s a ‘rubber meets the road’ year for us all.

        • As many I dont like 2020 much (even if I am making a killing financially), but i am starting to believe that 2021 is not going to smell like roses too