The week ahead wouldn’t be the same without quickly touching on the latest developments in the U.K. Brexit saga.
With the House of Lords passing the lower house’s Brexit bill late Friday, PM Boris Johnson is now legally obligated to head cap in hand to Europe and request another extension to the October 31st date if no deal is agreed by the October 19th. Having failed to overturn the bill, fired near 30 of his own MP’s, and failed to lure Labour into an early election, PM Johnson’s next move will be to challenge the bill’s legality in court while Parliament is in suspension. He may sell it as all part of his cunning Brexit plan; the rest of the world will likely view it as a desperate rear-guard action.
Saudi Arabia sent shockwaves through the oil industry over the weekend, with King Salman removing the Minister of Energy and replacing him with one of his sons. The general feeling is that the outgoing minister, Khalid al-Falih, had not delivered high enough oil prices since 2016. Oil could reach higher as the market speculates that incoming minister, Prince Abdulaziz al Salman, could accelerate a tightening of supplies, both to balance the state budget and ahead of Saudi Aramco’s IPO.
The Non-Farm Payrolls delivered a lower than expected 130,000 jobs on Friday. While disappointing, it wasn’t the end of the world. Markets quickly shook it off preferring to concentrates on Fed Chairman Jerome Powell’s speech later in the evening. He didn’t give too much away, continuing his mantra that the Fed would act “appropriately” to maintain growth. The street interpreted that as a Fed Funds rate cut is still on track for the mid-Septemeber FOMC meeting and Wall Street duly moved higher into the week’s end.
China’s balance of trade came in much lower than expected at $34.8 billion on Sunday. Exports fell unexpectedly by 1.0%, and imports fell by 5.7%. Friday’s RRR cut by China to boost bank lending, and impending fiscal stimulus measures, are arriving none too soon as it becomes clear that the trade war is biting both sides. More concerning to regional economies will be the fall in imports, which may have a knock-on effect across Asia-Pacific.
Japan releases its GDP at 0750 SGT with analysts expecting a tepid QoQ growth for Q2 of 0.30%. Germany’s balance of trade is published at 1400 SGT and is expected to show a decline in the surplus to Eur 13 billion. The data from both countries are likely to reinforce that the U.S. and China trade tensions are making themselves felt globally.
Hong Kong endured another weekend of violent protests as the governments concessions on the extradition bill were deemed too little too late. In what must be a world first anywhere I am sure, protestors called on U.S. President Donald Trump to intervene in the dispute and help them establish a full democracy, even singing the Star-Spangled Banner. As flattered as the U.S. President might be, the chances of him intervening to make Hong Kong great again are zero. They should quickly move on to Plan-B. The failure of concessions from the government to placate the protestors will probably take the edge of any gains in Hong Kong stock markets this week.
The week’s highlight will probably be the ECB rate decision. Hawkish voices against further easing from Germany, mean the ECB will most likely hold rates steady and the hope for a breakthrough in the U.S.-China trade talks in October. It has been Europe’s strategy for the last ten years to let the rest of the world do the heavy lifting. At this stage of the economic cycle, with fiscal stimulus still locked in the draw, it is a dangerous game to play. Being late to the QE party, and with rates still in negative territory, the ECB is poorly equipped to take the edge of a significant downturn.
Wall Street sold off after a less than encouraging Non-Farm Payrolls, but regained those loses as markets interpreted Powell’s comments as signalling another Fed easing this month. Wall Street closed the week almost flat with the S&P 500 rising 0.10%, the Dow Jones rising 0.26% and the Nasdaq falling just 0.17%.
A neutral finish on Wall Street leaves Asia with little to sink its teeth into this morning. Sentiment should remain positive but much more cautiously though after the trade talk euphoria last week.
Currency markets stubbornly refused to take any bait on Friday, preferring to fight their battles another day and looking ahead to the Septemeber FOMC. The dollar index was almost unchanged, down 0.10% to 98.41.
Early Asian trading indicates more of the same for the region today with G-20 currencies almost unchanged from Friday’s close. The prospects of a potential trade breakthrough, and a Fed rate cut should offset the fall in China imports data released at the weekend and keep regional currencies steady.
Much like equities, oil fell post the Non-Farm Payrolls but regained those losses after the Powell speech. Brent crude rose 1.5% to %61.65 a barrel and WTI rose 0.80% to $56.55 a barrel.
The changing of the guard at the Saudi Oil Ministry over the weekend could see oil firm this morning in Asia. Both from an uncertainty perspective, and the implication that Saudi Arabia may become more aggressive on tightening supplies to push prices higher.
Gold fell 0.80% to close at $1507.00 an ounce on Friday. Powell’s consistent remarks provided late support for gold and allowed it to hold just above the $1505.00 support.
Gold is unchanged this morning but is vulnerable to further pullbacks as the multi-month weight of haven-driven long positioning is reduced in a more positive macro-risk environment.
Gold has support at $1505.00 an ounce with significant technical support at $1480.00. A daily close below this level implies that another wave of gold deleveraging could be imminent.
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