U.S. And U.K. Manufacturing PMI Lower Than Forecast, Oil Enters Bear Market, Focus On Abe Stimulus And RBA Rate Decision On Tuesday, ASX SPI200 Futures Down 21 Points

U.S. equity markets closed mixed on Monday, with the S&P500 index falling -0.13%, while the Nasdaq100 gained +0.55%, helped by better than expected earnings in biotech and pharmaceuticals. Following a decline of -1.25% on Friday, the U.S Dollar index bounced back +0.28% despite disappointing ISM manufacturing data, which came in at 52.6 vs 53 expected (MoM Jul). Importantly, the sub-component for prices paid, which reflects sentiment towards inflation also fell to 55.0 against expectations of 61.0 while the employment index declined to 49.4 from 50.4 previously. Overall, the report highlights that the US economy is growing, albeit at a slowing rate.

European equity benchmarks were also broadly weaker, with the Euro Stoxx 600 & FTSE100 down -0.59% & -0.45% respectively, while the DAX30 finished flat, down just -0.07%. The Euro fell -0.11%, while the British pound was -0.40% weaker following Markit PMI manufacturing data which slowed to 48.2 in July from 52.1 a month earlier, readings of less than 50 signal contraction. Later this week we have the Bank of England rate decision on Thursday at 9pm Sydney time, with the probability of a rate cut priced by overnight index swaps at 97.8%.

Easing of monetary policy has been priced in by the market following the Brexit and while nothing is guaranteed the language from the July policy meeting suggested most members of the committee thought it would be appropriate to ease at the August meeting. With the market fully aware of this we may see an initial reaction lower in the Pound however I would expect any moves to be limited, unless we get more than the 25 basis point cut expected.

Japanese equities were fairly flat following a volatile session on Friday following what the market deemed to be an underwhelming decision to ease monetary policy further by double its purchases of ETFs and increasing lending of U.S. dollars to banks. The Nikkei225 index finished +0.40% higher while the Topix was relatively flat, down -0.07% and the USDJPY rose +0.36% following a -3.09% decline on Friday. Attention today will be focusing on Prime Minister Shinzo Abe who is set to announce the details of the 28 trillion yen (US$273 billion) fiscal stimulus package.

Turning to commodities, oil has now entered a bear market (generally defined as a 20% decline from a high point) with both WTI & Brent crude oil down -3.70% & -0.54% on Monday. The first chart below highlights both WTI & Brent crude following their recent highs in June 2016. The stronger dollar weighed on copper prices which fell -0.99% while cooler weather in the U.S. dampened natural gas prices down -3.65% with concerns a supply glut which has shrunk somewhat during a warmer than expected summer will continue to exceed demand for heating this winter. Finally iron ore gained +4.88% on Monday and both precious metals spot gold & silver were higher up +0.14% & +0.53% respectively.

Locally the ASX200 finished +0.45% up on Monday however the market looks set for a weaker open this morning with ASX SPI200 futures down 21 points in overnight trading. The domestic focus today will be on the Reserve Bank of Australia rate decision out at 2:30pm Sydney time. There has been no shortage of commentary around speculation they will act and lower rates by a further 25 basis points with the implied probability at 67% calculated by overnight index swaps. Despite the odds being better than even this is not by any means fully priced in and therefore we could see some significant volatility in the Australia dollar whether rates are held or lowered. The second chart below shows the AUDUSD which has been creeping higher over the past three months despite the RBA lowering the cash rate to 1.75% at the May meeting. If you’re interested in trading global markets and still need practice, click here to open a free $100,000 Rivkin Trader account. 

Data releases:

·         Australian Trade Balance & Building Approvals (MoM Jun) 11:30am AEST

·         RBNZ Two Year Inflation Expectations (QoQ Q3) 1:00pm AEST

·         RBA Interest Rate Decision (Aug) 2:30pm AEST

·         Japanese Consumer Confidence Index (MoM Jul) 3:00pm AEST

·         U.K. Markit/CIPS Construction PMI (MoM Jul) 6:30pm AEST

·         U.S. Personal Spending & Consumption Core Expenditure (YoY Jun) 10:30pM AEST

Chart 1 – WTI & Brent Crude Oil Futures

Chart 2 – AUD/USD

Source: Rivkin, Bloomberg

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This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.

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