U.S. Equities Decline With Dollar As Momentum Weakens, NZD Appreciates Despite RBNZ Rate Cut, ASX SPI200 Futures Up 9 Points

U.S. equities declined with the dollar on Wednesday, the S&P500 & Nasdaq100 both down -0.29% & -0.26% respectively while the U.S. dollar index fell by -0.60%. There is certainly doubt in the idea that the Fed will look to increase borrow costs later this year despite very strong job gains the past two months with the first even month of implied probability not until September 2017. This along with easing or further easy expectations for major central banks will be continue to be supportive of risk assets as well as commodity prices.

The first chart below shows the S&P500 from a technical point of view, the recent intraday high on Tuesday at 2,187.66 has not been confirmed by momentum indicators which have crossed over at a lower level. This has formed what is referred to as bearish momentum divergence, which suggests that the strength of gains is fading. While this does not mean we will see an imminent reversal it highlights the increased risk of a pullback in the near-term, although from a longer-term perspective the break to new all-time highs is very encouraging.

European equity markets were generally softer on Wednesday with the Euro Stoxx 600 down -0.20% and the DAX30 -0.39% weaker after entering into a bull market earlier this week, being a 20% rally from its lows in February. The Euro gained +0.59% against the USD while the Pound was modestly higher, up +0.11% as the FTSE100 closed +0.22% higher.

The Reserve Bank of New Zealand lowered interest rates by 25 basis points this morning to 2% “Weak global conditions and low interest rates relative to New Zealand are placing upward pressure on the New Zealand dollar exchange rate”, which in turn makes exports less competitive and imports relatively cheaper causing weak inflation. New Zealand inflation is currently around 0.4%, well below the 1-3% inflation target of the RBNZ and governor Graeme Wheeler hinting at a further reduction in rates stating “our current projections and assumptions indicate that further policy easy will be required to ensure that future inflation settles near the middle of the target range”. 

The market clearly wants more from the RBNZ sooner rather than later evident by the NZDUSD reaction following the announcement gaining 1.62% shown on the second chart below. New Zealand is in a very similar place to Australia, while commodity prices have improved they remain significantly below levels over the past few years, significant gains in housing prices have complicated the decisions to lower interest rates, both nominal and real interest rates (adjusted for inflation) remain well above those globally causing stronger currencies which complicate the ability to manage the economy and meet inflation targets.

Commodity prices were mixed despite the weaker U.S. dollar, both WTI & Brent crude oil falling -2.48% & -2.47% as U.S. crude oil inventories increased by 1.055m barrels for August 5th when expectations were for a -1.5m barrel decrease. Natural gas declined -2.07%, iron ore was flat down just -0.12% while copper gained +0.98%. Precious metals spot gold and silver benefited from the weaker dollar up +0.44% & +1.12% respectively.

Locally the ASX200 finished modestly weaker on Wednesday, down -0.16% while the market is set for a marginally stronger open this morning with ASX SPI200 futures up 9 points in overnight trading. 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 Consumer Inflation Expectations (MoM Aug) 11:00am AEST

·         Chinese New Yuan Loans, Foreign Direction Investment, Loan Growth (YoY Jul) 11:00am AEST

·         U.S. Initial & Continuing Jobless Claims (August 6th & July 30th) 10:30am AEST

·         U.S. Import & Export Prices (MoM & YoY Jul) 10:30pm AEST

Chart 1 – S&P500 Equity Index

Chart 2 – NZD/USD

Source: Rivkin, RivkinTrader

To view the Rivkin economic calendar and Global Markets matrix, members can click here.

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

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