The mood on the floors remains soured, and few are prepared to add risk into their portfolios with any conviction, and rightly so. The flow of capital and savings continue to exodus emerging markets and Europe and into the US, although many are questioning if this is sustainable and whether the S&P 500 should mean converge to an extent.
News flow has been on the light side, with everyone remaining fixated on emerging markets (EM), although we have seen some stability and even small gains currencies such as the TRY, ARS and CLP. The good-will has stopped there though, and EM equities have been generally offered, with the EEM ETF (MSCI Emerging Market) index closing -1.4%. Chinese equities remain a key driver of the EM basket, with the Hang Seng (-2.4%), and Indonesia (-4%), really leading Asia lower yesterday. Here, the bears will be eyeing a further sell-off on open this morning, where a close below 23,000 on the Hang Seng would be a key development.
The leads are not great for those long Asian equities. The German DAX has closed through the June and August double bottom, which tells us a picture of the bears having the dominant hand and the year-to-date lows look likely to be tested at 11,726. The S&P 500, was again supported on an early pullback, coming off the lows of 2876 and closing at 2,888 (-0.3%), with tech and discretionary stocks taking out the points. That said, we have seen some outperformance in materials names, with copper finding better buyers, closing +0.3%, with the Bloomberg metals index ending a run of four days of losses, closing +0.2%. We can put this down to a slight move lower through European and US trade in USDCNH, while EURUSD has pushed a touch higher.
The ASX 200 looks interesting this morning and should get attention from local clients. Trading the open has almost been too predictable and this notion that ‘mum and dads open the market, while professionals close it’ seems nonsense. Although this is probably true for traders and not investors. So often with this index, when there are brewing uncertainties in China and EM and a progressively bearish tape, we see order book dynamics take hold. With buyers hard to find and sellers becoming far more active on open, where subsequently the index falls under its own weight.
Today, however, we see Aussie SPI futures some 21-points lower than the ASX 200 cash close, and a simple overlap of the S&P 500 futures suggests that while the ASX 200 open will be a negative one, as it will be in Japan and Hong Kong, the downside seems capped around 6200. We should even see the likes of BHP open close to 1% higher.
The technical set-up of the ASX 200 is hardly a picture of positivity either, and we can see the index closing through both the July uptrend and the August double top neckline at 6230.9. While the move through the neckline is hardly convincing, this pattern does suggest the index could be targeting sub-6100. One to watch. 

In FX land the USD index closed 0.3% lower, with EURUSD coming off session lows of $1.1543 and currently sitting at $1.1630. This was spurred on by a sizeable 15-basis point narrowing of the Italy/German 10-year yield spread, with the focus here on Italian deputy PM defiantly pushing a message that they will defend EU budget law, with local press suggesting the budget deficit could come in at 2% of GDP. The US 10-year Treasury gained a couple of basis points to 2.90%, which is the middle of the 3% to 2.80% range it has traded for a number of months now. However, with German bunds yields moving higher and taking in positive sentiment from Italy, we ultimately saw the US-German yield spread narrow 2bp, which is a EUR positive.
(Source: Bloomberg)
Long EURAUD has been my preferred trade of late and this continues to work well, with the pair now testing the year-to-date highs (set in March) of A$1.6191. Ideally, I’d like to see a break of A$1.6200, with re-test of the breakout March highs, followed by the buyers stepping in the confirm this is now support. On this development, I would add to longs here.
On the session, NZD was the strongest performer in G10 FX, although we can put this down to positioning and shorts taking exposures off the table. GBP has been a mover on the day, with GBPUSD spiking from $1.7873 into $1.8083, with EURGBP falling from 0.9029 to 0.8957 on headlines that ‘Germany is ready to accept a less detailed agreement on the UK’s future economic and trade ties with the EU in a bid to get a Brexit deal done’. These headlines were later denied, with a German spokesman saying the government’s position was unchanged. As one could imagine the market has reversed a decent chunk of the GBP gains, although the market still feels there could be some truth to this, with GBPUSD sitting at $1.2910.
EURGBP has printed a huge ‘doji’ candle, which shows a battle between the bulls and bears, with neither party getting an upper hand. We should expect more of this type of price action, with GBP reacting sharply to news flow, both accurate and inaccurate.
USDCAD continues to find sellers into 1.3200, in what was a quite a choppy session. As expected the Bank of Canada held rates at 1.5%. The bank noted that ‘higher interest rates will be warranted to achieve the inflation target’ and this justifies the market’s pricing, with the swaps market currently pricing an 80% chance of a hike in October. All eyes fall on NAFTA developments, or whatever it will be called, where hopefully we will get clarity on proceedings this week.
Looking forward, there is not a lot of tier one data on the docket to drive, with the Australia trade balance unlikely to influence the AUD or rates market too greatly. In the US we get ADP private payrolls and ISM service data, and again neither should move markets too wildly. Recall, we have now passed the USTR period to accept public comment, and we could hear a decision at any stage on whether the US will proceed with $200b in tariffs, but also at what percentage they will be taxed at.  
Published by Chris Weston, Head of Research, Pepperstone