The headlines roll in, and price naturally reacts, but just as everyone becomes well-versed in the importance of Huawei in the trade drama, and an emerging cold war in China-US tech, we now hear that the US Commerce Department is allowing Huawei “engagements in transactions” in certain conditions and perhaps things don’t look so bleak. Google has also put plans to limit Huawei’s access on hold, and it seems that after two days of market uncertainty, we’re already seeing a slight calming of nerves, although out of the woods we’re not.
Nasdaq futures have gained 0.6% through Asia, with S&P 500 futures +0.4% at this point and this our German DAX opening call is looking quite constructive as a result. Certainly, one to watch, as there is now a better feel to Chinese markets too, with the China A50 cash +1.5% (CN50 on MT4/5) and CSI 300 +1.8%. We’ve also seen better buying in CNH and also KRW and TWD, which have been really good trade proxies of late, albeit with closer links to news on the tariff front than any tech war, which could actually be seen as a USD negative.
The ASX 200 has finally pushed into positive territory, with some rotation out of energy and material names and into financials (+1.2%), with the financial sector breaking out to the best levels since early 2018. We traded into a low of 6444 (at 10:47 aest) before the buyers stepped in and we saw a slow grind into RBA governor’s speech. Equities initially overlooked the news that APRA was removing its 7% assessment floor, providing these players scope to take its assessment rate below 6.8% – the rate that was more commonly used before December 2014. Consider that while we don’t know where banks will assess individuals from here, it will bring the cost of borrowing down and will have a clear impact on the maximum borrowing capacity of households. The news briefly took the AUDUSD from 0.6907 to 0.6929 as traders felt this could lower the prospect of a cut, and we saw the implied probability implied in rates pricing into 68%.
The RBA minutes (out at 11:30aest) took the heat of the APRA move, putting the currency back to the flatline, with headlines that a rate cut would be appropriate “if there were no further improvement in the labour market”, and as part of two easing scenarios. Consider we have seen monthly unemployment prints of 4.9%, 5.1% and 5.2%, and we can feasibly call this a trend. The big event risk though in trade was RBA governor Lowe’s speech, at a luncheon in Sydney (at 13:10aest) and there is little to deny that the cat is now out of the bag, with calls the board “will consider the case for a rate cut in June”. He also detailed that “unemployment can go below 5% without raising CPI concerns” and it reinforces a central bank who understands the natural rate of employment is far higher than prior cycles.
The wash-up of Dr Lowe’s speech has been a 4bp drop in Aussie 3-year bonds into 1.203%, although the move seems capped at 1.20% and sellers are in the mix. The June Aussie cash rate future has seen a 4.5bp move lower in yield to 1.305%, which equates to an 87% chance of a rate at the June meeting, so basically a done deal, in fact, there is a small chance of a back-to-back cut in the July meeting. Looking at the calendar, it seems there is very little in the upcoming Aussie economic data flow that is going to affect the banks thinking now. Calls that the housing market is going stabilise are naturally growing, but given the monster levels of household debt, it seems a bridge too far to think we are going to see a rampant credit binge. What it will do is provide real faith to first home buyers, who really should be eyeing Morrison’s 5% deposit initiative with interest, and while it may take time to emerge let’s see if this can resonate in higher auction clearance rates.
It certainly gives the confidence to hold income stocks, but the trade today has been to buy domestic and stocks less exposed to global macro issues. Long Aussie property, banks and discretionary is where the funds are flowing, and volumes are solid, with volume 30% above the 30-day average in the broad ASX 200.
The AUD is lower against all G10 currencies on the day, with AUDUSD pushing through Mondays low of 0.6890 as I write. AUDJPY has Monday’s lows of 75.81 in its sights and a break here, and we go onto test the recent trend low of 75.24. GBPAUD has had the big move on the day in G10 FX, but that is mostly short covering, and I would be more inclined to look at AUDCAD shorts, as the CAD is finding a better bid from stable crude prices – one for the radar.
Published by Chris Weston, Head of Research, Pepperstone