News and views
Risk took a turn last night, led by US equities which tumbled after spiking during the first hour, the S&P500 down 2.2% at the close. Banks were the worst stocks hit (index down 5.2%), with rumours of a large European bank in distress circulating. The VIX barometer of risk aversion rose 12% to 29. Oil fell 2.5%, following the script according to the 25 August key day reversal. US 10yr treasuries were volatile, spiking to 3.46% in yield before rallying down to 3.35%. The yield curve steepened slightly as shorter rates outperformed. Fundamentals were clearly overwhelmed by the psychology of the markets, the US ISM factory survey handily beating expectations and signalling industrial expansion.
The US dollar index strengthened around 1.3% from the Sydney close on the flight to safety. EUR fell two cents from 1.4378 to 1.4178. JPY held firm around the 93 level.
AUD’s domestic session drift turned into a slide after the close, falling to 0.8245 a couple of hours ago, and looking vulnerable on that support level.
NZD similarly slid from 0.6888 to 0.6722, currently holding around minor 0.6750 support. Finance minister last night English expressed both surprise and impotence at the NZD’s recent strength. Fonterra’s monthly milk powder auction saw another stellar result, US$ prices up 24% on the month, with little impact on the NZD given the risk averse mood. AUD/NZD congested in a slightly lower 1.2220-1.2290 range.
US ISM factory index jumps from 48.9 to 52.9 in Aug. The ISM factory survey posted its first 50+ reading since January 2008 last month, and its equal highest reading in three years. This report is now clearly signalling that the industrial sector is expanding and the economy is out of recession. Ongoing strength in new orders and production saw those components both at rarified 60+ altitudes in August, whereas inventories and employment continue to contract, albeit at a slightly slower pace than previously.
US construction spending down 0.2% in July. The small fall reflected a 2.3% surge in the residential component offset by a 1.0% fall in non-residential construction spending. Meanwhile, pending sales of existing homes rose 3.2% in July, their sixth consecutive monthly gain, adding more weight to the now undeniable view that the US housing market has turned the corner.
Euroland PMI factory revised higher. An upward revision from 47.9 to 48.2 but Euroland is still one of the slower performers compared to the other PMI factory surveys around the globe in August. A month earlier, the Euroland jobless rate edged up a tick to 9.5%, though the pace of gain has eased back from 0.3 pt per month at the start of this year to just 0.1 pt now. In other news, German retail sales rose 0.7% in July, their second monthly gain so far in 2009; and German unemployment fell slightly for the second month running, though the Labor Agency warned that once again “statistical changes” accounted for the fall, without which unemployment would have risen by 25k.
Softer UK data. The factory PMI slipped back below 50 in August after July’s peep over the parapet; consumer and mortgage credit outstandings both declined in July, as repayments outpaced new loan approvals.
Outlook
AUD and NZD outlook today: After a month of waning strength, a minor breakdown occurred last night, and we watch for the possibility it morphs into a full correction of the post-March rally. Support levels to watch are 0.8220 and 0.6760, which makes the NZD look vulnerable. Australian Q2 GDP today will be an important mood factor.
