News and views
An across-the-board sell-off in risk markets occurred last night. Attributed events included the consensus-missing US home sales data and announcements from major central banks (Fed, ECB, BOE) of a wind-down of some elements of their financial market support programs. The Fed cited improvements in markets and waning demand for some liquidity programs as the reasons behind shrinking the Term Auction Facility and the Term Securities Lending Facility. The S&P500 fell from the opening bell, closing down -1.0%. Technically significant is the follow-through from the previous day’s outside reversal. Oil, under inventory pressure all week, plunged 4.3%, and copper lost 4.1%. US 10yr notes earlier slipped by 5bp on improving jobless claims data, but then rallied by 8bp on the risk-reducing news and a solid 7yr auction.
The US dollar had its strongest session since early August, gaining 1.1% after the Sydney close. EUR firmed slightly after the Sydney close, from 1.4764 to 1.4802, when the weak US home sales data helped push it down to 1.4629. German IFO was strong, but slightly sub-consensus. GBP posted the largest decline among the majors, losing 2.2% to 1.6023 from the London open when the BoE’s King welcomed a weaker sterling. USD/JPY bounced from its 90.40 low a few hours earlier than the broader US dollar turnaround, rumours of a large option barrier being protected.
AUD knocked against 0.8750 for several hours before peeking at 0.8770 around noon London, and then followed the risk-reduction move to 0.8620.
NZD followed the AUD, peaking at 0.7271 and then falling to 0.7190. AUD/NZD ranged sideways between 1.2040 and 1.2120.
US existing home sales fall 2.7% in Aug, their first decline since March, although not enough of a fall to materially impact the uptrend in sales which is currently running at more than 2% per month. The ongoing uptrend in pending home sales, which purport to measure the same home sales as this report (but at an earlier stage of the transaction process) suggests that August’s decline should soon be reversed. That said, the current support for the market from a tax credit for first home buyers, due to expire in November, could prove to be a future driver of weaker sales. Other detail in the August report was positive, including a further decline in the number of months it would take to clear the current stock of unsold homes at the latest sales pace; and a slower pace of annual house price decline.
US initial jobless claims fell by a sharp 21k to 530k last week (the week after the payrolls survey for September was conducted), further evidence that the US labour market is responding to the improving economic environment of recent months. In the prior week, continuing claims fell by 123k, though their recent trend is flat rather than lower, probably a function of an extension to benefits that means fewer longterm claimants are dropping off the register (i.e. this claims number is not such a reliable guide to the job market currently).
Japan’s August trade balance widened to ¥235bn. That compares to an upwardly revised ¥222bn outcome for July. Both exports and imports fell in the month, down 0.7% and 1.0% respectively. These figures are indicative of the relative calm presiding in international trade after the violence seen late last year and through Q1.
German IFO business confidence rose for the sixth month in a row in September, with both expectations and the current assessment measures contributing to the rise from 90.5 to 91.3. The index has now recovered about a third of its decline from a peak of 109.1 in late 2006 to the 82.2 trough in March this year.
Outlook
AUD/USD and NZD/USD outlook today: The follow through in the S&P500 from the previous day’s technical reversal signal raises a warning flag. While the fundamental backdrop supports AUD and NZD further, the post-March rallies are ripe, and a correction wouldn’t surprise. Accordingly we are sidelined today. There’s no AU data today, and the NZ trade balance should have minimal market influence.
