After a few days of tumult across markets there is a sense of markets beginning to settle down again. Reaction to Jerome Powell’s Jackson Hole speech, followed by further uncertainty of the US/China trade dispute meant that markets were flying around the turn of the week. However, with Chinese officials shrugging at the prospect of trade talks with the US, there is an ongoing sense of resigned negativity throughout markets. This is reflected well through bond markets with the US yield curve further inverting as longer dated yields continue to fall away. The 2s/10s spread is turning increasingly negative at -4 basis points (the FOMC’s referenced inversion between 3 month/10 years is now -51bps). Lower risk asset plays continue to outperform, with the yen and gold rebounding yesterday, at the expense of higher risk, as the Aussie and Kiwi fell along with equities. The US dollar has edged slightly higher overnight with a mild rebound on equity futures (although very tentative) and a stronger oil price, all helped by a surprisingly large API oil inventories drawdown. However, as the mood music surrounding the trade dispute remains negative, any positive moves are likely to be restricted before the safe haven plays resume their outperformance.
Wall Street fell marginally last night with the S&P 500 -0.3% at 2869 but this is being regained today with the US futures +0.3% early today. Asian markets have been mixed with the Nikkei +0.2% and Shanghai Composite -0.2%. European markets are cautious in early moves, with FTSE futures and DAX futures all but flat. In forex, there is a mild USD positive bias across major pairs, with the commodity currencies once more the key underperformers, whilst GBP is also dropping back slightly after yesterday’s decent gains. There is a mixed look to commodity markets with gold just giving back some of yesterday’s gains, whilst silver continues to push on strongly. Oil is a further 1% higher today after yesterday’s surprise drawdown on the API inventories.
It is a quiet day on the economic calendar with little of any note until the EIA oil inventories at 1530BST which are expected to show another crude oil drawdown of -2.1m barrels -2.7m barrels last week). With distillates there is expected to be a mild build of +0.8m (+2.6m build last week), whilst gasoline stocks are expected to drawdown by -1.0m (+0.3m build last week). It will also be interesting to keep an eye on a German 10 year Bund auction of after the recent struggle to get the 30 year Bund away.
Chart of the Day – AUD/JPY
The bigger picture continues to be one of muted risk appetite, something which is pulled yen outperformance across the major crosses. Subsequently, the negative trends of the past five weeks continues to weigh on AUD/JPY. The latest consolidation briefly broke down on Monday only for an intraday rebound to pull the market higher into t