The US Treasury yield curve inverting at the key 3 month/10 year spread is a concern for risk appetite. Whilst the distortions of unwinding its massive balance sheet (around $4.5trillion at its peak) means that there needs to be a degree of scepticism over the implications of curve inversion, it is still coming at a time during which fears over a global cyclical slowdown are taking hold. It was interesting to see the US dollar performing well yesterday even as housing data and consumer confidence both missed expectations. The dollar is still seen as a safe haven option. Against a slowing Eurozone this is a drag on EUR/USD, however, a rebound against the yen may not last the course. Major central banks around the world seem to be falling over each other in a drive to turn dovish again. The Reserve Bank of New Zealand monetary policy decision to keep rates flat at a low of +1.75% was fully expected (no change +1.75% exp, +1.75% last). However what did surprise the market was a shift in emphasis which has opened the way towards a possible rate cut. Citing increasing downside risks to its outlook, the next move is more likely to be a rate cut. The New Zealand dollar, which has been a standout performer during these past few weeks, has been hit hard overnight and is around 1.5% lower. This could now put the Kiwi on a path of correction across the majors as outperformance unwinds on new expectation of a cut. The Brexit circus rolls on today and MPS will vote on a series of “indicative votes” (non-binding on the government). Options for MPs include a second referendum (do we really want to do this?), a customs union with the EU (softer Brexit), to revoke Article 50 entirely (no Brexit), amongst others. Mrs May’s much-maligned deal could be voted on for a third time later this week.
Wall Street closed solidly higher last night with the S&P 500 +0.7% at 2818, with US futures +0.2% higher. In Asia, markets have been mixed with the Nikkei -0.2% and the Shanghai Composite +0.9%. In Europe the outlook is slightly positive again after yesterday’s rebound, with FTSE futures and DAX futures around +0.3% higher. In forex, there is a mild risk negative/dollar positive vibe. The big underperformer is the Kiwi, whilst sterling is also slipping back again along with mild euro losses. The dollar is performing well along with the safe haven yen. In commodities, there is tick or two lower on gold and silver, whilst oil is also mixed.
Once more focus in the economic calendar turns to US data, with the Q4 2018 US current account deficit announced at 1230GMT which is expected to deteriorate further to -$130bn (-$125bn in Q3 2018). The US trade balance for January is also at 1230GMT and is expected to improve slightly to -$57.0bn although this is still hugely large after December’s -$59.8bn which was the widest trade deficit for ten years. US EIA oil inventories are at 1430GMT which are expected to show crude stocks again in drawdown of -3.3m barrels (last week -9.6bn) whilst distillates are expected to drawdown by -0.8m barrels (last week -4.1m barrels) and gasoline drawdown by -3.0m barrels (-4.6m last week).
Chart of the Day – GBP/AUD
The Aussie has had a bit of a jump in recent sessions, however hitting resistance across major pairs some profits seem to now be setting in to restrict its advance. With sterling expected to feel the benefit of a move towards a softer Brexit in the coming days, this sets up GBP/AUD as a correction to be bought into within the uptrend channel. There has been a pivot at 1.8400 which has been a basis o