Tuesday, August 4, 2020

Asia Times: The RBA looks likely to keep monetary policy on hold, but will probably revise its outlook for the Australian economy downwards

Tags
  • Dollar
  • Gold
  • Yen
  • Euro
  • Stocks
  • Oil
  • AUD
  • RBA

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Market Recap: The RBA looks likely to keep monetary policy on hold, but will probably revise its outlook for the Australian economy downwards

Stocks continued to rally in the US on upbeat data and improved prospects for the upcoming stimulus measures from the US government. ISM's manufacturing PMI data beat economists' expectations for July of 53.6 to rise to 54.2, helping to fuel optimism for an economic recovery in the US. The supplier delivery sub-index of the report continued to signal that the global supply chain was extending its recovery, while new orders and production continued to surge. Employment in the sector improved, but still remained in contractionary territory (A: 44.3, P: 42.1). Sentiment among the different industries in the sector should be concerning however, as the report signalled that the overall manufacturing sector may be experiencing an imbalanced recovery. Industries such as the computer and electronic products were more optimistic while transportation was clearly expecting to face larger headwinds moving forward. China's better-than-expected manufacturing PMI data from Caixin (A: 52.8, E: 51.1) likely also helped drive sentiment for the global economy. Sentiment was also likely improved by the prospects for the upcoming stimulus bill from the US government after the White House said that it is exploring whether US President Donald Trump can unilaterally extend the enhanced employment benefits that was part of the CARES Act which expired on July 31st.

In sector news, the tech sector led gains among S&P500 sectors for the second trading day in a row. Gains within the tech sector were mostly driven by Microsoft's shares surging 5.62% thanks to news that the company is looking to acquire social media app TikTok's US operations. Apple's stock rose another 2.52% on Monday, extending gains from last week after posting better-than-expected quarterly results, pushing it closer to US$2 trillion in market capitalisation.

Indexes Daily Change (%) Net Change Closing Price
Dow +0.89% +236.08 26,664.40
S&P500 +0.72% +23.49 3,294.61
Nasdaq +1.47% +157.53 10,902.80
*Source: Bloomberg

The greenback continued to rise against most of the other G10 basket of currencies on Monday, likely thanks to the better-than-expected ISM manufacturing PMI report and as cases of Covid-19 slowed in the US. Profit taking from short positions on the dollar likely also contributed to gains in the currency as the data by Reuters and the US Commodity Futures Trading Commission shows that net shorts on the dollar are at their highest since August 2011. The outlook for the dollar may look increasingly more attractive as opposed to the euro, as the EU deals with a resurgence of Covid-19 cases in multiple of its member countries while the US starts to recover from the earlier spikes in Covid-19 cases in states such as Arizona and California.

The Reserve Bank of Australia (RBA) looks more likely to keep monetary policy on hold at today's meeting, but with a more dovish tone on the economic outlook for the Australian economy as compared to before. While Australia continues to deal with the spike in new Covid-19 in the state of Victoria, it's earlier success in containing the spread of the novel coronavirus is likely to be offset by some of the expected negative impact from reintroducing lockdowns in parts of the state. Fiscal stimulus should remain the key driving force of the economy for now as a result, since another round of monetary stimulus is unlikely to be as effective as a targeted fiscal stimulus policy. However, this also means that some of the optimism from the RBA's previous meeting will likely be dampened by the resurgence of the virus in Victoria, which should place the central bank's outlook back closer towards its base case outlook, instead of its earlier expectations for the economic recovery to be range within the base to best case scenario. This may put more downward pressure on the AUD/USD currency pair in addition to the upward momentum that the dollar is currently experiencing, possibly towards 0.7079's level.

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Safe haven assets were mostly tilted towards the downside on Monday. Gold managed to inch a touch higher but was close to flat. The Japanese yen weakened against the dollar but strengthened slightly against the euro, highlighting the potential shift back from the euro to dollar. US Treasuries fell across the board, pushing benchmark 10-year yields 2.6bps higher to 0.55%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.06% +1.12 1,976.98
Silver -0.37% -0.09 24.30
USD/JPY +0.11% +0.12 105.95
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.4bps 0.11%
10-Year +2.6bps 0.55%
30-Year +3.9bps 1.23%
*Source: Bloomberg

Brent and WTI active crude oil futures rose the most in the last eight trading sessions as better-than-expected PMI data around the world helped to dampen concerns on energy demand. While economic activity was seen to be improving, continued weakness in the transportation sector is likely to continue to weigh on crude oil prices. ISM's manufacturing PMI supports this, as does Marathon Petroleum Co's latest earnings call on Monday, who estimates July gasoline and diesel demand to have both been down about 10% in July. A slowdown in Covid-19 cases in the US along with greater encourage from the Trump administration to wear masks might be able to boost demand for gasoline and diesel as more people return to work. But with a potential spike of Covid-19 cases in the EU and OPEC+ tapering back production cuts, risks continue to look to be tilted to the downside for crude oil.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +1.45% +0.63 44.15
WTI +1.84% +0.74 41.01
*Source: Bloomberg

Asian stocks started Tuesday's trading session surging, with investor sentiment fuelled by the prospects for a global economic recovery driven by improved economic activity in the US coupled with the upcoming fiscal stimulus measures in the US. The Nikkei, KOSPI and ASX200 were all trading upwards of 1.20% in the earlier hours of Tuesday's trading session. Futures tracking major indices in the US were trading flat however, signalling that the consecutive days of buying in the US stock market maybe be starting to ease off.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +1.50% +337.39 22,532.77 8:43:10 AM
KOSPI +1.23% +28.00 2,279.04 9:03:10 AM
ASX200 +1.98% +119.51 6,045.60 9:02:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.05% +13.00 26,571.00 8:52:39 AM
US Futures +0.02% +0.75 3,289.25 8:52:59 AM
Nasdaq Futures +0.02% +2.50 11,046.75 8:53:04 AM
*Source: Bloomberg

Economic releases for the day ahead include (all timings in GMT +8):

  • RBA Monetary Policy Statement/Decision (12.30pm)
  • Canada Jul Manufacturing PMI (Markit) (9.30pm)

Companies reporting earnings next include (all timings in GMT +8):

  • Sony Corp (2pm)
  • Activision Blizzard (4.30am +1)
  • Walt Disney Co (4.30am +1)
  • Beyond Meat (4.30am +1)