Monday, September 30, 2019

Wall Street ends the week in the red; will the Royal Bank of Australia cut rates?

  • China
  • Dollar
  • Gold
  • Euro

Market recap: Renewed trade war chatter causes market jitters

Investors retreated from risky assets late last week, after reports claimed the US is considering limiting capital flows into Chinese stocks, potentially by delisting in the US stock exchange. Wall Street had a tough Friday as a result, with the DJIA slipping 0.26% and the S&P 500 falling 0.53%. The Nasdaq plunged 1.13%, thanks in part to tech company Micron. It pushed the index down even further after a weak Q1 profit outlook sent it tumbling 11% on Friday. The Dollar Index rose slightly on Friday but saw little change during the day, closing just 0.08% lower.

Safe haven assets also pulled back, as new economic data released in the US beat expectations. Inflation rose to 1.9% (beating predictions of 1.7%), which is just shy of the Fed’s target of 2%. Durable goods orders for August also overperformed. They were expected to drop 1% but advanced slightly by 0.2% month-on-month. US Consumer Sentiment (a survey conducted by the University of Michigan) rose to 93.2, beating expectations of 92. As a result, gold fell 0.65% while the yen dropped 0.17% against the dollar.

The Aussie fell against the dollar to 0.675’s level on Monday morning, as investors keep one eye on the Royal Bank of Australia’s (RBA) monetary policy decision, which is due on Tuesday, October 1st at 8.30am (GMT +4).

Meanwhile, several important economic data releases are scheduled for this week. Most notably is the UK’s second quarter GDP, the Eurozone’s inflation rate and the US’s NonFarm Payrolls report and unemployment rates.

Today’s Analysis: Does Chinese data hint at an RBA rate cut?

The ASX 30 Day Interbank Cash Rate Futures (an indicator of investor consensus regarding a potential rate cut by the RBA) suggests there is a 78% probability of a rate cut as of September 27th; a small change from its prediction of 80% a week ago.

Market sentiment regarding an RBA rate cut

Since China is Australia’s largest trade partner (China contributed to 30.6% of its total exports in 2018) and the US is Australia’s largest foreign direct investor (accounting for roughly 27% in 2017), the slight drop in probability is mainly due to an easing of downside risk regarding the US China trade war during the past week.

China released mixed PMI data this morning, with both the official National Bureau of Statistics (NBS) and the Caixin (Markit) manufacturing PMI beating expectations (rising to 49.8 and 51.4 respectively). But the NBS non-manufacturing PMI fell short of expectations (54.2), contracting slightly to 53.7 from the previous month’s figure of 53.8. The new data suggests China’s manufacturing may be recovering slightly, while services sector growth is likely to expand more slowly in the next month. As the data from China remains mixed, it is unlikely to influence the RBA’s outlook of its economy and its cash rate decision.

As a rate cut has already been priced into the market, don’t expect to see a strong reaction from the Aussie. Instead, investors are more likely to look for the RBA’s economic outlook domestically and globally to determine the future direction of its monetary policy. We forecast the RBA’s tone will remain unchanged. It will continue its wait and see approach while also addressing the global risks and maintaining lower rates if necessary. We expect the Aussie to fall against the dollar from its current 0.675’s level to 0.667’s level (which is roughly a downside potential of 1.1%) in the short-term following the monetary policy decision, while further facing more geopolitical risk from China and the US. If tensions between the two superpowers escalate this year, we could possibly see the Aussie drop down to 0.65’s level before 2020.

Scenario analysis of RBA's October Monetary Policy Decision