Friday, September 20, 2019

Hopes for a Brexit deal stay afloat; the chances of a rate cut in Australia spike

  • China
  • Dollar
  • Gold
  • Euro
  • Pound
  • Stocks

Market recap: Wall Street remains flat while sterling rises

There was little change on Wall Street on Thursday, after the Fed cut interest rates for the second time this year but also sent out mixed signals about the economic outlook. The DJIA dropped 0.19% while the S&P500 remained flat, gaining only six points on closing. The Nasdaq rose 0.07%, most notably with Microsoft rising 1.84% after announcing a US$40bn buy-back plan. The dollar slipped as much as 0.34% ahead of central bank monetary policy decisions around the globe.

Sterling surged past 1.25’s level after European Commission president Jean-Claude Juncker indicated that a Brexit plan with an alternative solution to the Irish backstop issue is possible, sparking hopes a deal can be completed by the October 31st deadline.

US Treasuries also had a mixed day, with two-year and 30-year yields increasing to 1.74% and 2.23%, while 10-year yields fell to 1.78%.

Safe haven assets remained mostly flat as investors wait for further developments in the trade war between the US and China.

Today’s analysis:
Royal Bank of Australia likely to cut rates amid rising unemployment rates

China plays an important role in Australia’s economy and is its largest trade partner. It made up 18% of Australia’s total imports and 30.6% of its total exports in 2017/18, according to the Australian Department of Foreign Affairs and Trade (DFAT). The top goods being bought by China were iron ores, coal and natural gas. Consequently, the mining industry in Australia was the largest export contributor, producing 57% of the total value of merchandise exports.

Australias Top Export Markets

Additionally, China contributed AU$11.7bn to education-related travel and AU$4.1billion on personal travel, which is around 27.8% of Australia’s total travel exports.

Top 10 investment source

*Source: DFAT

But China is not Australia’s largest foreign direct investor. Instead, the US accounts for roughly 27% of Australia’s total foreign direct investment, which implies both the US and China significantly influence its economy. As a result, the Australian dollar (AUD) has weakened against the US dollar by 6% the past year, partly because of the US China trade war, and more recently because of the increased slowdown in China’s economy.

The Royal Bank of Australia (RBA) kept rates unchanged at 1% during its monetary policy meeting on September 3rd, with the minutes of the meeting highlighting conflicting domestic economic data, a growing international economic slowdown and increasing geopolitical risk. Inflation was forecast to rise gradually to its target level of 2-3%.

Recent economic data though has been bleak. Australia’s job market failed to meet the RBA’s expectations, with unemployment increasing to 5.3% and full-time employment figures falling by 15,500 in September. Consumer confidence also fell to 98.2 in September (it was previously at 100). The balance of trade fell short of market expectations (A$7.4bn), and dropped to A$7.268bn from the previous month’s A$7.977bn. GDP was as predicted, growing 0.5% quarter-on-quarter. In addition, China showed more signs of a slowdown last Monday, as the Fixed Asset Investment, industrial production and retail sales all fell short of expectations and dropped below year-on-year numbers.

The negative economic data is likely to influence the RBA into easing monetary policy to support sustainable growth in the economy, and achieve its target inflation over the medium term. In the last week, expectations of a 25bps rate cut by the RBA surged to 80%, depressing AUD in the process.

Trading Day

*Source: ASX'

We believe the RBA will announce a rate cut at its October 1st meeting, to compensate for a weaker than expected employment market while highlighting increasing global economic risks. AUD is likely to continue its descent against the dollar before the meeting but is unlikely to break 0.63’s level, and will most likely remain flat despite the RBA’s monetary policy announcement.