Wednesday, October 23, 2019

Markets slide as Brexit overshadows earnings reports; will the Fed cut rates?


Market recap: Brexit delayed again as parliament forces EU to decide on deadline extension request

Sterling weakened 0.68% against the dollar on Tuesday, after the UK’s parliament rejected Prime Minister Boris Johnson’s timetable to implement his legislation on Brexit. Johnson’s Withdrawal Agreement Bill won the majority of MPs votes (329 to 299) but minutes later, MPs voted against the bill’s three-day timetable by 322 votes to 308. Now, EU leaders must decide on whether to extend the Brexit deadline and if they do, for how long.

Meanwhile, US equities took a beating thanks to mixed earnings reports from corporates. Procter & Gamble and Harley-Davidson surged 2.60% and 7.98% respectively, after beating analysts’ estimates, while McDonald’s stock plummeted 5.04%. The DJIA fell 0.15%, the S&P 500 retreated 0.36% and the Nasdaq sank 0.72%.

Safe havens advanced after the latest Brexit headlines, with gold shifting upwards 0.21%. The Dollar Index rose 0.20% and the yen strengthened 0.12% against the greenback. US Treasury yields fell across the board, with two-year yields rising 3bps to 1.59% and 30-year yields increasing 4bps to 2.25%.

In Asia, major indices had a mixed start to Wednesday, but fell during the day thanks to increased geopolitical risk. The Nikkei index climbed 0.31% in early trading, while the Straits Times Index opened flat but was down 0.63% from yesterday at the end of the morning session. The Hang Seng Index lost 0.05% and continued to fall, finishing 0.90% before the lunch break. The drop followed a Financial Times report that claims China is looking to replace Hong Kong Chief Executive Carrie Lam with an interim official, who would finish the remainder of her term that ends in 2022.
Investors will now focus on earnings report from Boeing, Caterpillar, Microsoft and Tesla.

Today’s analysis: Will the US economy show more signs of a slowdown?

US Durable Goods Orders for September, and Markit’s Purchasing Managers’ Index (PMI) for the manufacturing and services sectors for October, will be released tomorrow, October 24th at 4.30pm and 5.45pm (GMT +4) respectively. Investors will examine data for more confirmation of a Fed rate cut at its next monetary policy meeting on October 30th.

Upcoming economic releases from the US

Since the last monetary policy meeting (where the Fed cut rates by 25bps), the US economy has shown more sign of a slowdown, with the most prominent being the Institute for Supply Management’s (ISM) manufacturing sector’s PMI contracted to 47.9, its lowest since June 2009. The report also indicated that employment in the manufacturing sector contracted 1.1%. The decline was likely due to businesses holding back on investments and cutting costs to mitigate risk from the ongoing US-China trade war.

Recent economic data indicates possible slowdown of the US's domestic economy

FED Fund Future's implied probability of a rate cut

You can expect Durable Goods Orders in September to contract, since there was greater uncertainty regarding the trade war during September. It may even fall short of estimates (of -0.7% month-on-month) due to lower-than-expected purchases on production equipment, after the ISM PMI report in September indicated lower production across all sectors. But Markit PMI data for October should fall within expectations, as US-China tensions have eased over the past few weeks and markets are waiting to see if a trade pact can be finalised during the Asian-Pacific Economic Cooperation meeting in Chile on November 16th and 17th.

Probabilities of a rate cut may rise following the data’s release, which implies that the greenback has room to drop against major currencies. We expect the Dollar Index to fall slightly to 97.36’s level as a result.

The dollar index could fall on mixed economic data on thursday

Can thursdays data give greenback bulls a chance to break 97.65? (H4)

Dollar bulls continue to exert upward pressure on the Dollar Index, while the bears still maintain possession. The bulls will try to retest resistance levels of 97.65 but will fail if Thursday’s economic data disappoints, giving the bears the opportunity to push the dollar past 97.36 to 97.23’s level.