Markets continue mechanical links to US equities
Wall Street pared its gains overnight as US construction spending fell 0.6% unexpectedly overnight. This took the froth off the markets, which started the week in the green as the US and China appeared to be edging towards a trade deal. The S&P fell 0.39%, and the Nasdaq dropped 0.23%. The Dow Jones fared the worst, falling 0.82%, weighed down by the healthcare sector as OxyContin maker Purdue Pharma announced it is exploring Chapter 11 bankruptcy options.
The dollar rose as Wall Street fell, firming against its G-10 counterparts. US bond yields were also rising slightly across the curve. The lock-step manner in which currencies and bonds are moving to the nuances of equities suggests that many investors remain on the sidelines awaiting a clearer macroeconomic and trade picture.
The data calendar is light today with the Reserve Bank of Australia (RBA) rate decision at 11:30 am Singapore time. The RBA is expected to leave rates unchanged and attention will be focused on any comments accompanying the decision. Traders will be looking for more evidence that the RBA is swinging from neutral to dovish. Eurozone retail sales may spark some short-term activity before the US ISM Non-Manufacturing data this evening.
Equities
Asia Pacific reacted as expected yesterday with most bourses moving into the green as news emerged on positive progress on the US-China trade talks. Regional stocks will perhaps be more muted today following a directionless session from Wall Street. The trade talks remain the most important game in town for local markets, and we expect listless trading today until we see more clarity on that front.
FX
The US dollar strengthened on haven flows as Wall Street edged lower reflecting the mechanical nature of the currency markets at the moment. With implied volatility at near-record lows in the options market, the FX markets are apparently waiting for clearer macroeconomic or geopolitical drivers before committing heavily to new positioning.
Oil
As expected, oil firmed overnight on a reduction in US-China tariff tensions. Brent crude rose 1% to USD65.50 a barrel and WTI rose 1.20% to USD56.40 a barrel. The energy markets will continue to bask in trade optimism.
Gold
Gold fell USD7 to USD1,286.00 an ounce overnight as the dollar strengthened and unwinding of long positioning continued apace. USD1,275.00 looms as the next significant technical support for the yellow metal.
