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US Mid-Term elections hold key to market risk

Market Overview:

Melbourne Cup runs today at 5.05pm NZT.
The potential future of Donald Trump’s presidency could be decided this week with US Midterm elections taking place. The Democrats need only 23 further seats to make a total of 218 to take control of the House, polling starts Wednesday NZ time. The world’s economies have enjoyed a buoyant year with the international Monetary Fund in April saying the planet was enjoying the most united upswing since 2010. The mood however has changed in October when they cut its global outlook saying global growth has plateaued. The change is being led by China with the weakest current stretch of performance since 2009 is expected to get worse unless a favorable deal can be negotiated in the trade war with the US. The Eurozone is also losing pace expanding in the third quarter less than the previous quarter as Germany and Italy staled. The big question now is if recent US growth can continue providing good results on the back of protectionism and higher interest rates heading into 2019 and provide a counterweight for the rest of the world.  Reports have indicated that a potential trade deal could be close between China and the US. Trump’s lead adviser Kudlow has played this down when he said “no massive movement to deal with China” and “we’re not on the cusp of a deal”. Chinese manufacturers who have the misfortune of being on the list of affected companies who will have tariffs raised from 10% to 25% on a 1 January 2019 are flat out producing products for export into the US markets to make shipping deadlines before the due date. US Non-Farm Payroll employment increased by a healthy 250,000 jobs Friday for the month of October well up on the forecasted 190,000. Wage growth has risen by 3.1% year on year, this is the fastest increase since 2009. The greenback rallied along with the US 10 year treasury bond jumping 8 points to 3.21%. US equity markets turned negative – the Nasdaq falling 1.20%. Three central banks will release cash rate announcements this week starting with the RBA Tuesday with no change from the 1.5% expected. RBNZ Thursday with no change from 1.75% expected and Federal Reserve also who will keep their benchmark rate at 2.25%

Australia

The Australian Dollar eased back off its highs Friday after a disappointing close to equity markets dragged risk associated currencies lower. At one point trading back over the 0.7200 area against the big Dollar after Trade Balance figures buoyed Aussie sentiment posting a hefty 3.02 Billion trade Balance based on market expectations of 1.71 Billion. This week’s main economic news of interest is the RBA cash rate and statement due today at 4.30 NZT. Last week’s weaker than predicted CPI inflation data could impact the tone with the overall inflation number well below the 2-3% target for the 11th quarter in a row. Even with the economy in its 27th year without no recession the economy has dangerously high household debt and stagnant wage growth which is putting as squeeze on household spending. Even though net exports and capital expenditure are stimulating the economy these offer no real impetus for the RBA to increase its benchmark rate. No further economic data of note is due to be published over the week. Good luck in the Melbourne Cup.

New Zealand

The New Zealand Dollar held onto gains last week in the wake of a stronger US dollar. The kiwi was the strongest performer surprisingly out muscling its main rivals. Tagging along with the Aussie Dollar trading higher in the wake of surprising Aussie Trade and Chinese data, risk currencies did well. Its widely expected the RBNZ will keep rates on hold this week- Thursday, but a no hike wasn’t always a dead cert with some market participants suggesting the cash rate would drop. With recent economic data suggesting rates will stay the same looking ahead to 2019 may not be the case. With US company earnings over, stock market moves will resume normal price action this week. With all three US indices falling into the weekly close momentum could resume to the downside dragging the kiwi lower. Certainly if the NZ unemployment rate drops to 4.4% from 4.5% Wednesday the opposite could be said.

United States

The US Midterm elections kick off this Tuesday with polling starting at 6.00am Tuesday (NY time). The battle for congress is heating up with the fate of Donald Trump’s presidency on the line. As it stands the democrats need an additional 23 seats to make up 218 required to take back control of the senate and drive a stake through the hopes of Donald Trump’s future plans at the helm of USA. Traditionally the voting turnout with midterm elections is low but with 33 million votes already on the table the turnout of voters is set to be the biggest turnout in over 50 years. The anti-immigration moves recently deployed by the president with the clampdown on asylum seekers this falls at the heart of the midterms with intensity building over race related rhetoric. If the Republicans are ousted from the house and hand over congress to the Democrats President Trump’s agenda and campaign promises are sure to be revised. Most importantly if the Democrats were to take control of the House it would allow the Democrats to start impeachment proceedings against the President, obviously something Donald Trump is clearly hoping to avoid. The Federal Reserve will keep their cash rate on hold until the December meeting at 2.25%

Europe

The Euro reached a high last week of 1.1455 but was quick to give back gains closing around the 1.1380 area versus the greenback. Risk aversion overshadowed US Non- Farm Payroll announcements with the better than predicted number of 250,000 failing to really give the US Dollar a decent push. Profit taking allowed the EUR to drift lower amid reports circulating that the ECB will consider TLTRO (Targeted long term refinancing options) in the December ECB meeting with the central bank requiring more funds. The Euro was the third worst performing currency outside the Swiss Franc and the Japanese Yen for the second straight week with risk associated currencies getting the nod, along with new Brexit related risks dropping the Pound sparking a EUR based sell off late in the week. A very quiet economic Eurozone calendar this week will offer no real support for Euro with it lacking any concrete drivers. Last week’s second tier data was mainly disappointing suggesting the EURO could drift lower this week.

United Kingdom

Brexit headlines continue to occupy British media. UK’s Prime Minister Theresa may looks to have secured concessions from the EU to keep Britain in a customs union. This includes Ireland which effectively solves recent issues of a hard Irish border thus pioneering the way for a negotiated Brexit deal. May is also in the throes of securing an “economic partnership” of sorts with the EU. The deal would give UK financial services companies access to European markets post Brexit. UK’s Cabinet will catch up today with a further meeting on Friday in the hopes of gaining enough support for the EU to announce a special summit. May still has many cabinet folk who would love her job so she will be vigilant to dot the I’s and cross the T’s this week. The British Pound rallied off the low of 1.2700 against the US Dollar to climb back above the 1.3000 physiological level before easing back to 1.2980. UK Manufacturing data and quarterly GDP print Friday.

Japan

The Japanese Yen struggled to conger up any decent momentum over the week – the worst performing currency battled against every main player falling 1.17% against the US Dollar. Recovering equity markets and increased risk sentiment left investors leaving the Yen. Bank of Japan’s Governor Kuroda said in a statement it was necessary to continue to ease monetary policy with slow inflation – but not the same as we have done in the past 5 years. The governor introduced a large scale asset program in 2013 and it was the best thing to do but now as the economy improves with solid corporate earnings and tight labour markets the bank recognises that continuing the monetary easing could affect financial stability, he said. At last week’s Bank of Japan (BoJ) meeting the BoJ kept policy the same including setting short term interest rates at -.1% and keep low interest rates for an extended period of time. Average Cash Earnings (value in the employment income collected by workers) releases Wednesday

Canada

The Canadian Dollar has lost value five straight weeks and continues to struggle shifting off the bottom of the table against the major currencies. Crude Oil a big contributing factor coming from a high around the first of October at 77.00 to trade 62.72 now. Soft Canadian job numbers Friday with the number of new employed people releasing at 11,200 based on market predictions of 12,700 dented any upside momentum – the CAD losing half a cent against the Dollar. However, the employment rate ticked lower to 5.8% below the estimate of 5.9%. Interestingly while the CAD has underperformed the economy grew 0.1% in August, the economy has been mostly performing well and remains on track for annualised growth of 2% for 2018. This week sees governor Poloz speak later today about financial markets, with no other tier one significant data to publish.

Major Announcements last week:

  • ANZ NZ Business Confidence prints down.
  • Bank of Japan leave rates at -0.10%
  • Canadian monthly GDP releaes at 0.1% from 0.0% expected.
  • Australian Trade Balance prints at a whopping 3.02B compared to 1.71B markets expected.
  • Bank of England cash rate remains unchanged at 0.75% in a 0-9 vote.
  • Aussie Retail Sales publishes at 0.2% down on the 0.3% expected.
  • US Non-Farm Payroll prints higher at 250,000 new jobs compared to 194,000.
  • US Manufacturing prints higher at 60.3 over 59.3 predicted.
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