A convergence of bad news sent equities and currencies tumbling lower. U.S. assets were hit the hardest today with USD/JPY falling to a fresh one month low and the Dow Industrial Average dropping more than 750 points intraday. Although stocks rebounded off the lows into the close, risk aversion remained. Today’s sell-off started with the decline in yields. Having breached 3% on Monday, 10 year Treasury rates dropped below 2.9% today on concerns about inflation and growth. But what really kicked off the decline in stocks and Asian currencies was the arrest of Huawei’s CFO and Deputy chairwoman Wanzhou Meng. Huawei is one of China’s largest tech companies and she is founder’s daughter. Her arrest has been met by anger and surprise as the Chinese government has asked for an immediate release. On paper, the Trump Administration wants to look like they are willing to work with China on trade but the seriousness of their intentions are questioned by this arrest. Instead of focusing on reconciliation and negotiation, the U.S. has made it clear that they are not going soft on China. Unfortunately this is a very delicate time for negotiations and today’s move is major setback to U.S. – Chinese relations. As a result, equities and currencies sold off aggressively on the fear that no agreements will be made in the next 90 days, triggering the next round of tariffs.
US data also failed to impress. Jobless claims increased, ADPWealth Strength IndexADP is Moderately Flat and trending Up reported a much smaller than expected rise in employment and according to Challenger, Gray & Christmas, job cuts rose 51.5% y/y in November. The trade balance also widened while factory orders and durable goods fell. The only good news was service sector activity. Instead of falling, the ISM non-manufacturing index rose to 60.7 from 60.3 but the employment component of the report declined. None of this is good news for tomorrow’s jobs report. As you can see by the list below, there are more reasons to believe that job growth slowed than improved in the month of November. Not only did ADPWealth Strength IndexADP is Moderately Flat and trending Up report significantly lower employment change but the 4 week moving average of jobless claims increased, consumer confidence is down and most importantly, the employment component of the service sector activity report fell. The US labor market is one of the strongest parts of the economy but with stocks falling sharply over the past 2 months, businesses may have grown more conservative about hiring. Economists are looking for weaker job growth and if their outlook is confirmed, the dollar could extend its slide. Wage growth will also be important because that’s where the forecast diverges with market sentiment. Economists are looking for an uptick in wages and if they are wrong, the sell-off in the greenback could be even more significant with USD/JPY eyeing a test of 112.
- Employment Component of Manufacturing ISM rises to 58.4 from 56.8
- Continuing Claims Drop to 1.63M from 1.67m
- ADPWealth Strength IndexADP is Moderately Flat and trending Up drops to 179k from 225k
- Employment Component of Non-Manufacturing ISM drops to 58.4 from 59.7
- Challenger Reports 51% Increase in Layoffs
- 4 Week Average Jobless Claims Rises to 228K from 213k
- University of Michigan Consumer Sentiment Index drops to 97.5 from 98.6
- Consumer Confidence Index Drops to 135.7 from 137.9
Considering that the source of market anxiety is US-Chinese trade relations, its no surprise to see that the Australian dollar is the day’s worst performing currency. Recent economic reports have been disappointing with the trade surplus shrinking instead of expanding. Although retail sales increased, the improvement was lost amidst all of the negative news and risk aversion. Technically, AUD/USD has fallen below the 20-day SMA for the first time since early November and this move signals a deeper correction towards 71 cents. NZD fell in sympathy with AUD but Canadian dollar traders have their own reasons to be worried. The first day of the OPEC meeting ended with no deal. Russia is resisting the pressure to cut production and with their pushback, oil prices are down 2% today. Bank of Canada Governor Poloz also sounded less hawkish in his economic assessment – he said data since October has been disappointing and therefore the current level of rates is appropriate for the time being. They are worried about oil and the US-China trade war and they need to do more work to understand how much of a shock the oil decline will have on their economy. All of this implies that they are in no rush to raise interest rates again. USD/CAD will be in focus tomorrow with a number of factors affecting the currency including OPEC, US and Canadian employment reports.
Euro and sterling on the other hand traded higher against the greenback. No news is good news for EUR/USD, which continues to trade in a tight range. Meanwhile sterling traders are staying on sidelines as they wait to see if the UK Parliament supports Prime Minister May’s Brexit deal. A lot is at stake and despite talk of delaying the vote, May is pressing forward with the December 11th date, saying that its her deal, no deal or no Brexit. The day before the European Court of Justice will decide if Britain could halt Brexit. Next week is judgment week for Brexit, the pound and Prime Minister May so we expect further consolidation ahead of these big decisions.