SP500 tests 2018 low, NZD jumps on improved business sentiment

Summary:

• Major indices on Wall Street moved lower on Monday

• Crude prices settled below $50 per barrel for the first time in more than a year

• RBA minutes points to no strong case for a change in policy

• NZ dollar jumps on improved business sentiment

Getting lower

The final month of the year has not been upbeat for equity investors so far and nothing suggests that it could change noticeably over the next couple of days. Friday was ugly and Monday was brought the same with major indices falling over 2% without a particular reason standing behind these moves. It seems that investors are only looking for an excuse to shed their holdings and these excuses can be always found. Over the course of the recent weeks the prime reason has been the Federal Reserve and further interest rate hikes which are lifting the terminal rate pushing down the present value of stocks and thereby weighing on their current valuation. On top of that, rising oil prices, EM-related risks, Italian woes were on the investors’ screen but since then a lot has changed. The Fed is expected to slow down with its rate hikes, the Italian budget thread appears to be on track to be resolved before long, risks related to some EM economies such as Argentina and Turkey have subsided and oil prices have plunged. On top of that, there are stock market positive and should have helped push higher their valuation. Having said that, US stocks’ valuation still looks demanding and economic growth is forecast to slow down next year, therefore from this viewpoint one may arrive at a conclusion that the ongoing sell-off could be justified. Moreover, the US-China trade war is also weighing on economic activity through lower net exports. While the Federal Reserve is broadly expected to hike rates this Wednesday, Donald Trump still expresses his criticism regarding higher rates. He tweeted on Monday mocking the central bank that it is even considering another rate increase suggesting that there is no reason to move because inflation is low. These comments came in along with falling stock and crude prices underpinning the Trump’s stance. Looking forward, we  think that the US stock market may have passed its peak in this cycle, and along with tighter monetary conditions it could perform worse in the following year.

Technically the SP00 (US500) broke through its crucial support line at 2600 points and tested the February’s lows. So, the death cross is still alive. 2490 points could be another target when the line at 2540 points is smashed. Source: xStation5

NZ dollar higher, RBA’s minutes say the same

The NZ dollar seems to be a winner of the Asian session in the G10 space as it has climbed as much as 0.75% against the US dollar following improved business sentiment. The ANZ’s monthly business outlook survey produced encouraging values for December as business confidence improved to -24.1 from -37.1 (the highest number in eight months) while activity outlook picked up to 13.6 from 7.6 (the highest number in seven months). The detailed data showed that both employment and investment intentions improved while profitability remained still negative. While lack of workers remains the most prominent problem for NZ employers, the Immigration Ministry has come up with quite a weird idea proposing a new scheme that would increase oversight of employers planning to hire migrants on temporary work visas, including checks to ensure than neither New Zealander could do the job instead. In practice, it could put more downside pressure on employers acting toward a lower production level or forcing them to hire local workers who could turn out to be more expensive pushing up production costs. However, it is a long-term issue to watch and investors do not seem to be particularly worried about it today instead focusing on improved sentiment among businesses. In turn, the RBA’s minutes produced the same headline as we saw previously as the central bank underlined that the next move could be either up or down with no strong case to act for the time being. The Aussie barely moved in response to this release and it is trading subtly higher against the US dollar at the time of writing.

The NZDUSD could be en route to the peak drawn at the beginning of this month (0.6970). Until the price is hovering above the orange trend line it appears to be the base scenario. What’s more, the greenback could find itself under bearish pressure in anticipation of the Federal Reserve meeting. Source: xStation5

In the other news:

• Chinese President Xi Jinping said that no one is in a position to dictate China what should be done

• Japanese government slashed economic forecasts expecting GDP growth at 0.9% YoY in the 2018 fiscal year compared to 1.5% YoY previously and CPI growth at 1% YoY compared to 1.1% YoY predicted previously; forecasts for the next fiscal year were revised down as well (GDP to 1.3% from 1.5% and CPI to 1.1% from 1.5%)

• Japan’s finance minister Aso said that the country will reduce tax on buying cars ahead of a planned sales tax increase in October 2019

• BoC’s Poloz suggested that rates need to be more neutral with economy being close to its full capacity; he is not expecting a recession in 2019

• The EU will seek no a “managed no-deal” with the UK if the British Parliament fails to ratify the withdrawal treaty before the country’s scheduled leaving date of March 29

• Crude prices are trading more than 1.5% down, the US 10Y yield has fallen to below 2.85%

• NIKKEI closed 1.8% lower, Chinese indices are trading lower as well with the Shanghai Composite falling 0.7% and the Hang Seng going down 1.3%