The Monday Report – 15 July 2024

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This story features AUCKLAND INTERNATIONAL AIRPORT LIMITED, and other companies.
For more info SHARE ANALYSIS: AIA
The company is included in ASX200, ASX300 and ALL-ORDS

By Chris Weston, Head of Research, Pepperstone

We move past an eventful week, and while traders were still coming to terms with the unfolding news and market moves, the weekend news flow has hardly let us stop for breath and has been defining.

Trump in the driving seat

The assassination attempt on Donald Trump has seen images of a defiant leader spread through social media and has seemingly galvanised his chance of reclaiming the White House.

While the betting markets can be fickle, they have swung to a view that Trump in as President is almost a done deal. However one perceives the weekend images, it sets up this week’s Republican National Convention to portray a party united behind its leader, a stark contrast to the current fragile state of the Democrats. 

Joe Biden and the Democratic Party must pull a rabbit out of the hat, and they need to find a spark to shift the attention back to their cause. That may be hard to do, and if any further high-profile Democrats endorse Biden to step down it could remove the taboo, and lead to Biden’s determined position having to be significantly reconsidered.

The big consideration for markets is whether the Republicans have the potential not just to take the White House and Senate, but whether they can also swing the House in their favour as well which, if the betting markets are on the money, is where they are behind, but that gap is closing.

If the markets feel a Republican Red Wave’ is on the cards, then we could see the market accelerate various election trades. Trump as President is likely a positive for risk, at least for US equity and we should see S&P500 futures and the USD push higher today most talk up the impact of tariffs as the key point, and it certainly may help drive capital out of China and into US markets, but it’s the promises of deregulating US industries which should be the big equity kicker.

As the picture unfolds, it seems that if Trump does indeed get the gig of President, then he’ll likely do so with the Fed already easing policy and offering him a tailwind from a falling cost of capital.

A -25bp rate cut from the Fed in September is seen as a lock

With US data coming in softer than expected we’ve seen the US 2-year Treasury yield fall another -15bp w/w to 4.45%, with the US swaps market now pricing a 90% chance of a -25bp cut in the September FOMC meeting, and nearly 2.5x -25bp cuts priced by year-end.

Looking even further out, the swaps market price seven -25bp cuts over the coming two years, which seems fairly priced on current economic trends so unless we’re looking at a far more protracted downturn and a sizeable decline in consumption, then it is hard to see much more than seven cuts eventuate.

With the USD index (DXY) pulling into big support at 104, primarily led by EURUSD rising above 1.0900, we have seen relative implied rate differentials working against the greenback.

By way of data to drive the US this week, US retail sales (on Tuesday) is the main event, with expectations for a -0.2% decline month-on-month, an outcome which would only keep consumption estimates headed lower and keep the selling pressure on the USD.

Perhaps the bigger driver of US markets will be the raft of Fed speakers due this week, and notably, guidance from Powell, Waller and Willimas jump out.

The markets have largely ignored individual Fed chatter of late, but given this elevated rate cut expectations, the market will be looking for their views post CPI, and whether these individuals hold same levels of increased confidence that data are slowing that the market does.

US earnings start to roll in at a faster clip

For equity traders, we’ve already seen a handful of US banks report, but the US quarterly earnings season starts to ramp up this week with 8% of the S&P500 market cap hitting us with numbers.

US financials remain front and centre, but Netflix also reports, and this always kicks on equity traders’ radars, given the punchy moves we often see after reporting. This time the options market implies a move of -/+8.3% on the day of reporting, so the share price could be looking at a break of US$700 and new highs if the numbers and guidance please the market.

The ECB meeting is a marquee event but unlikely to move markets

The EUR on a broad basis will focus on the ECB meeting (Thursday 22:15 AEST), which will be seen as a marquee event of the week for macro heads. As important as central bank meetings are for markets, this should be a non-event. The ECB will leave rates unchanged and likely detail that more data is needed to see them ease again. September seems a far more fitting date for the next ECB rate cut.

Data to move the NZD and AUD

On the week we also saw a dovish twist from the RBNZ, which brings a -25bp rate cut onto the table for the 14 August RBNZ meeting this week’s NZ Q2 CPI print should influence that probability, so it is a potential volatility event for those running NZD positions.

Staying in the antipodean currencies, we’ve seen the AUDUSD rising for 8 of the last 9 trading sessions and now approaches the 68c level. Relative AUS vs US interest differentials are driving the pair and are certainly more influential on the direction of travel than Chinese equity indices or industrial metals. AUDCAD is another which has real upside momentum in play.

With that in mind, the key release to put on the radar this week is the Aus June employment report (due Thursday at 11:30 AEST), where a strong report could modestly increase the prospect of an RBA hike in August although it’s the Q2 CPI print (due 31 July) that could really make or break that decision.

 Keep the ASX200 on the radar not only did we see the index close at a new all-time high last week, but our opening call suggests we see an unwind above 8000. On the day, we question if the index can hold the big figure.

We also get a fair bit of event risk from China, with the MLF decision, new/used home sales, Q2 GDP, industrial production, retail sales and property sales all due through the week. The marquee risk though is the Third Plenum, which essentially sees more than 370 members of the Communist Party’s Central Committee come together and plan for the 10 years ahead. Third Plenum’s have been the forum to announce radical change in policy over the years, hence the market interest.

It is expected that we could get headlines from the Third Plenum from Thursday, but expectations of an announcement that causes significant volatility are low. I am turning more constructive on Chinese/HK equity, but they need work.

On the calendar today:

-Auckland International Airport ((AIA)) Quarterly update

-Rio Tinto ((RIO)) Quarterly update

Elsewhere:

-China GDP 2Q

-China June retail sales/industrial production

-USA Empire Manufacturing July

Corporate news in Australia:

– Macquarie Asset Management ((MQG)) among first-round bidders for Healius’s ((HLS) $700m diagnostic imaging unit, Lumus Imaging

The Australian share market over the past thirty days

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