The Overnight Report: Not Comfortable, Sam

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By Chris Weston, Head of Research, Pepperstone

Good morning.

Traders have again been treated to some upsized moves in markets, where the need for agility and to remain open-minded to intra-day price swings remains paramount.

The US Treasury market has been the main game in town, and the buying across the curve has been solid. US 2yr Treasury yields have closed -10bp lower at 3.75%; the lowest close (in yield) since Sept 2022.

Fixed income traders reacting to the weaker US labour market data, with JOLTS job openings falling -3% m/m; the ratio of job openings to unemployed fell from 1.16 to 1.07.

With that in mind, the bar to a -50bp cut in September FOMC meeting has been pulled just that bit lower. The US 2’s v 10s yield curve momentarily un-inverted (now -0.89bp), and we can see US 2-year yields trading at a -156bp discount to the fed funds effective rate a clear sign that bond traders see Fed policy as far too tight given the dynamics shaping up in inflation and the US labour market.

The short-end of the Treasury curve has been impacted by Fed policy expectations, and we see that US interest rate swaps are pricing -34bp of cuts now for the Sept FOMC meeting essentially a 1/3 implied chance of a -50bp cut. A poor non-farm payrolls outcome on Friday and we should see swaps pricing a -50bp cut at a 50/50 implied. We also see -106bp of implied cuts by December, which suggests a small premium of two -50bp cuts this year.

Naturally, when we see this sort of bid in the Treasury market, and increased rate cut expectations, the USD will attract sellers and we’ve seen that play out.

US equity has held in well despite the data flow, and we see both the S&P500 and NAS100 close -0.2%. The intraday tape of the S&P500 showed it was largely a sellers’ market, with the S&P500 attempting to move higher early in cash trade before the sellers took the S&P500 from a high of 5552 into 5503 and settling out at 5520.

It seems few are really prepared to put money to work at risk until we get past Friday’s non-farm payrolls report that said, investors haven’t given up on equity altogether and on the day we have seen a rotation into the safety of utilities and staples, while REITS felt the tailwind of lower bond yields.

Tech remains the clear focus though and talk of where to now for Nvidia is the central discussion. On the day, we saw Nvidia stage a rally into US$109.99 but there is just no conviction to push this higher right now, and despite retracing 70% of the Tuesday 9%-plus selloff, we’ve seen the stock close at US$106.20, lower by -1.7%.

The AI trade unwinds on a broad basis globally, but is it really a bubble’ as some suggest? I’m sceptical on that call, given Nvidia’s long-term share price appreciation has been well correlated with earnings (unlike Cisco in the 90’s)  – but there is no doubt the wheels in Ai-names are looking shaky.

Looking ahead our calls for Asia are mixed. The ASX200 should unwind on a flat note. 

By way of risk to navigate, in the session ahead we turn once again to the US data flow as the central focus, with US ADP payrolls, weekly jobless claims and ISM services in play.

The ISM services print has the potential to further rock sentiment, and with the consensus seeing the diffusion index coming in at 51.4 (unchanged from the July read), where any read below 50.0 could increase cross-asset volatility.

On the calendar today:

-Australia July trade balance

-Amcor ((AMC)) ex-div 19.01c

-Beacon Lighting Group ((BLX)) ex-div 3.8c (100%)

-Clinuvel Pharmaceuticals ((CUV)) ex-div 5c (100%)

-Globe International ((GLB)) ex-div 13c (100%)

-Helloworld Travel ((HLO)) ex-div 6c (100%)

-Monadelphous ((MND)) ex-div 33c (100%)

-nib Holdings ((NHF)) ex-div 14c (100%)

-Origin Energy ((ORG)) ex-div 27.50c (100%)

-Platinum Asset Management ((PTM)) ex-div 4c (100%)

-Reliance Worldwide ((RWC)) ex-div 3.78c

-Schaffer Corp ((SFC)) ex-div 45c (100%)

-Sky Network Television ((SKT)) ex-div 10.93c

-FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

Corporate news in Australia:

-Macquarie Group ((MQG)) is evaluating CommBank’s ((CBA)) ultra-high-net-worth business

-Orora ((ORA)) is selling its North American packaging business, Orora Packaging Solutions (OPS), to Veritiv for $1.78bn

-POSCO will invest $40m in Black Rock Mining ((BKT)), increasing its stake to 20% and securing long-term offtake agreements for the Tanzanian graphite project

-Apollo Global is selling a 10.6% stake in Challenger ((CGF)) for about $460m

-Private hospital operator Healthscope is seeking rent relief at 38 hospitals

-Home Affairs Minister Tony Burke has received draft cybersecurity laws

-Vanguard’s Australian office has laid off about -40 employees, mainly from marketing

The Australian share market over the past thirty days

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

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