The Overnight Report: The First Cut

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By Chris Weston, Head of Research, Pepperstone

Good morning.

On a day when the Atlanta Fed Q3 GDP Nowcast Model was revised higher to show the US economy tracking at 3% y/y, courtesy of better-than-expected US retail sales and industrial production reports, many viewing this impressive tracking rate may find it hard to reconcile the Fed potentially cutting rates by -50bp.

But here we are, and we stare down with great anticipation at today’s Fed meeting – where the tone of the messaging and the level of concern or control that we read in the statement and hear from Jay Powell will be the deciding factor that guides broad market sentiment.

Portfolio positioning and risk management have been the central focus today, and have been the factors driving moves in equity, US Treasuries, the USD, and gold.

Traders and money managers have weighed up the propensity and the possible extent of cross-asset volatility and have massaged exposures according to their risk framework. We saw this play out in US equity, where the buyers initially stepped in on the open before a punchy 1441-stock sell program (seen in the NYSE TICK index) hit the market 3 hours into trade with the selling pushing both the NAS100 and S&P500 into the red before the respective indices flatlined in a tight range into the close.

The result was a largely unchanged close in the US equity indices, with the internals finely balanced, with 54% of S&P500 companies closing higher on the day. Energy, consumer discretionary and industrials outperformed, while healthcare, staples and REITs lost ground.

The better-than-expected US data and the Atlanta GDP Nowcast revision promoted selling and repositioning in US 2yr Treasuries with yields closing +5bp to 3.59%, resulting in the Treasury curve undergoing modest bear flattening. Near-term Fed cut expectations didn’t change and remain perfectly split on a -25bp vs -50bp outcome, with -39bp of cuts priced for today’s meeting, although we’ve seen around -7bp of cuts come out of the forward meeting pricing.

Fixed income traders remain heavily long of US Treasuries, and while that position has been reviewed, it feels a tall order to think we’ll see a sustained move higher in yields, as this would require significant repricing in expected rate cuts over the next two years.

With the market short of USDs, the rise in US bond yields triggered modest USD buying vs the GBP, EUR, and CHF, although USD repositioning has been most pronounced in USDJPY, with the spot rate trading above 142.

The UK CPI report (16:00 AEST) due in the session ahead will obviously be a secondary consideration to the Fed meeting.

In commodity markets, we’ve seen a further push higher in crude, while some of the heat has come out of the recent gold move, with the yellow metal closing -0.5%. Gold is at all-time highs for a reason though and I see the strong probability that pullbacks will be well supported, and on the day, should the US 2yr yield and the USD initially spike, I would be seeing how gold reacts (should it get there) into the former range highs and breakout level of US$2525/oz.

Turning to Asia, after hitting a new all-time high yesterday (8150.5) the ASX200 looks to open on the back foot, and with the Fed meeting holding the potential to significantly volatility, there are clearly enough reasons for would-be buyers to sit on their hands, and while shorts may look to cover, the prospect of a day where we see a grind lower through trade on lighter volumes seems highly plausible.

On the calendar today:

-New Zealand 2Q current account

-Japan July core machine orders

-Eurozone Aug CPI

-UK Aug CPI

-US FOMC policy rates

-Auswide Bank ((ABA)) earnings report

-Auckland Airport ((AIA)) ex-div 5.92c

-APM Human Services International ((APM)) AGM

-Clarity Pharma ((CU6)) investor briefing

-Flight Centre ((FLT)) ex-div 30c (100%)

-New Hope Corp ((NHC)) earnings report

-Supply Network ((SNL)) ex-div 33c (100%)

-Service Stream ((SSM)) ex-div 2.50c (100%)

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

Corporate news in Australia:

-Genesis Capital has returned for take-over of Pacific Smiles ((PSQ))

-Xero ((XRO)) acquires Syft to boost reporting and analytics, planning to integrate its functionality into Xero software across global markets

-A Santos ((STO)) led consortium has sold part of equity in the Bayu Undan project to Timor Leste’s state energy company

-Market speculation sees KKR returning with take-over bid for Ramsay Health Care ((RHC))

-Webjet ((WEB)) shareholders approved a demerger into two ASX-listed companies: WEB Travel Group and Webjet Group

-Actinogen Medical ((ACW)) is raising funds to expand Phase 2b trials for its Alzheimer’s drug XanaMIA, targeting 220 patients

-Bloomberg reports Macquarie Group ((MQG)) is weighing the sale of potentially a majority stake in IT services provider Wavenet and a formal sale process is likely to kick off next year, people with knowledge of the matter said. The UK company could be valued at GBP1.2bn (A$2.3bn) or more in a deal

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.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author’s and not by association FNArena’s – see disclaimer on the website)

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