US Bond Yield Plunge Raise Recession Fears, Stocks Sink

Summary: What a difference a day makes, 24 little hours..” Yesterday’s risk-on move proved short-lived as US bond yields plunged anew. Ten and two-year yields ended at parity (1.58%), heading toward a yield inversion which screams recession. President Trump’s move to de-escalate the trade war with China was discounted by traders and investors alike. Recent past initiatives have proved ineffectual. This time Trump took aim once again at Fed head Jerome Powell, blaming the near inversion curve on Fed policy. Adding to market woes was a shocking read in China’s trifecta of economic data, all of which had big misses. China’s July Industrial Output rose 4.8%, its slowest in 17 years, widely missing forecasts of 6.0%. Eurozone Industrial Production fell to –1.6% from forecasts of -1.4% in June. Germany, Italy and the UK are likely headed for a recession according to some analysts. The Euro lost 0.41%, retreating to fresh two-week lows at 1.11308, settling at 1.1138 (1.1172 yesterday). The Yen re-asserted its uptrend, with USD/JPY losing 0.7% to 105.82 (106.72). Sterling was little changed at 1.2052 (1.2057) despite a rise in the UK Consumer Price Index to an annual 2.1% in July from 2.0% in June. Sentiment on the British currency remained weak on the likelihood of a no-deal Brexit on October 31 with Boris Johnson in power. Global recession fears and a risk-off stance led the Australian Dollar lower to 0.6750 (0.6793 yesterday). China’s Offshore Yuan dipped (USD/CNH 7.0550 from 7.0150 yesterday). EM currencies were lower.

China’s Retail Sales missed forecasts of 8.6%, falling to 7.6% while Fixed Asset Investment was down to 5.7% from 5.9% forecast.

  • USD/DXY – despite the plunge in US bond yields, the Dollar Index, which often mirrors the Euro, climbed 0.18% to 97.991 (from 97.837). While an inversion of the US bond yield curve signals a recession, fundamentals in other G10 countries look worse. Which boosts the Greenback’s appeal.
  • EUR/USD – The Euro retreated further to fresh two-week lows at 1.11308, settling at it’s current 1.1143 in early Sydney. Eurozone data released yesterday mostly underwhelmed and weighed on the Single currency.
  • AUD/USD – The Aussie Battler, always a loser in a risk-off environment dipped anew to 0.67454 overnight before settling at 0.6750 this morning. Dismal Chinese economic data also pulled the Aussie down.
  • USD/JPY – the Dollar reversed its gains, dropping to 105.95 from 106.72 yesterday and a high at 106.977 Tuesday night. The benchmark US 10-year yield plunged 12 basis points to 1.58% while Japan’s 10-year JGB yield was up two basis points to -0.23%.

On the Lookout – FX will continue to monitor the asset markets and their reaction in Asia. The Hongkong protest crisis is getting worse and the likelihood of China’s intervention is high. Which will add damage to the already fragile relationship with the US. Already there are reports of a Trump initiative to dialogue with Chinese President Xi.
Economic data releases today will also affect FX and risk.

Australia starts off with its July Employment report (11.30 am Sydney). Japanese Industrial Production and Capacity Utilisation follow.  Euro area data sees UK Headline and Core Retail Sales (July). The US finishes off our trading day with a plethora of data: Headline and Core Retail Sales, New York Empire State Manufacturing Index, Philadelphia Fed Manufacturing Index, US Capacity Utilisation, Industrial Production and Weekly Jobless Claims.

Trading Perspective: The Dollar will eventually succumb against it’s rivals without yield support. While a risk-off environment will benefit certain currencies, we can expect the Greenback to decline overall.  Market volumes continue to be low this month but expect a pick-up toward the end. Next week’s Jackson Hole annual global central bank symposium (August 24) is highlighted by a speech from Fed Chief Jerome Powell. Who has stayed quiet despite Trump’s accusations. Interference by the White House through Trump’s tweets are only adding to the market’s risk-off mood.

The latest COT/CFTC on the nine IMM currencies saw speculators increase long bets against the Yen (first time this year) and Canadian Dollar. Speculative shorts against Sterling and  the Australian increased while Euro shorts were pared further. Biggest moves in market positioning came in the Yen and British Pound.

  1. USD/JPY – The haven sought Japanese currency continues to outperform, against the US Dollar and many other currencies. The risk-off, recession fearing market sentiment favours the Yen. USD/JPY fell back to 105.652 overnight before settling currently at 105.92. Immediate support for today lies at 105.65 followed by 105.25. Immediate resistance can be found at 106.30 and 106.70. The latest COT report saw speculators turn their short JPY positions into long JPY for the first time this year. Net speculative JPY longs (week ended July 6) totalled +JPY 10,561 bets from the previous week’s -JPY 4,218. That’s a turnaround of JPY 14,779 contracts. And while the numbers aren’t big on the surface it’s a significant change. Traders are now short USD/long JPY which should see the psychological 105.00 level hold. Look for a likely range of 105.60-106.60. Prefer to buy dips.
  2. GBP/USD – Sterling continues to trade within a range of 1.2020 and 1.2120 while all the chaos goes on in the asset markets. It’s wedged in between an overall weaker US Dollar and bearish Brexit sentiment with new PM Boris Johnson calling the shots. UK economic data has been at par of slightly better than forecast this week. And the latest COT/CFTC report saw speculative GBP shorts increase to their highest in a year. Net speculative GBP shorts increased to -GBP 102,702 contracts from the previous week’s -GBP 90,150. That’s huge. GBP/USD has immediate support at 1.2040 (1.2045 overnight low) and 1.2010. Immediate support can be found at 1.2080 and 1.2120. Prefer to buy dips near 1.20.
  1. AUD/USD – The Australian Battler faces a risk-off environment with sentiment still heavy at current levels. We reported last week that the Aussie TWI is near lows not seen since 2008. That’s huge. Net speculative Aussie Dollar shorts increased in the latest COT report (week ended July 6) to -AUD 55,511 bets from -AUD 53,442 the previous week. AUD/USD has immediate support at 0.6740 and 0.6710. Immediate resistance lies at 0.6780 and 0.6810. Australian Employment data today will drive the currency in the short term. Watch for the breakdown in Full-time (+21,100 last month) against Part-time Jobs (-20,600). Prefer to buy AUD on dips with a likely range today of 0.6740-0.6790.

Tin helmets on, happy Thursday and trading all.