LCG: RBNZ cuts 50bp, spurs Fed expectations. US stocks rebound as PBoC doesn’t want a currency war. Gold advanced to $1490

August 7, 2019

The Reserve Bank of New Zealand (RBNZ) lowered its official cash rate target by 50 basis points to an all-time low of 1.00% unexpectedly. Kiwi fell more than 1.70% against the US dollar to the lowest level since January 2016 and the NZ 10-year yield slid 17 points. The surprise rate action from the RBNZ can only spur the expectations of a similar size cut from the Federal Reserve (Fed). The US 10-year yield slipped below 1.66% in Asia, as the probability of a 50-basis-point cut in FOMC’s September meeting stood at 33%, slightly lower than on Tuesday, after the People’s Bank of China stabilized the yuan near the 7 mark to cool off the sell-off across the global equity markets. The PBoC pledged that the yuan won’t fall continuously in an effort to prevent the US-China trade war from turning into a currency war. White House’s Larry Kudlow said that they still expect to welcome Chinese officials for September talks.

The PBoC’s goodwill gesture has been a quick fix for the US equity markets. Major US indices gained past 1% on Tuesday. The volatility index, VIX, fell 18% after reaching the highest levels since January on the back of this year’s biggest stock rout. The S&P500 (+1.30%), the Dow Jones (+1.21%) and Nasdaq (+1.39%) closed Tuesday’s session in the green, although the Asian traders rebuffed New York gains. US equity futures fell in Asia.

St Louis Fed’s Bullard, a dovish FOMC member, remained impassive regarding the escalation in US-China trade tensions. He said that the Fed has already cut rates to give support to the economy and that the ‘US monetary policy cannot reasonably react to the day-to-day give-and-take of trade negotiations.’ At this point, the FOMC members will likely avoid fueling the dovish Fed expectations, which have already gone well ahead of the Fed’s thinking. The Fed has given a hand, but the market is now looking to take the whole arm.

The Nikkei (-0.48%) and Topix (-0.21%) eased in Tokyo, as the Japanese yen remained the best performer (+0.48%) against the US dollar. Shanghai’s Composite remained unchanged (-0.01%), while Australia’s ASX (+0.68%) gained after the RBNZ surprised by a 50-basis-point cut. Energy stocks (-0.37%) remained offered in Sydney however, amid WTI crude consolidated losses near $53 a barrel. Brent crude extended losses to $58 a barrel.

FTSE futures (-0.03%) hint at a sideways open in London, after the FTSE 100 index shred 7.25% over the past week. Dip buyers are tempted to enter fresh long FTSE positions near the 200-day moving average (7184p) before a further pound recovery, but the dust needs to settle first. Energy and mining stocks should continue weighing on the FTSE, as rising concerns of a weaker global demand keep the downside pressure tight on the commodity markets.

Cable tested the 1.22-resistance on the back of a softening US dollar, as the speculations of an additional 50-basis-point rate cut from the Fed in September pulled the US yields and the dollar lower. The slowing negative momentum in sterling hints that a second bullish attempt could clear the 1.22 offers. The next key resistance stands at a distant 1.2387, the minor 23.6% Fibonacci retracement on March – August drop. Decent 1.22 call options will expire tomorrow and could give a further boost if the pound manages to catch the 1.22 train.

Gold rallied to $1490 an ounce in Asia. Risk averse investors seem determined to test the $1500 level for the first time since April 2013. The falling sovereign bond yields and increased market volatility could justify an attempt to the $1500 mark. Though the gold market is on the verge of an overbought market, with the 14-day relative strength index pointing at the 70% level, investors will likely continue buying the dips.

Opening calls

FTSE is expected to open flat at 7172

DAX is expected to open 35 points higher at 11590