US: Divergence between the industrial and the services sectors continues – TD Securities

Analysts at TD Securities, notes that the August ISM non-manufacturing index continued to highlight the divergence between the industrial and the services sectors, as so far the woes from the trade war and global weakness affecting manufacturing production appear not to have spilled over into the rest of the economy.

Key Quotes

“In the details, the index exceeded expectations, jumping to a six-month high at 56.4 from 53.7 before (mkt 56.4). Most of the key components were strong, with new orders (to 60.3 from 54.1) and business activity (to 61.5 from 53.1) leading the way.”
“The only negative read in an otherwise strong report was the decline in the employment component to its lowest level since March 2017 at 53.1 from a strong 56.2, which would suggest an slowdown ahead in service-sector employment which is not surprising at this stage of the cycle.”

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EUR/USD Recovers, GBP/USD Rallies, USD/CAD Eyes BoC Risk - US Market Open

MARKET DEVELOPMENT –EUR/USD Recovers, GBP/USD Rallies, USD/CAD Eyes BoC Risk

DailyFX 2019 FX Trading Forecasts

Equities: Global equities are notably firmer following the announcement by Hong Kong’s Carrie Lam that the controversial extradition bill that sparked protests for 3-months will be withdrawn. Consequently, this has spurred risk-on sentiment with European and US equity futures trading higher throughout today’s session. That said, following yesterday’s surprise contraction in the US ISM report, eyes will be on key tier 1 US data during the weak, particularly as the weak ISM employment subcomponent raises concerns over this weeks ADP and NFP reports.
GBP: The first day back to parliament for PM Johnson kicked off with defeat in the House of Commons after a cross-party motion to delay the UK’s departure from the EU until January 31st, 2020 had been passed. In response, PM Johnson called for a snap-election to take place on October 15th, however, with opposition parties viewing this as a way to push forward with a no-deal Brexit, the PM is expected to struggle to achieve the 2/3 of MPs needed to support him until the delay bill is passed. As such, while this has seen a no-deal Brexit threat edge lower, thus sparking a short squeeze in GBP/USD, the road ahead remains an uncertain one for the Pound.
EUR: Better than expected Eurozone services PMI data has helped the Euro recover, which in turn has reclaimed the 1.1000 handle. Alongside this, the Euro had been further boosted by the ECB President nominee, Christine Lagarde, who stated that the ECB must be mindful with regard to negative effects of unconvential polices, suggesting that the next ECB President may not be major advocate of significant policy stimulus.
CAD: The Canadian Dollar has traded in subdued fashion despite the 2% surge in Brent crude futures. Market participants await the BoC monetary policy, where interest rates are likely to be left unchanged. However, focus will be on whether the central bank sets the tone for a potential move at the October monetary policy report where money markets are pricing in a 66% chance of a 25bps cut. (full analysis)







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When are the German Factory Orders and how could they affect EUR/USD?

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German Factory Orders overview

The German data scheduled for release at 06:00 GMT is expected to show the Factory Orders dropped at a seasonally adjusted 1.3% year-on-year in July, following a 3.36% slide in June.

Manufacturing PMI hit 7-year low in July

The headline IHS Markit/BME Germany Manufacturing PMI – a single-figure snapshot of the performance of the manufacturing economy – sank to a seven-year low of 43.2 in July, mainly due to the steepest drop in new export orders since 2009.
Put simply, German manufacturers went into full retrenchment mode in July. Therefore, the Factory Orders are unlikely to surprise with a positive print.

Impact on EUR/USD

That the German economy is experiencing a slowdown is generally accepted by now and priced to a greater extent. Further, EUR/USD's daily chart is flashing a short-term bullish reversal, as discussed earlier today.
Also, investors are buying risk in response to new optimism on a possible US-China trade dispute resolution and the fading prospect of a hard Brexit.
Put simply, a bigger-than-expected drop in the German Factory Orders is needed to put the EUR under pressure.
The common currency will likely rise toward the resistance at 1.1064, as suggested by the daily chart if the Factory Orders print in line with the estimates or blow past expectations.

About German Factory Orders

The Factory orders released by the Deutsche Bundesbank is an indicator that includes shipments, inventories, and new and unfilled orders. An increase in the factory order total may indicate an expansion in the German economy and could be an inflationary factor. It is worth noting that the German Factory barely influences, either positively or negatively, the total Eurozone GDP. A high reading is positive (or bullish) for the EUR, while a low reading is negative.

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US President Trump aides say he isn’t ordering US companies out of China – WSJ

The Wall Street Journal (WSJ) reports the weekend’s comments by the US President Trump’s top Economic Adviser Kudlow and Treasury Secretary Mnuchin, as they clarified on Trump’s Friday’s tweet, ordering ordered US companies to look for alternatives to China after China said it would add more tariffs to US imports.
Kudlow said that Trump has no intent to invoke emergency powers and force companies to relocate operations from China.
Mnuchin noted that Trump wants US firms to start looking beyond China while adding that US President’s reference to the Fed Chair Powell as enemy not 'literal'.
China’s President Xi has become an enemy on trade issues, Mnuchin said.
The softer tones by the US officials on the trade issue combined with the Chinese Vice-Premier Liu's conciliatory remarks will likely help ease some nerves in Asia, as the risk-off trades appear to have eased off a bit.

Yen Gains, Stocks to Drop as Trade-War Ramps Up

(Aug 26): The yen climbed and stocks were headed for steep losses in Asia after the U.S.-China trade war ratcheted up. The yuan retreated.

Equity futures indicated losses of more than 2% in Tokyo and Hong Kong. On Friday, President Donald Trump announced additional levies on Chinese imports and called for American companies to pull out of Asia’s largest economy after China said it would impose retaliatory tariffs on U.S. goods. Trump acknowledged having second thoughts on escalating the trade war, only for his top spokeswoman to clarify he meant he regretted not raising tariffs even more. The yen touched a fresh 2019 high against the greenback. The Aussie and kiwi dipped.

The latest turn in the trade war comes during an already tumultuous August for financial markets amid concerns of slowing global economic growth. On Friday, Trump bumped existing tariffs on Chinese goods to 30% from 25% and planned duties to 15% from 10%. That followed retaliatory levies from China, which indicated it will follow through with tariffs on $75 billion of U.S. goods it announced Friday and fight the trade war to the end, according to an editorial in the state-run People’s Daily.

“Friday’s events raise the risk of an all-out economic war between the U.S. and China,” said Thomas Harr, global head of fixed-income and commodity research at Danske Bank.

Here are the main moves in markets:
Stocks

    The S&P 500 sank 2.6% on Friday.
    Futures on Japan’s Nikkei 225 fell 2.6%.
    Hang Seng futures declined 2.4%.
    Futures on Australia’s S&P/ASX 200 Index lost 1.3%.

Currencies

    The yen rose 0.3% to 105.03 per dollar.
    The offshore yuan dropped 0.6% to 7.1752 per dollar.
    The euro gained 0.1% to $1.1152.
    The Aussie fell 0.3% to 67.40 U.S. cents.

Bonds

    The yield on 10-year Treasuries fell seven basis points to 1.54% on Friday.

Commodities

    West Texas Intermediate crude fell 2.1% to $54.17 a barrel.
    Gold surged 1.9% to $1,526.96 an ounce.

Gold prices set on the 127% Fibo extension target

• Gold prices on Friday were higher following the trade war escalations and a weaker dollar. 
• Powell, as expected, gave a balanced assessment of monetary policy.

Spot prices rallied to a high of $1,530.22 from a low of $1,493 on the day, ending 1.86% higher ahead of what is expected to be a bullish open in Sydney today and for the ahead.

On Friday, China announced retaliatory tariffs on USD75 billion of US imports on Friday, effective 1st September and 15th December - US autos will have a 25% tariff imposed from 15 December, and other tariffs are 5-10%.

Then, President Trump stated that the 10% levy on USD300 billion of Chinese goods would be raised to 15% and the existing 25% levy on USD250 billion of Chinese goods would lift to 30%. Trump also urged US companies to pull out of China and produce in the US and there has been some talk of how he can legally force companies to stop trading with whichever country he chooses.  The entire story completely overshadowed the Jackson Hole symposium where the main event was Fed Chair Powell’s speech.

Powell: "Economy is in a good place and that the Fed will act appropriately ... " ...

Powell, as expected, gave a balanced assessment of monetary policy but repeated that there are significant risks to the economy from external economic developments and trade frictions. He noted that the economy is in a good place and that the Fed will act appropriately to maintain the expansion. Taken together with the tariff news, market pricing for US rate cuts increased slightly.

"At the same time, diverse views have been expressed by other Fed officials on the need for further US rate cuts," analysts at ANZ Bank explained:

"Regional Fed Presidents George, Harker, and Rosengren have voiced their resistance to lower interest rates, noting solid US data, financial stability risks, and the need for a long-term view. Meanwhile, Kaplan said he has an open mind about further action, and Bullard advocated for a 50bp cut at the upcoming meeting as an insurance cut. Market pricing is on the side of the dovish officials, with a full cut priced in for September and 100bp of Fed cuts priced in by mid-2020."

We now await the Sydney gold open and it is worth noting that gold futures rallied on Friday as well on China’s plan for retaliatory tariffs on U.S. goods. The December gold climbed by $29.10, or 1.9%, to settle at $1,537.60 on Comex as being the highest most-active contract settlement since April 2013 and prices were up 0.9%, following weekly gains in each of the past three weeks.

Gold levels

The market is a spike away from a breach of the 1535s. A break there guards a longer run higher with the first major stop on the map being the 127.2% Fibo target which is located around 1,560, guarding the Oct 2012 highs at 1795. On the downside, should there be some fundamental switch up, bears can target a 23.6% retracement to 1472 ahead of a 50% mean reversion to 1401.

*Note:-

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The AUD/JPY pair opened with a bearish gap on trade-war escalation

• AUD/JPY is in a continuation of the downside, pressure below 75 handle.
• The bears look to a long term 78.6% Fibo target that marries up with the Jan 2003 swing lows.

The AUD/JPY pair opened with a bearish gap, to be expected considering the geopolitical climate over the trade war escalations. AUD/JPY is currently trading at 0.7073 and has fallen right on the 6th August lows and just a touch off the 2019 lows, (which even broker you use will have their own low for the year as it was a flash crash that printed the low). AUD/JPY is -0.59% on the session so far.

On Friday, the US stock markets finished deeply in the red which has weighed on the cross as the FX market's risk barometer. AUD/JPY is also weighed on directly related to commodity priced and Chinese economic growth. The fact that the Reserve Bank of Australia will now be expected to cut interest rates sooner than later is an additional weight on the bar also.

Trade war escalations

Trump urged US companies to pull out of China and produce in the US following the Chinese announcement of retaliatory tariffs on USD75bn of US imports on Friday, effective 1 September and 15 December. Then, President Trump stated that the 10% levy on USD300bn of Chinese goods would be raised to 15% and the existing 25% levy on USD250bn of Chinese goods would lift to 30%. 

"The latest escalation suggests that uncertainty will continue to weigh on global trade, industrial production, and investment in the months ahead, with no sign of a resolution anytime soon. That said, the US and Japan agreed in principle to a trade deal at the G7 over the weekend, offering a glimmer of hope for world trade,"

analysts at ANZ Bank explained this morning. 

AUD/JPY levels

There is a bearish bias while below the 75 handle and the 72.20 resistance. Depending on your broker's 2019 low, the pair can continue south. Pulling up the long-term charts, dating back to the global financial crisis, we can see that the cross is on its way towards the 78.6% Fibo target that marries up with the Jan 2003 swing lows - This is located at 66.40.

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