The question in my mind as we approach the weekend is whether we’re witnessing a knee-jerk reaction to the downgrade and are at risk of prior trends returning, or whether it is the beginning of something more sinister. We only have one prior example of a US credit rating downgrade in 2011, and we found risk assets sold off for 1-2 days before stabilising.
However, simply comparing this downgrade to the one in 2011 is a crude comparison, as the downgrade occurred near the end of an already-established bearish move. In this instance, WTI had rallied 23% over the prior three days and Wall Street indices were approaching their record high. And from that angle, one might assume that many are now questioning their appetite for risk, given the strong moves already seen. And at best, perhaps we’ll see choppy trading conditions or wide oscillations around current levels. At worst, we’ll see a stronger bearish follow through. Again, this runs counter to the usual quiet activity associated with the time of year, but traders may be wise to remain nimble and not marry positions for the time being.
With that said, US futures have opened higher, so perhaps we may see some earlier signs of stability for today’s session.
- Fitch’s decision to downgrade the US credit status to AA+ continued to send ripples across markets and set a risk-off tine in the European and US sessions
- Treasury Secretary continued to object against the downgrade, saying "I strongly disagree with Fitch's decision, and I believe it is entirely unwarranted."
- The Nasdaq 100 led Wall Street indices lower, down -2.1% and the S&P 500 were off by -1.4%. Both of which are now on track for a bearish engulfing week.
- The fact the gold eventually fell to a 3-week low suggests portfolio managers were trimming exposure to the precious metal to either go to cash or fund losses on equities
- The USD and Japanese yen acted as safe-haven currencies, resulting in a flat USD/JPY pair by the close
- AUD/USD was the weakest major and fell beneath 66c to an 8-week, low, NZD/USD was not far behind and closed beneath 61c to a 4-week low
- The dovish RBA meeting, softer Australian data and general risk-off combined with expectations of a 25 or 50bp BOE hike today helped GBP/AUD rise to a 3-year, 3-month high
- Lost among the commotion but still relevant ahead of tomorrow’s Nonfarm payroll report, ADP employment once again smashed expectations and added 324k job, compared with 189k expected and 455k previous.
- Australia economy continued to soften according to AIG’s surveys, with manufacturing printing a record low of -25.6, whilst their construction index fell to -9.2 – its sixth contraction over the past seven months
Events in focus (AEDT):
- 10:30 – Japan’s services PMI
- 11:30 – Australian trade balance data, retail sales q/q
- 11:45 – China services PMI (Caixin)
- 16:30 – Swiss CPI
- 21:00 – BOE interest rate decision (25bp hike expected)
- AUD/JPY saw a false break (and double top) around trend resistance on the daily chart and fell to a 3-day low. The February high around 93 is the next line of defence for bulls
- AUD/NZD formed an inverted hammer just above the July low, a key level of support over the near-term. But if it held yesterday, perhaps it can hold today. 1.0800 is a reasonable near-term target for swing traders (beneath yesterday’s high)
- The Nikkei 225 has handed back all of the week’s gains, but with US futures opening higher perhaps it can regain its footing above 32,450.
- The China A50 retraced for a third day, but 13,000 is nearby as a potential support zone for bulls to try and defend
- A large bearish engulfing candle formed on WTI crude oil during its worst day in five weeks, closing just below $80 (a pivotal level early in today’s Asian session)
ASX 200 at a glance:
- The ASX 200 stumbled out of the gates and continued to trade lower through the session, breaking 7400 support
- A bearish engulfing candle formed and closed at a 5-day low during its worst session in a month
- All 11 sectors were lower, led by Utilities and real estate
- The ASX utilities sectors suffered its worst day in six months, financials endured its worst in two months
AUD/USD daily chart:
AUD/USD fell to an 8-week low and closed near the lows of the day. It sits around the halfway point between the YTD low and July low (which bears broke with ease yesterday). Whilst prices remain beneath the July low around 66c, risks remain for another dip lower given markets now expect the RBA rate to have peaked and the US dollar sucks in safe-haven flows and enjoys stronger employment data (NFP is tomorrow…). For today, we’re waiting to see how far prices can retrace towards the March of July low, at which point we’ll look out for evidence of a swing high and potential for a move towards 0.6500 or the YTD low.