Yesterday’s price action proved to be a head-fake with the sell-off in asset prices continuing.
It’s not a classic risk-off move as bonds prices are also falling (yields rising). A Bank of America survey showed money managers raising cash holdings to 5.5%, their highest level in nearly 15 years, with a record number of respondents saying that stocks and bonds were “over-valued”. This is the crux of the matter – there is widespread agreement that bonds and equities are over-valued and investors are finally doing something about it.
Europe’s Stoxx 600 index fell by 1% and the S&P500 is currently down 1.5%, with the VIX index up 24% to 18.8, a level not seen since the aftermath of the Brexit vote.
The USD is hgher against all the major currencies, with the US TWI up 0.7%. The EUR is down only slightly against the USD to 1.1210 and that currency’s large weight in the DXY sees that index up by 0.6%.
In times of trouble JPY would normally outperform, but USD/JPY is up 0.9% to 102.70. The Nikkei newspaper reported that the BoJ will conclude that the benefits of a negative deposit rate outweighs the costs and the Board will discuss a policy of trimming long bond purchases in favour of short-term bonds. This could mean the BoJ cuts its deposit rate further into negative territory late next week.
The commodity currencies have significantly underperformed, a reflection of increased risk aversion and the stronger USD has led to widespread falls in commodity prices. Oil got an extra kick down as the International Energy Agency predicted that global oversupply will extend into 2017.
The NZD is down 1.5% to 0.7245 wiping out all of the gains through September to date. While we think there is some fundamental support for the NZD, with a strong economy and higher dairy prices, the currency remains vulnerable to a further fall in risk appetite.
Indeed, our working assumption has been that the Fed hikes later this year, causing a bout of risk aversion and taking the NZD down to USD 0.70 by year-end.
The AUD is also down 1.5%, taking it to 0.7450. The RBA should be happy with this move, with Assistant Governor Kent yesterday commenting that the AUD real TWI “has not depreciated quite as much as might have been expected in response to the actual decline in the terms of trade…in recent years”.
GBP also underperformed, down 1.1% to 1.3180. UK CPI inflation for August came in slightly weaker than market expectations.
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