As cities across the United States erupt in chaos after a grand jury’s decision not to indict the officer involved in the fatal shooting of Michael Brown this past August, financial markets have embraced a greater sense of calm, instead choosing to focus on monetary policy direction in developed nations.
The greenback is outperforming early in the session, with the antipodean currencies catching the brunt of the trauma as the Kiwi and Aussie both see sharp declines against the USD this morning. The familiar jawboning of Australian policy makers aimed at trying to talk down the domestic currency in order to stimulate growth has re-emerged, though a new trend low in iron ore prices has helped expedite the rush to the exits for the small group of Aussie bulls that remain.
AUDUSD has found some initial support around the 0.85 level due to a strong barrier defense, though revisions to American GDP due later in the session could see renewed vigor in downward pressure on the pair.
Not helping growth-correlated currencies was the fact that the Organization for Economic Co-operation and Development revised its global growth outlook lower this morning, citing continued headwinds from Japan and the Eurozone as the key drivers of struggling growth in trade and investment. The OECD also called on the Eurozone to provide additional stimulus measures to preemptively combat the growing risk of stagnation in the currency-bloc, which has increased the prospect of seeing additional easing measures from the ECB as early as next week.
Expectations that asset purchases by the ECB will extend to sovereign bond purchase (i.e. full-blown QE) have built significantly since Draghi’s speech last Friday, with market participants now trying to gauge the timing of further moves by the bank to expand their balance sheet. We see an outside chance there will be a further widening of acceptable assets for ECB purchases at the December meeting, with the more probable scenario being a tinkering of the second TLTRO offering terms and greater discussion about sovereign bond purchases in Q1 2015.
The rally in European bond markets has translated to weakness in the Euro, with EURUSD heading back to the 1.24 handle as traders jockey for position ahead of next week’s ECB meeting.
Heading into the North American open, equity futures have remained insulated from the overnight protests across the United States, and are poised to open at another record high. Front month WTI is seeing the bid side of its order book well populated as the oil benchmark changes hands north of $76/barrel. Demand for hydrocarbons have perked up ahead of the OPEC meeting on the 27th and speculation that production cuts could be used to shore up prices and help some members of the organization come closer to balancing their budgets.
With oil far below the price needed to balance budgets in 2014 for Venezuela, Iran, Saudi Arabia, and Russia, it will be interesting to see how the talks later this week proceed, and if there is any cooperation from Russia in cutting exports or production if OPEC does the same.
On the economic data front, the second estimate of Q3 GDP growth for the American economy came in better than anticipated, with an upward revision to 3.9% as bigger gains in consumer spending and business investment drove growth higher. This comes on the back of economists downgrading their forecasts from 3.5% to 3.3% due to softening exports in September, though a strengthening labour market is clearly underpinning consumer spending and helping to insulate the drop in exports.
The DXY popped higher on the news, and equity futures have been able to hold onto their modest gains ahead of the opening bell. Also hitting the wires were retail sales figures for the Canadian economy in September, with mixed results not helping the Loonie find direction in trading, especially after the better than forecast US GDP report.
Headline retail sales in Canada blew forecasts out of the water with a 0.8% increase from the prior month, though the core reading came in flat and below expectations of a 0.3% increase, mitigating most of the optimism surrounding the headline number. The Loonie has been confined to a relatively narrow, but choppy, trading range against its American counterpart, with the pair pivoting just below the 1.13 handle ahead of the opening bell. Consumer Confidence for the American economy is still to be released later in the session, with it being hard to envision a material deviation to the downside in consumer confidence.
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