European equities point up at open
Equity benchmarks caught a decent bid through Asia with ASX 200 high beta, finishing up 0.8% on the day. Price action was primarily supported by a few upbeat US-China headlines, with no major developments in sight. Global Times, a Chinese media source, quoted a local academic saying ‘the two sides have basically reached broad consensus for the phase one agreement’, also noting that a phone call between Vice-Premier He, Mnuchin and Lighthizer took place today. While a phase 1 deal appears increasingly likely to get done before the end of the year, we continue to flag the long list of tail risks that stand between the positive narrative painted by negotiators on both sides and a tangible, meaningful trade deal. USDCNH, a strong indicator of where trade talks are at, appears to reflect this scepticism of ours having sustained above 7.03. DAX ought to open 12pts higher. FTSE is set for a moderate 19pt bid.
German fundamentals and DAX price action not in sync
In the past, on one hand, bullish price action in the DAX has been met with falling high-yield credit spreads reflecting lower credit risk. On the other hand, bearish price action in the DAX has seen a commensurate rally in high yield credit spreads. High-yield credit spreads widen because the investor requires more return for taking on a riskier investment. The risk in this case being credit or counterparty risk. From the chart below, this relationship has worked between April and October of 2019 but has since failed from the middle of October. We have a strong belief that the Fed’s resumption of liquidity injections via the Repo market are to solely to blame here. Stronger liquidity conditions by means of Fed liquidity injections, despite waning fundamentals, can keep market rallies going longer than expected.
AUD risk to crank up on unconventional policy talk
It was a quiet day for AUDUSD traders with markets awaiting Lowe’s 9.05am LT speech titled ‘Unconventional Monetary Policy: Some Lessons From Overseas’. While we aren’t expecting any firm commitments, we do think Lowe might drop some hints as to whether he thinks they’re effective or not. If Lowe endorses UMPTs, it’s likely to put some downward pressure on AUDUSD over the session. However, the two more pressing questions we want answered, like most watching the RBA, is the when and what of UMPTs. Any indication here and you should expect some readjustment of 2020 market pricing. November lows are at 0.6765 and could be an interesting level to watch for entry. Short AUDNZD into 1.054 seems possible having been favoured in November since the RBNZ’s surprise hold.
