Xe Morning Update - Your daily market wrap

Developments in markets for Tuesday 04 November......

• Snapshot: S&P500/Nasdaq?? yields??, crude oil??, gold??US dollar??
• AUD/USD:??downside pressure intensifies, fails to maintain levels above 0.65
• Risk sentiment sours amidst growing concerns over U.S. equity market correction
• Nasdaq crunched close to 2% as ongoing AI hype inflates bubble-like conditions
• RBA delivers universally expected on-hold decision, strikes a balanced tone
• Lively day ahead: NZ jobs data; U.S: ADP Employment Change & ISM Services PMI

Each morning we bring you up to speed with the latest market news, including the events and themes that are impacting currencies and other related asset classes......

Risk sentiment has deteriorated through Tuesday's sessions, the S&P 500 and Nasdaq both dropping over 1%, logging their largest intraday loss since Trump threatened 100% additional tariffs on China in early October. The Japanese yen has benefited from safe-haven flows sitting atop the G10 leaderboard with a circa four-tenths-of-a-percent gain, closely followed by the USD, the dollar index (DXY) gaining a third-of-a-percent. Falling for a fifth consecutive day, the Australian dollar has failed to maintain a foothold above 65 US cents, marking its intraday low a pip or so above 0.6480, over 2% lower from last week's pre-FOMC high just shy of 0.6620.
 
There hasn't been a single, conspicuous trigger for the pivot towards risk aversion, although the mix of last week's FOMC meeting and Fed speakers that have followed are an obvious factor. The relatively hawkish cohort within the FOMC have emphasised that caution is required in considering additional monetary easing, casting doubt on a third 25-bps cut at the final meeting of the year, to be held on 9-10 December. Their justification is persistently elevated inflation and tenuous signs of moderating labour market softness.
 
Amidst the macroeconomic data vacuum due to the record long U.S. government shutdown, the outcome of this evening's ADP Employment Change and ISM Manufacturing data releases will be a key factor in influencing expectations of a December cut. Current market pricing assigns a circa two-thirds implied probability to the target rate being lowered by a quarter point to 3.50-3.75% on 10 December.
 
Also contributing to the negative vibes is market jitters regarding the sustainability of richly valued U.S. equities, in particular concerns that megacap tech stocks may falter as AI hype fosters bubble-like conditions. Following the S&P500 achieving one if its best 6-month runs since the 1950's, conditions are ripe for a correction. The Fed refraining from a December cut is one development that may spook equity market bulls.
 
A pronounced correction for U.S. and more broadly global equity markets would further weigh on pro-cyclical currencies such as the Australian and New Zealand dollars. That being said, November is the best month for the S&P500 dating back to 1927, the index rising 60% of the time. It will be interesting to see if dip buyers enter the market with conviction following the S&P500's near 3% pullback from last week's pre-FOMC record high.

US equity markets as at time of morning update release and may not represent session closing prices  

In central bank news from Tuesday, the Reserve Bank of Australia has left the cash rate unchanged……the key takeaways:
 

• RBA on-hold, cash rate unchanged at 3.60%
• Cautious outlook, refrains from confirming a bias
• Tone of statement/press conference less hawkish than expected

 
As universally expected, following last week's notable CPI beat, Governor Bullock and her fellow board members opted to hold the cash rate but did refrain from offering any form of forward guidance, remaining non-committal to either an easing or tightening bias. During the Q&A portion of the presser, Bullock commented: "We think we are pretty close to neutral. We may be a little bit restrictive, we may not be," she said. "We don't have a bias."
 
The accompanying statement and press conference that followed the decision were less hawkish than what the market may have been expecting given references to the latest inflation spike being temporary and the board gave no consideration to a hike. Changes to accompanying forecasts were immaterial whilst "a little tight" was used to describe the state-of-play in the labour market.
 
The RBA will remain on hold through the final meeting of the year and may resume the easing cycle through 1Q 2026 should the data record an inflation pullback and further cooling of the labour market. Some analysts are backing the call the easing cycle has already concluded, reasoning inflation will remain near the upper bound of the RBA's 2-3% target.
 
Despite the RBA's neutral tone, the Aussie extended its prolific ascent against the Kiwi, AUD/NZD recording a fresh 3-year high a pip or so shy of 1.1490. In September 2022, the antipodean cross rose to a then 9-year low at 1.1490, a level that will very likely be breached today – AUD/NZD set to trade above 1.1500 for the first time in a dozen years.
 
The day ahead presents as a lively affair, a stacked calendar delivering domestic jobs data, and the forementioned ADP Employment Change and ISM Services PMI. Layer in equity market jitters, expectations are for a volatile 24-hours. Soft outcomes for ADP and the PMI would see DXY fail to maintain a foothold above the 100.00 mark.
 
Will we see aa further deterioration in risk sentiment through Wednesday's sessions or will soft U.S. data lock in a December rate cut, compelling the dip buyers to pile back into U.S. stocks? The Aussie looks vulnerable to extend its run lower through 0.6450, but a reversal should not be discounted given momentum indicators have plunged into oversold territory.
 
Have a productive day. 
Stuart Talman (stuart.talman@xe.com)
Xe Corporate

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