13-NOV-2018, TUESDAY

1) Asian Stocks Wilt Under Wall Street Pressure, Dollar Holds Up
2) Euro to Sink Further as Rome Clashes with Brussels Over Budget
3) Crude Oil Prices May Rise with Stocks on US
4) AUD/USD Carves Bearish Sequence Following Failed Run at September-High

1) Asian Stocks Wilt Under Wall Street Pressure, Dollar Holds Up

Asia Pacific stocks had Tuesday to follow a US session that saw the Dow shed more than 600 points and, sure enough, most major regional bourses were lower on the day. Wall Street was hit by reports that the Trump Administration was studying tariffs on car imports, also by a weak performance from Apple shares, which, as ever, rippled out into the broader tech sector. The California based titan slid as investors worried about demand for its iPhone flagship. Europe was also providing its share of concerns, with the chances of any likely Brexit deal passing the UK parliament still in severe doubt, while the European Union and Italy are at loggerheads over the latter’s budget proposals.

Given all of the above its perhaps not surprising that the Nikkei 225 should have been down more than 2% as its Tuesday closed loomed. Australia’s ASX 200 was down 1.7%- the big four local banks were under special pressure there. The Hang Seng shed 0.5% with only Shanghai showing resilience. It was in the green by 0.4%.

The US Dollar remained broadly supported by a lack of overall risk appetite, holding near 16-month highs against a basket of its major traded rivals. The same worries about trade and Europe have beset the currency market, although the Japanese Yen pared its own gains, having done quite well recently in the ‘battle of the havens’ with the Dollar.

2) Euro to Sink Further as Rome Clashes with Brussels Over Budget

The Euro looks like it will continue its downward trend as uncertainty surrounding the Italian government’s controversial budget looms over investors. Brussels and Rome are headed for a budgetary showdown on November 13th.Economic nationalism has weighed the European unit down amid broader global risk aversion. After the first draft was rejected, the EU Commission demanded a resubmission. The Italian government has affirmed it has no intention to radically alter its budgetary parameters. The regional authority is now sharpening its regulatory claws.

If Italy continues to break regional fiscal laws, they are required to follow a specific set of regulations known as the Excessive Deficit Procedure (EDP). This requires that they commit to a target that will bring deficits and debts back to statutory levels. If they cannot propose a fiscal plan within regulatory parameters, they face the possibility of economic sanctions. This puts the EU in a conundrum: if their penalties are too harsh and push Italy into a crisis, it would strengthen nationalist eurosceptics. Conversely, if they are too lenient, it may provoke populists in other EU member states to push their own rule-violating agenda and justify it through citing Italy’s fiscal exceptionalism.

Financial markets have responded with risk aversion as the spread between German and Italian bonds widened. The increased political risk may cause a rise in demand for regional alternatives such as the Swiss Franc. If broader risk aversion follows, the Yen may also rise.

Rome is not likely to back down anytime soon or implement any meaningful reform due to the domestic risk of losing local voter support which has also begun to dwindle. This comes amid weak economic data from last month and the EU’s low forecasts for growth in Italy in 2019 and 2020. The EU’s hard stance on applying uniform regulatory measures for all member states will continue to clash with Rome’s determination to push through their fiscal plan. That probably bodes ill for the Euro going forward.

3) Crude Oil Prices May Rise with Stocks on US

Crude oil prices plunged alongside stocks as risk aversion swept financial markets. Gold prices likewise tumbled as the rout stoked haven-seeking demand for the US Dollar, pushing the benchmark currency to a two-week high and sapping the appeal of anti-fiat alternatives. From here, the OPEC monthly oil market report and EIA drilling productivity statistics are in focus. That will continue to feed speculation about emerging supply trends, with the cartel and its allies warning that new output cuts may be needed while US production swells to record levels.

Crude oil prices are testing critical support in the 58.66-11 area, marked by a trend line set from early 2016 and the February 9 low. A daily close below this barrier exposes the 54.48-55.21 zone, a resistance-turned-support band established between December 2016 and February 2017. Alternatively, a rebound back above the $60/bbl figure opens the door for a retest of the April 6 lowest 61.84. Longer-term positioning points to major bearish reversal in progress.

4) AUD/USD Carves Bearish Sequence Following Failed Run at September-High

AUD/USD struggles to retain the advance from earlier this month as the Reserve Bank of Australia’s (RBA) quarter Statement on Monetary Policy (SMP) highlights a diverging path with the Federal Reserve, and the rebound from the 2018-low (0.7021) may continue to unravel as the exchange rate carves a fresh series of lower highs & lows. It seems as though the RBA will stick to the same script at its last 2018-meeting on December 4 as ‘the Board does not see a strong case to adjust the cash rate in the near term,’ and the central bank may continue to tame bets for higher interest rates amid the ‘uncertainty about the outlook for household income growth as well as uncertainty about how households may respond to significant housing price declines.’

In turn, Governor Philip Lowe & Co. may stick to a wait-and-see approach throughout the first-half of 2019 as ‘there continues to be uncertainty about how quickly the unemployment rate will decline and how quickly that will feed into wage pressures and inflation,’ and the ongoing disparity with the Federal Reserve instills a long-term bearish outlook for AUD/USD especially as Chairman Jerome Powell & Co. show no interest in abandoning the hiking-cycle.

With that said, the failed attempt to test the September-high (0.7315) may bring the downside targets back on the radar as Fed Fund Futures continue to highlight bets for a 25bp rate-hike in December, and it appears as though the retail crowd is attempting to take advantage of the range-bound price action carried over from late-September as traders now appear to be fading the recent strength in AUD/USD.