Markets ended the week on a high last Friday night, supported by positive US earnings reports and headlines that an agreement has been reached to temporarily end the US government shutdown. US President Trump and Congress leaders reached an agreement to reopen the government for three weeks, following a 35-day shutdown – the longest in US history, but only until 15 February. Further talks would be held over Trump’s demands for financing to build a wall on the US-Mexico border.
US equities were up on Friday night while yields were higher across the curve. The US dollar underperformed against the G10 currencies while the British pound continues to rally, not because of any progress on an actual Brexit plan, but rather on signs of bipartisan support for extending the Brexit timetable. More time means a less likely "no deal" outcome, and the currency has responded accordingly.
Yesterday however was a completely different story. Caterpillar reported its largest quarterly profit miss in a decade and computer chip maker Nvidia released disappointing earnings results, both blaming the slowdown in China and the resultant lower demand for their products. These are not the first companies to blame China for a profit downgrade but both companies are seen as bell-whether stocks (market leaders) and the market took notice, Caterpillar shares down 9% and Nvidia down 15% on Monday night.
This led to another large sell off in shares and a rally in government bond yields as investors once again fled to the safety of risk-averse assets. Our share market will start the week lower, as will bond yields while the AUD is trading around USD0.7160.