Overnight Headlines

*US stocks sold off, closing at their lowest since July

*USD eased versus its peers, but is in the green today  

*Oil jumped +2.5% to a three-year peak after OPEC+ confirmed its current policy

*No change to RBA policy as expected, AUD weaker on risk sentiment

US equities started the final quarter of the year on the defensive. Rising inflation due to supply chain disruptions and the rally in energy prices are worrying investors. Tech was hit the hardest taking the Nasdaq -2.1% lower and back to June levels. Implied volatility (VIX) is slightly higher at 23. The S&P500 is down around 5% from its record close on 2 September. Asia is following Wall Street with Japan falling -2% and near correction territory. Futures are mixed in the US.

USD dropped to the previous August high at 93.72 but has since bounced back above 94. EUR rose for a second day but is struggling around the 1.1604 level. GBP/USD advanced 0.5% to 1.3610, the highest level in a week and its third day of gains. AUD was unchanged after the RBA announcement, battling against resistance at 0.7290. The downbeat risk mood is taking AUD and NZD lower this morning.

Market Thoughts – OPEC+ adds to inflationary pressures

Hopes that OPEC+ might boost their already agreed production increase were dashed yesterday at its monthly meeting. The group stuck to its 400k bpd target which disappointed markets who had expected an increase given the recent rise in energy prices.

Brent rose sharply above $81 and the previous high at $80.72. Saudi Aramco estimates that the recent rise in gas prices has already supported oil demand by around 500k bpd. The outlook remains uncertain as we head into the Winter months. Limited supply simply adds to the inflationary pressures created by elevated energy prices. Th next OPEC+ meeting is on 4 November which decides December output.

Chart of the Day – AUD/NZD consolidates around 1.0450

With the RBA meeting done as forecast, the RBNZ is widely expected to hike rates by 25bps overnight. Since leaving rates on hold in August due to another lockdown, RBNZ officials have strongly pointed to a rate rise this week. Markets price around an 80% chance which should give some support to NZD. That said, the kiwi is vulnerable to broader risk sentiment woes which are currently hurting markets.

AUD/NZD trended lower from late March to mid-September but has tried to recover into this month. Any delay by the RBNZ would push the pair above recent highs at 1.0491. Resistance above sits at 1.0537/42. Over the medium-term, policy divergence should see the wider downtrend reassert itself. We note that the AUD short is now the largest bearish position on the aussie since records began.