Markets Today: It ain’t over ’til it’s over

The UK Brexit letter has finally been delivered, but market reaction has been fairly muted.

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US equity indices have traded in and out of positive territory and main European indices closed the day up between 0.29% and 0.45%. The USD is stronger against European currencies amid a report noting the ECB was wary of changing its policy message before June and commodity linked currencies are the outperformers with AUD and CAD at the top of the leader board, aided by the rise in oil prices and steadiness in iron ore.

The UK letter to Europe struck a conciliatory tone, but there was a notable underlying warning that EU security would be “weakened” if Britain left the block without a new comprehensive deal with Brussels. EU Council president, Donald Tusk, decided to focus on the letter’s positive tone and even showed a bit of sense of humour noting that “After nine months, the UK has delivered”. PM May addressed the House of Commons and called for early technical talks on a “bold and ambitious free trade agreement”. Chancellor Merkel on the other hand, took a hard line, saying Britain’s future relationship with the EU could be discussed only after a divorce settlement is reached which Europe believes is somewhere in the region of €60bn .  So it is still early days and negotiations still have the potential to get messy. Recent history also suggests a deal could take several years, Canada’s free trade agreement took 5 years and then the ratification of the deal took another 2. The UK has started its divorce process, but as Lenny Kravitz ‘It Ain’t Over ’til It’s Over’.

US equities are still struggling to get back into a positive trend. Yesterday financials were the winners and today they are at the bottom of the pile. Meanwhile the energy sector is leading the way, currently up 1.25%, helped along by the move higher in oil prices. After yesterday’ reports of disruptions in Libya’s oil output, oil prices rose again overnight following news that US crude stocks rose by less than expected. WTI is currently up 2.2% and Brent is 1.9%.

The move higher in oil, the steadiness in bulk commodities and the improvement in risk appetite has been a nice positive combo for the AUD. After trading to a low of 0.7588 on Tuesday, the AUD has been on a steady rise and is currently trading at 0.7672. Our AUD model is currently suggesting fair value is at 0.776, so on this measure the AUD still has room to climb a little bit higher.

GBP was under pressure yesterday during our Asian session and eventually traded to a low of 1.2377 just after the Brexit letter was delivered. That said the currency has been rising since midnight and now it is essentially back to where it was yesterday, currently trading at 1.2439.

A Reuters report noted that the ECB wants to reassure markets that that its extraordinary support isn’t yet ending and that its tweak in its policy language was over- interpreted. The news saw the EUR dropped from 1.0790 to an overnight low of 1.074 and now it is trading at 1.0766.

The report also triggered a rally in bonds with German Bunds leading the way. 10y Bunds ended the day 4.5bps lower at 0.339% and after trading to an overnight high of 2.425%, 10y UST are down 5bps and currently trading at 2.378%.

US pending home sales jumped by 5.5% in February, well above the 2.5% expected by consensus, but the data was largely ignored by the market.  Meanwhile Fed Williams said that “would not rule out more than three increases total for this year.” While Fe Rosenberg suggested that that four hikes in 2017 may be needed to guard against economic overheating.

Coming Up

This morning HIA New Homes Sales and Job vacancies are out in Australia and New Zealand publishes its Regional GDP estimates for the year ended March 2016. None of these data releases are expected to be market moving.

The European session should be more interesting with CPI prints for Spain and Germany along with the Euro Area consumer confidence reading for March. Ahead of tomorrow’s Euro Zone CPI, today’s releases for Spanish (2.7%yoy exp. vs 3.0% prev.) and German inflation are expected to have eased in March (1.8%yoy exp. vs 2.2% prev.). Given the increase chatter around ECB QE exit strategy, since the Bank’s meeting on March 9, we suspect softer than expected CPI readings could weight on the Euro as the market questions its expectations on timing of ECB QE tapering and the deposit rate lift-off.

Later on, the US gets its third Q4 GDP reading along with weekly jobless claims and an abundance of Fed speakers.  Fed Mester, Kaplan, Williams and Dudley are all in the roster, but given so many of them have already spoken this week, it is difficult to conceive that we are going to learn anything new. For choice Fed Dudley’s speech could be interesting as he will be talking on financial conditions and monetary policy (Dudley speaks at 7:30 tomorrow morning Sydney time).

Overnight

On global stock markets, the S&P 500 was +0.11%. Bond markets saw US 10-years -3.77bp to 2.38%. In commodities, Brent crude oil +1.93% to $52.32, gold-0.3% to $1,252, iron ore +0.3% to $82.25, steam coal +0.0% to $80.75, met.coal -0.6% to $156.00. AUD is at 0.7668 and the range since yesterday 5pm Sydney time is 0.7633 to 0.7675.

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