Markets Today: Blurred Lines

Oil remains a keen focus with prices back up around $1 a barrel.

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Though it’s tempting to look at market price action since the start of the week and suggest that ‘Trumphoria’ is waning, we are much more inclined to view the USD/JPY-led decline in the US dollar, modest dip in bond yields and softer stocks as more reflective of short term market positioning than any fundamental reassessment of the what Trumpenomics might look like in practise next year.

Mexican Peso aside, the Japanese Yen has been the biggest loser since news of Trump’s victory, and the British Pound the only major currencies to have strengthened against the US dollar. So seeing JPY at the top and GBP at the bottom of the G10 leader-board suggest these moves  two sides of the same (positioning) coin and reflect perhaps the oldest adage in financial markets, that ‘nothing goes in a straight line’.

Oil remains a keen focus with prices back up around $1 a barrel, seemingly on comments from Iraq’s oil minister Monday that he is optimistic a deal will be reached at the OPEC summit in Vienna on Wednesday.  This news hasn’t helped energy stocks however which are down around 0.6% and underperforming the broader market (the S&P 500 is currently -0.4%). Incidentally, Bloomberg ran a good chart on Monday showing that the market capitalisation of global energy stocks has risen by $490nbn this year, on the back of the rally in crude prices (we were close to $30 at the start of the year).  This is perhaps a warning of how much damage might be wreaked if OPEC (and Russia) fails to come to any supply agreement this week.

Low oil prices might be good for consumers, but they are going to be very negative for energy stocks and, we’d suggest, the broader market. The S&P energy sector is up 18.8% YTD against 8.0% for the overall S&P. There really is a huge amount to play for this week.  See Chart of the Day.

Also coming on to the centre of the market’s radar is Italy, where the stock market was off almost 2% Monday and led by the banks. The FT lead story on Monday notes that if PM Renzi loses Sunday’s referendum, market turbulence is likely to deter investors from recapitalising up to eight of Italy’s troubled banks. It notes that the banks overall have €360bn of problem loans versus €225bn of equity of their books.

ECB President Draghi was in parliament yesterday warning that the greatest risk to the euro-area came from weak growth and warned that a long period of low rates is a fertile ground for instability. Still no signal on tapering prospects for next year, and unlike the many currencies that have reversed some of the recent post-Trump election moves, the weaker euro is not one of them.

Coming Up

The weekly ANZ/Roy Morgan weekly consumer confidence index is the only thing of note on the local calendar today. Last week, confidence dropped by 2.7 points to 115.4.  New Zealand has its Q3 terms of trade.

Japan has the October unemployment data, retail sales and household spending, none of which are likely to have major bearing on the JPY, at least intra-day.

Tonight, the U.S.  Conference Board’s version of November consumer confidence in due. Last week’s final University of Michigan version, recall, showed an improvement to 93 .5 from 91.8 with the resurvey occurring after news of Trump’s victory.  A similar showing by the Conference Board’s version would reinforce the view that consumer spending should be reasonably buoyant into Christmas

We also get the second estimate of U.S. Q3 GDP, seen lifting to 3.0% from the 2.9% Advance estimate. The Atlanta Fed’s latest GDPNow estimate stands at 3.6%, but hasn’t been updated since 25th November

The first hint at November Eurozone CPI will be coming today with German data due.  It was last at 0.7% in EU-harmonised (HICP) terms and is expected at 0.8%.  Before that we’ll get the various EZ survey readings covering economic, business, industrial, services and consumer confidence.

Overnight

On global stock markets, the S&P 500 was -0.36%. Bond markets saw US 10-years -3.76bp to 2.32%. In commodities, Brent crude oil +1.63% to $48.01, gold+1.2% to $1,192, iron ore +1.5% to $80.83. AUD is at 0.7477 and the range since yesterday 5pm Sydney time is 0.7448 to 0.7493.

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