Markets Today: Brexit Poker Face

Global equities were mostly lower overnight, dragged lower by the oil price. That added to an already uncertain tone following indications that the UK may be hurtling towards a harder Brexit than first thought.

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UK PM Theresa May stated on the Weekend that the upcoming Brexit negotiations will be about “getting the right relationship, not about keeping bits of membership”. Running counter to the EU’s free movement of people, PM May also reinforced her commitment to border control: “we will have control of our borders, control of our laws”. German Chancellor Angela Merkel put the kybosh to such thoughts stating that “access to the single market can only be possible on the condition of respecting the four basic freedoms. Otherwise one has to talk about limits”. This implies the UK cannot cheery pick without concessions. In this round of high stakes poker it seems May lost the first hand – giving inspiration to today’s title Poker Face by Lady Gaga.

Against those headlines it’s no surprise to see the Pound at the bottom of the G10 leader board – down 1.0% overnight to 1.2161 and close to the October closing low of 1.2123. The US dollar was also lower overnight, down 0.2% alongside the fall in global bond yields. Correspondingly the Euro was up 0.4% to 1.0589. The Aussie and the Kiwi outperformed overnight both up 0.9% and the Yen was also 0.8% higher. While the clear underperformer was the pound, the Norwegian Krone was also lower, down 0.1% – likely due to the moves in the oil price.

In rates, 10-year bond yields were mostly lower overnight. US Treasuries fell 5.10bps to 2.37% and German Bunds were down 2 bps to 0.28%. UK Gilts fell similarly, down 4.8 bps to 1.34% and likely partly in reaction to PM May’s comments which would imply an easier BoE policy rate for longer (see above). Movements in Aussie CGS yields followed the move in Treasuries yesterday and were up 8.20bps to 2.76%.

More Fed speak did little to add to the debate around the Fed which mostly reiterated the views of three rate hikes for 2017 being reasonable and that fiscal stimulus was not needed. The Fed’s Williams (non-voter) repeated remarks given last week in an FT Interview overnight that three rate hikes for 2017 was “very reasonable”, and Rosenregn (non-voter) also said that he was looking for a “a still gradual but somewhat more regular increase in the federal funds rate”. The OIS market now prices a 41% chance of a rate hike by March and 2.2 rate hikes in 2017, still a bit little less than the FOMC’s median dot point of three hikes.

The oil price fell around 3% overnight with the WTI measure at $52.37 a barrel. The fall comes amid signs that US producers are set to ramp up production in response to the higher oil price with the Baker Hughs Rig Count rising to 665 rigs – the highest since the beginning of 2016. Higher US production could offset some of the cuts committed to by OPEC and non-OPEC countries which were designed to move the oil price into a $55-60 a barrel range – note breakeven costs for US shale producers are estimated to be in the $40-50 a barrel range.

Global equities were mostly lower, driven lower by the oil price. The S&P500 fell 0.3% with energy stocks down 1.4% on the day. The Dow looks less likely to make the magic 20,000 level soon despite coming close in recent days, with this also down 0.3% to 19,896. European equities were also lower with the Dax down 0.3% and the CAC40 down 0.5%.

In commodities, Coking coal continued its downward run, down 3.3% to $206 a tonne. Thermal coal also declined, down 2.6% to $83.50 a tonne. Iron ore bucked the trend, up 1.9% to $77.7 a tonne. Gold was higher overnight, up 0.9% given the mixed tone and some notion of Chinese New Year demand.

Coming Up

Domestically all eyes will be on November Retail Sales. While the market consensus is looking for a 0.4% m/m increase, your scribe suggests there is likely upside risk and NAB is looking for a 0.7% m/m outcome. Major retailers reported solid sales in the lead up to Christmas, NAB’s Online Retail Sales Index was strong in November and there is some upside from the risk that the incorporation of major US shopping events in the Australian retail calendar (e.g. Black Friday and Cyber Monday) is not being fully adjusted for by seasonal adjustment — this is what the UK Statistician reported in their November retail report. There is also the potential for a small boost coming from South Australia as catch-up to the weak read it had in October due to the blackout in late September/early October.

Internationally the calendar is sparse. Across the Ditch we get REINZ House Prices, while China has the CPI and PPI and Japan has Consumer Confidence.

In the US, JOLTS figures are out along with Wholesale Inventories and the NFIB Small Business Optimism index. Otherwise tonight sees outgoing US President Obama giving a farewell speech in Chicago and the US Energy Information Administration gives its latest short-term energy outlook – relevant given the moves in oil overnight.

Overnight

On global stock markets, the S&P 500 was -0.30%. Bond markets saw US 10-years -4.37bp to 2.37%. In commodities, Brent crude oil -3.96% to $54.84, gold+0.9% to $1,184, iron ore +1.9% to $77.73, St. Coal -2.6% to $83.50, Met. Coal -5.3% to $195.00. AUD is at 0.736 and the range since yesterday 5pm Sydney time is 0.7302 to 0.7373.

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