Markets Today: Calm before the storm

It has been a quiet overnight session ahead of what could be a stormy Thursday with the ECB, UK election and Comey’s testimony all occurring on the same day.

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US equities have closed the day marginally in negative territory, tension in Qatar have so far failed to ignite big moves in oil prices and US Treasury yields are a little bit higher while  in currencies the AUD is the G10 outperformer.

US and European equity markets have begun the week in a tentative fashion with travel and insurance companies coming under a bit of selling pressures following the weekend terrorist attack in London. Meanwhile energy stocks are little changed despite rising tension in the Middle East.

The USD is a little bit stronger against most G10 currencies with GBP and AUD the two notable exceptions. After yesterday’s better than expected Australian Q1 GDP partials (inventories and profits) the risk of a negative Q1 GDP growth outcome on Wednesday has diminished and in the process it has helped the AUD outperformed. Yesterday’s news of Saudi Arabia, Bahrain, UAE and Egypt suspending diplomatic relations with Qatar and banning flights to and from the country, could be an additional factor helping the AUD. Qatar is the biggest LNG exporter in the world and any disruptions to their exports could trigger an increase in LNG demand from Australia. The fall in oil prices overnight might also reflect concerns over OPEC and friends ability to implement the extended agreement to curb production. AUD has been on a steady rise overnight, reaching an overnight high of 0.7498 and is currently trading at 0.7486.

GBP’s outperformance appears to have been driven by yet another poll despite a softer than expected Services PMI (53.8 vs 55.8 prev.). A Guardian/ICM poll shows Conservatives have an 11-point lead over Labour and it suggests that the Tories lead remains in double digits. The pound climbed to an overnight high of 1.2940, but it has drifted lower over the past few hours and is currently trading at 1.2906.

Price action in the Euro has also been somewhat interesting. The Euro is 0.21% lower against the USD with softness in the pair seemingly triggered by a Bloomberg survey showing 90% of analysts expect the ECB to upgrade its risks around the euro area recovery to “balanced”, but analysts are split as to whether the Bank will remove its easing bias on interest rates, with the majority now expecting that to occur next month. We see EUR ultimately heading higher over the balance of the year.

10y UST yields are have ended the NY session at 2.1817%, about 1.5bps higher relative to Sydney’s closing level. Overnight the ISM non-manufacturing index printed marginally below expectations at 56.9 vs 57.1 fcst., but the interesting bit in the report was the rise in the employment index.  The index jumped to 57.8, its highest level since July 2015 and after two months of unexpectedly weak sub-52 readings. The rebound in the employment index supports our view that that the recent softish non-farm payrolls and earnings prints are largely driven by temporary weather and seasonality effects. Stronger numbers should be expected over the coming months

Coming Up

We have a busy morning of key domestic data releases with Q1 Balance of Payments and Government Spending out at 11:30 am (Sydney Time) followed by the RBA cash rate decision this afternoon. Also this morning, New Zealand releases its Q1 Building Work Put in Place and early tomorrow morning the dairy auction is expected to be broadly steady. Germany and the Eurozone get their final services and composite PMI’s for May and the JOLTS report and Labour Market Conditions index are due for release in the US tonight.

The Q1 Balance of Payments publication today could print the first current account surplus since 1975 aided by yet another boost from the terms of trade. Nevertheless in volume terms, the trade balance is expected to detract 0.4% from GDP growth.

The RBA Board is universally expected to leave rates on hold and focus on the Statement is likely to be on whether there is any tilt in the Bank’s description of the global and Australian economies. We would not be surprised to see some easing in concerns from the Bank around the housing market, likely observing the easing in Sydney and Melbourne residential property prices of late.  The Board is also likely to draw some comfort from the more encouraging labour market report in April and the decent rebound in retail sales. That being said the underlying consumption trend remains anaemic, wage growth has also failed to pick up and with economic growth likely to undershoot the Bank’s own forecast, it will be interesting to see if the Board views the current slowdown as driven by one off effects or more enduring factors. At this stage, our economists continue to expect the RBA to wait and watch before drawing any conclusions about how weakness in the labour market and GDP data and/or strength in house prices will resolve themselves.

Overnight

On global stock markets, the S&P 500 was -0.12%. Bond markets saw US 10-years +1.91bp to 2.18%. In commodities, Brent crude oil -0.94% to $49.48, gold+0.1% to $1,278, iron ore -3.3% to $55.90, steam coal -0.1% to $75.90, met. coal -2.9% to $150.50. AUD is at 0.7486 and the range since yesterday 5pm Sydney time is 0.7373 to 0.7498.

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