Markets Today: Chilled end to a big quarter

A negative end by US equities to Friday coupled with upcoming risk events suggest the AUD and NZD are likely to tread water at the start of the week.

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U.S. equities fell on the last day of a solid quarter, comments from Fed Dudley drag 10y UST below 2.40% and the USD had a mixed night, softer against GBP and JPY, but stronger against most other G10. US data releases were also mixed and didn’t have much of an impact on markets.

The S&P 500 ended Friday down 0.2%, but up 5.5% for the quarter. The Dow dropped 0.3% on Friday, but sealed the quarter with a solid 4.6% and the NASDAQ ended the week almost unchanged at 0.04% but up a whopping 9.8% in Q1, its best quarter since 2013. The VIX closed the week at 12.37, almost unchanged on the week and marginally higher than its average of 11.73 year to date.

The USD ended the week under a little bit of pressure, following the move lower in UST yields in last few hours of trading. In the event, DXY was little changed on the day (-0.06%) and after trading to a low of 98.85 on Monday, it closed the quarter above 100 and up 0.73% on the week (BBDXY was -0.1% on Friday and up 0.27% on the week). Looking at G10 currencies, EUR remained under pressure on Friday with the EU CPI data printing below expectations (headline CPI for March printed at 1.5% y/y versus 1.8% exp. while core CPI fell to 0.7% vs 0.8% exp.) and consistent with the softer German and Spanish CPI reading the previous day. On Monday EUR reached an intraday high of 1.0906, but it closed the week at 1.0652 weighed by a pull-back in expectation for the timing on the ECB QE exit strategy. GBP was not only Friday’s top G10 performer against the USD (0.62%), it was also the best performer for the week (0.66%), despite the fact that the UK formally commenced its divorce process with Europe. Cable ended the week at 1.2550 and with speculators still severely short, the risk of short covering as well as key technical levels suggest the pound can still tick a little bit higher.

Meanwhile the AUD has remained contained within its 0.7585 and 0.7685 range held since March 22. The pair closed the week at 0.7629, little changed on the week. AUD support from steady to stronger commodity prices has been offset by hesitant risk appetite amid uncertainty surrounding US trade and fiscal policy.. Similarly NZD has also been treading water, the NZ economy remains buoyant, but the outlook for dairy continues to weigh on the NZD. The kiwi ended the week just above the 70c mark, -0.31% on the week, but near the middle of its 0.6970-0.7090 range held over the past 10 days.

JPY is still a beta play on UST yields and with 10y USTs rallying on Friday from a high of 2.428% to close the week at 2.387%, USD/JPY followed the move dropping from ¥112.20 to ¥111.39. The move lower in UST yields was triggered by dovish comments from Fed Dudley with the NY Fed president noting that three interest-rate hikes in 2017 is a “reasonable” projection and that the central bank may also begin shrinking its balance sheet later this year or in 2018, possibly pausing rate increases in the process. However his comment that “we have maybe 100, 150 basis points of tightening ahead, perhaps” was interpreted as dovish as it suggested a terminal rate of somewhere in between 2% to 3% rather than the 3% suggested by the median dot plot.

US core PCE edged up a little on a yoy basis from 1.7% to 1.8% yoy (+0.2% m/m, Jan revised up), but the reading remains slightly below the Fed’s 2% goal. US personal income and spending for February printed broadly as expected (income +0.4% in line, with a one-tenth upward rev, spending one tenth below f/c at +0.1%, with no rev). So the spending data continues to suggest Q1 is going to be soft for private consumption. The Atlanta Fed’s GDP Now estimate slipped to just 0.9% for Q1.

As for commodities, WTI oil consolidated above the $50 mark ending the week up 5.5% and in contrasting fortunes, iron ore closed the week at $80.39, down 1.7% on the day and 5.5% on the week. Met coal was unchanged on Friday but up 14.8% on the week while gold and thermal coal were little changed on the day.

On Saturday and against the trend seen in the official PMI reading, China’s Caixin PMI fell to 51.2 in March from 51.7 previously. Weakness was concentrated in exports, clouding the outlook on foreign demand

Core logic weekend market update reported yet another solid week of auctions across capital cities. The combined capital cities recorded a preliminary auction clearance rate of 78.1%, up from 74.5% in the previous week.

Coming Up

A negative end by US equities to Friday coupled with upcoming risk events suggest the AUD and NZD are likely to tread water at the start of the week. Impending US data releases have the potential to set the tone for risk sentiment over the near term, another round of positive readings starting with the ISM manufacturing tonight could work as a reminder that, politics aside, all is well in the USA and a solid US employment report on Friday would provide the Fed additional encouragement to “add a bit more fruit juice to the punch bowl” as Fed Dudley would remark. All that being said, the Xi -Trump Summit starting Thursday also looms large and any evidence of tension between the two leaders could heighten concerns of an imminent trade war.

As for today’s calendar, Australia gets retail sales (Feb 0.3% exp. Vs 0.4% prev.) and building approval, Japan publishes its Tankan survey and the US releases its ISM Manufacturing for March (53.5  exp. vs 53.4 prev.). We also have another round of Fed speakers.

Overnight

On global stock markets, the S&P 500 was -0.23%. Bond markets saw US 10-years -3.23bp to 2.39%. In commodities, Brent crude oil +0.75% to $53.53, gold+0.2% to $1,247, iron ore -1.7% to $80.39, steam coal +1.0% to $80.75, met.coal +0.0% to $178.00. AUD is at 0.7635 and the range since Friday 5pmSydney time is 0.7623 to 0.7663.

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