Markets Today: Deal or no deal

The global equity rally that began on Friday has started to show signs of fatigue

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The global equity rally that began on Friday has started to show signs of fatigue. Equity markets had a mixed night, with most European indices ending marginally lower while US indices are currently up between 1.2% to 2.0%, partly playing catch up from their long weekend break. Early, in the European session, news emerged from Doha that Russia, Saudi Arabia, Venezuela and Qatar agreed to freeze oil output at January levels as long as other producers also participate. Oil rose as speculation built of a potential deal, and equities also briefly enjoyed a pickup, but the rally quickly faded as it became apparent that the freezing news was merely symbolic while the chances of other important producers, namely Iran and Irag, also look slim.

As more details of the deal began to emerge, it was clear that the freeze in production comes from producers that are already producing at or close to their max (barring Saudi Arabia). Iran, and Iraq are the other big producers and they have both publically stated their intention to increase their oil output. Talks are expected to continue in Tehran today/tomorrow, but scepticism remains that a meaningful agreement will be reach. The fact that talks are taking place is probably a positive sign, however, if these talks only serve to highlight tension between producers, then they may end up creating more uncertainty than any good.

In currencies, Sterling got an initial boost from a ComRes BREXIT poll that revealed EU supporters in the lead at 49% (vs the 41% leavers). But, it later emerged that 42% of those polled say they could change their minds ahead of the vote. The news triggered a GBP sell off while a softer CPI report (core 1.2%yoy vs 1.3% exp.) also didn’t help sentiment.

Soft US data also weighed on sentiment. Empire State manufacturing index for February rose slightly to -16.6 from -19.4, below the consensus, -10.0. While the details of the report were encouraging (employment and new orders improved), the soft data and disappointing oil news triggered a rise in the USD against most currencies.

The Yen was the only outperformer against the big dollar while commodity currencies were the worst performers with NZD at the bottom of the G10 leader board despite the fact that the overnight milk auction was not as bad as expected. Dairy prices fell 2.8% on average with wholemilk powder down 3.7% to an average of US$1,890/T.

Relative to last week’s moves, core global yields had a calm night with 10y Bunds rising 2.8bps to 0.264% while 10y UST have traded in a 5bps range and are currently at 1.774%.

Looking at commodities in more detail, Brent is down 3.4% at $32.25, WTI is off 1.2% at $29.08 and gold has lost another 2.8%, currently trading at $1204.3. Copper has continued its recovery, up 1.4% and iron ore had another positive day, gaining 1.1% ending the day at $46.8.

Lastly, in central bank news, Philly Fed Harker (no voter) said he’d be in favour of delaying further interest-rate increases until inflation recovers from oil-price-induced weakness. Meanwhile Minneapolis President noted that “The biggest banks are still too big to fail and continue to pose a significant risk to our economy”..

Coming Up

It’s a quiet day in Australia with no major data prints scheduled for release, however across the Tasman we have New Zealand Finance minister English presenting the December’s Half-year Economic and Fiscal Update (HYEFU) in Parliament.

This morning we also get Japan’s machine and machine tool orders. For machine orders, consensus forecast is for a 4.6%mom gain, which if right, it would signal a small pick up from the soft November’s -14.4% print.

Today there are no significant European data releases, but is a busy day in the US with housing starts, PPI, industrial production, and the FOMC January 26-27 Minutes.

Housing starts are expected to be little changed at 1171k, PPI is expected to be softer (-0.3%) depressed by falling energy prices and while industrial production should print higher ( 0.3% exp), the surge in production is almost entirely due to a rebound in weather related utility production. That said, manufacturing output is the number to watch, where a pickup of 0.2% is expected.

After Fed Chair Yellen’s testimony last week, the FOMC minutes are unlikely to elicit any major reaction by the market. Our interpretation of Yellen’s testimony was that the bar has been set quite high for a March hike. Further out the curve, however, rate hikes have not been ruled out. We would expect a similar message from the minutes.

Overnight

On global stock markets, the S&P 500 was +1.50%. Bond markets saw US 10-years +3.28bp to 1.78%. On commodity markets, Brent crude oil -3.35% to $32.27, gold-2.8% to $1,204, iron ore +1.1% to $46.78. AUD is at 0.7102 and the range was 0.7082 to 0.7182.

Good luck.

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