Markets Today: Deal or no deal

The key event this week will come from Vienna where ministers from OPEC are scheduled to meet and hopefully finalise the first cut in oil production in eight years.

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If it wasn’t for the OPEC meeting later today the overnight trifecta of solid US data releases should have provided a boost to risk assets, sent US Treasury yields higher and boosted the US Dollar. Instead while equity markets had a decent night, posting modest gains on either side of the Atlantic, the big dollar and US Treasuries yields are a little bit lower with the boost from the positive data releases proving to be short-lived.

The US second quarter GDP growth was revised up to 3.2% from 2.9% (above the consensus of 3.0%) with almost all the revision coming from the consumption component. So the US consumer was happy in Q3 and appears to have remained in a positive mood so far in Q4. In November, the Conference Board’s consumer confidence index jumped to 107.1 from 100.8, well above consensus at 102.0.The survey partly captured the immediate impact of the election and it is now at its highest level since 2007, suggesting real consumer spending should rise to 3.5% yoy. Not quite a sustainable pace given real income growth is travelling at 2-2.5%, but still very buoyant indeed. Last but not least the Case-Shiller home price index recorded a 5.5% annual gain in September climbing above the housing boom high in July 2006 and if recent existing home sales figures are any guide, further gains should be expected over the coming months.

So while equities managed to make modest gains overnight, painting a picture of a healthy risk appetite backdrop. The softness in the USD and modest decline US Treasury yields suggest a more cautious underlying tone is at play amid fading hopes of an OPEC deal later today. Oil prices have continued to slide with Brent down 3.6% and WTI down 3.7% following comments late yesterday from Saudi Arabia that output curves aren’t essential.

Looking at currencies in more detail, the USD has only managed to outperform the Yen (-0.36%), it is little changed against the CAD, NOK and AUD and softer against EUR (0.27%), GBP (0.66%) and NZD (0.80%). The NZD has been the outperformer overnight, it is currently trading at 0.7127 and our BNZ strategist notes that the 200-day moving average at 0.7040 should provide some support to the currency while near term resistance is likely to be encounter on any moves above 0.72. Meanwhile after trading to an overnight low of 0.7433 immediately after the US data releases, the AUD has recovered some ground and it is currently trading at 0.7485. Last week we noted that the AUD was starting to look cheap given the buoyancy in risk appetite and resilience of commodity prices. Our model is currently suggesting the AUD still has the potential to trade a little bit higher, however lingering concerns over the stability in EM markets as well as imminent risk events (OPEC and Italian referendum and Austrian election) suggest meaningful upside looks limited for now.

Softness in commodity prices has also not helped the AUD. Iron ore lost 4.4% overnight (yesterday the Dalian exchange raised its margin requirement on iron ore futures from 8% to 10%), steaming coal was -4.1% and copper was down 3.0%.

Coming Up

We have a fairly busy calendar today with a stack of domestic and offshore data releases. However the key event will come from Vienna where ministers from OPEC are scheduled to meet and hopefully finalise the first cut in oil production in eight years.  In April and June this year OPEC failed to agree an output cap after months of consultation with Iran on both occasions proving the major sticking point.  If recent headlines are any guide, it seems that not much has changed with objections to output cuts from Iran and Iraq seemingly the two major stumbling blocks to current negotiations. We see the OPEC meeting as a binary event, failure to reach an agreement could be very negative for energy stocks and broader risk markets and vice-versa on a (credible) deal that lifts oil prices significantly.

Back to the calendar as we go to print RBNZ has released its six-monthly Financial Stability Report noting that vulnerabilities in the housing market have grown; bank exposure to offshore funding markets is increasing; the dairy sector remains vulnerable to low commodity prices. Governor Wheeler speaks before parliament this morning and deputy Prime Minister Bill English testifies on Crown accounts.

Meanwhile in Australia this morning we get building approvals and private sector credit, both for October. Our economists expect a modest rise in building approvals (1%), but the key question will be whether we see a rebound in private apartment approvals after the 16.3% drop in September. As for the credit data another moderate print is expected with growth in housing credit climbing just 0.5% and further subdued growth in business credit.

Also this morning, Japan releases industrial production data for October and although company forecasts suggest production should have increased by 1.1%, the market is looking for a flat outcome.

Moving on to Europe, inflation data for the Euro Area is expected to show headline CPI rose to 0.6% in November from 0.5% previously while core is seen to have risen from 0.8% to 0.9%. Across the Channel, the BoE releases its financial stability report and President Draghi speaks later in the day.

Lastly the US releases its income and spending figures along with the PCE deflator (all for October). The YoY deflator is expected to remain unchanged at 1.7% and other data releases include ADP employment (160k exp), Chicago PMI and Fed Beige book.

Overnight

On global stock markets, the S&P 500 was +0.14%. Bond markets saw US 10-years -1.61bp to 2.30%. In commodities, Brent crude oil -3.67% to $46.47, gold-0.2% to $1,188, iron ore -4.4% to $77.30. AUD is at 0.7486 and the range since yesterday 5pm Sydney time is 0.7435 to 0.749.

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