Markets Today: Ding dong merrily on high

Shock and awe is how one London based analyst described the Saudi’s decision to cut oil production even further at the weekend.

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Sorry, but ‘tis the season and the S&P did make another record high on Friday. Doubtless some of my more youthful colleagues will be back with Lady Gaga or Rihanna later in the week.

News to be absorbed in Asia this morning is that OPEC and some non-OPEC producer hammered out a deal on Saturday culminating in Saudi Arabia signalling its intent to cut oil production by more than agreed on Nov.30th and possibly to below 10mn bpd from 10.64mn of late. The news is set to lift crude prices in Asia and which in turn should further support inflation break-evens and nominal bond yields and, if so, the US dollar.

On Friday, the FX market’s symbiotic relationship with US Treasury yields remained very much in evidence, the dollar pulling ahead once more on a day when yields pushed back up toward the recent highs. However the tick charts shows that the dollar moved ahead of Treasuries, most of the day’s gains occurring prior to the release of a better than expected University of Michigan consumer sentiment index (to 98.0 from 93.5) and most of the run up in US yields only coming after.

The S&P gained 0.59% to 2259.53 and a new record high, to be 3.1% higher on the week. The VIX finished 0.89 lower at 11.75, 2.37 points or 16.8% down on the week. European stock indices ended higher as well, despite shares in Italy’s Monte di Paschi Sienna (MPS) being suspended limit-down after a report than the ECB had rejected an extension beyond year-end for a planned EUR5bn recapitalization.  The market’s collective and considered take on Thursday’s ECB announcements was that that it was ‘dovish’ – reflected in higher stocks, a weaker euro and Bund yields falling slightly against a backdrop of higher Treasury yields.  Over the weekend, Italian foreign minister Gentiloni (a Renzi loyalist) has been mandate by President Mattarella to form new government which could now be place early this week – a positive for euro sentiment.

US bond markets meandered fairly aimlessly until after the consumer sentiment release, pushed higher in the two hours afterwards and then trading sideways near the day’s highs in afternoon trade.  2yr treasuries added 2.3bps to 1.135% and +3.7bps on the week; 10s +6.0bps to 2.468% and 8.4bps on the week but still (just) beneath the 2.4919% 1st December post-US election high.

In FX, the dollar was higher against all G10 currencies bar the CAD (+0.1%) and in EM against all bar RUB (+1.35%) and the Chilean Peso (+0.77%). USD/JPY was the best performing G10 pair, trading back above Y115 for the first time since February 10th this year. It ended Friday +1.12% at 115.32.and at +1.6% is also the biggest G10 mover on the week. The DXY added 0.48 to 101.59 (the high on November 24th was 102.05).  The broader BBDXY added 0.46%. AUD/USD  ended 0.19% down at 0.7449.

In commodities, WTI crude gained 70 cents to $51.50 but ended the week 18 cents down. Brent added 40 cents to $54.33 to be 13 cents down on the week. This is of course before the weekend production accord news. Gold lost $110.40 to $1159.40 as is $15.70 down on the week. The LMEX index added 1.07% and is 1.3% up on the week. Iron ore -12 cents to $84.35 (+$3.87 on the week). Coking coal didn’t trade Friday so ends the week at $280 down from its recent high of $300. Steaming coal was down $3.05 on the week at $84.35 (+$0.35 on the day).

CoreLogic’s weekend housing market summary reports a preliminary nationwide auction clearance rate of 74.6% up from a final 72.3% previously.  No sign of a year-end lull here. Sydney cleared a preliminary 77.4% similar to last week. Melbourne cleared 80.2% up from a final 77.3%.

Coming Up

Oil prices are set to provide the early week focus after the weekend news. The Fed meets with the outcome, forecasts and press conference incoming from 4:00 AEDT Thursday.  A rate rise taking the Fed Funds target to 0.5-0.75% is nailed on, so market interest is in the new ‘dot plot’ (probably unchanged) and the tone of Janet Yellen’s press conference. Retail sales and CPI are the top tier US releases.

There’s a fair bit else of interest besides the Fed and which prevents markets going into complete year-end shut down mode.  Locally the last NAB business survey of the year (Tuesday)  comes on the heels of last week’s negative Q3 GDP print, a sharp fall in building approvals in October and recent less-than-stellar labour market readings. We’ll get latest labour data on Thursday. A small rise in employment and steady unemployment rate is the consensus.   This week also brings the November China activity readings covering industrial production, retail sales and investment. Japan’s quarterly Tankan is Wednesday.

Overnight

On global stock markets, the S&P 500 was +0.59%. Bond markets saw US 10-years +6.04bp to 2.47%. In commodities, Brent crude oil +0.82% to $54.33, gold-0.9% to $1,159, iron ore -0.1% to $81.66, St. coal +0.4% to $84.35, Met. coal didn’t trade (last $280.00). AUD is at 0.7456 and the range since Friday 5pm Sydney time is 0.7436 to 0.7495.

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