Markets Today: Free falling
Chicken Little would have been in his element today. The sky may not be falling, but plenty else is, be it latest Eurozone inflation prints and bond yields, incoming US economic data or China’s Reserve Requirement Ratio.
The latter was cut by 50bps to 17% for big banks after we went home last night. Given fears that RRR cuts would compound pressure on capital flows, making it harder for the authorities to keep the RMB relatively stable, the move does hint that these pressures are abating. Either that or we will shortly see a resumption of more pronounced USD/CNY appreciation. Watch this space.
The other big news overnight, though not really a shock after Germany’s latest CPI prints last Friday was the February pan-Eurozone inflation data, coming in at -0.2% against the 0.0% expected prior to the German downside surprise. Inflation is now negative throughout the big four Eurozone economies (Germany, France, Italy and Spain) with the core measure also slipping; to 0.7% from 1.0% (0.9% was expected). That is seen to mandate a strong response from the ECB on 10 March, a fact not lost on the bond market where 10 year cash Bund yields have fallen to an overnight low of 10.2bp. This is still a fraction above last April’s 4.9bps low and which preceded the ‘7-sigma’ melt up to 80bps two weeks later. Though as our interest rate strategist Alex Stanley wrote last Friday, this time things are different in so far as inflation dynamics are so much weaker now than back then.
US data, while hardly top drawer, also showed unexpected weakness. The ever-volatile Chicago PMI slumped to 47.6 from 55.6 (52.5 expected) while Pending Home Sales fell by 2.5% in January against the +0.5% expected. US equities took the data in its stride to post morning gains, but have since fallen away with the main indices now all in the red an hour before the close.
In currencies, the yen is the standout winner of the past 24 hours. Curious in so far as it has not been a big ‘risk-off’ start to the week, but probably explained by the needs of some offshore fund managers to lighten their currency hedges on Japanese equity exposure given the 7% fall in the Nikkei in February. After the NZD, which remains the biggest G10 loser after yesterday’s data prints, the Euro is next weakest and following the aforementioned CPI data. AUD has traded quietly, spending most of the night between 0.7120 and 0.7150.
Hard commodities are mostly firmer (as is oil – up over $1) including a $1.33 lift to China iron ore import prices.
It’s a very big day ahead both during the local time zone and offshore. On the latter, the highlight should be the US manufacturing ISM survey. The consensus expectation is for a very small lift, to 48.5 from 48.2. We’ll also get the UK manufacturing PMI (seen slipping to 523 from 52.9) and – ahead of next week’s bank of Canada meeting, GDP for December and Q4. The ECB’s Sabine Lautenschlaeger speaks in New York, and at 15:30 AEDT today in China, FOMC vice-chairman Bill Dudley speaks.
Today is also ‘Super Tuesday’ and where we may end up closer to knowing the identities of both the Republican and Democratic presidential election nominees following the outcome of 13 state caucuses or primaries. This has not yet impacted markets, but could be about to, in particular if Donald Trump looks increasingly like a shoo-in to win the Republican nomination. The outcomes here won’t be known until well into our Wednesday.
During our day, we get the remaining GDP partials (covering net export and real government spending) ahead of the RBA at 14:30 AEDT. On the latter, the Bank has noted for the last few months that it has scope to ease if needed. Last month, it clarified the conditions under which such scope might be used, namely: (i) should Australian labour market conditions deteriorate; and (ii) should global financial market volatility have clear negative implications for Australian and global demand. With this meeting just four weeks after the last Board meeting, it’s hard to see any significant change in the wording of the text. It would likely take a number of months of weakness in the broad suite of employment indicators to change the Bank’s view. A reasonably confident sounding RBA would be expectedly to produce a small lift for the AUD on the day, while a (less likely) attempt to talk down the currency would likely see a knee-jerk – and bigger – move lower.
Vying with the RBA for top billing and ahead of the US ISM are the China official vintages of both manufacturing and non-manufacturing PMI (12:00 AEDT) and where manufacturing is seen flat at 49.4, then 45 minutes later the Caixin version, seen unchanged at 48.4.
On global stock markets, the S&P 500 is 0.30%. Bond markets saw US 10-years -2.58bp to 1.74%. On commodity markets, Brent crude oil +2.48% to $36.62, gold+1.4% to $1,238, iron ore +2.8% to $49.62. AUD is at 0.7137 and the range has been 0.7109 to 0.7168.
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About the Author: Ray Attrill
Ray Attrill is Global Co-Head of FX Strategy within the Fixed income, Currencies and Commodities division of National Australia Bank. In this role, he advises the bank’s dealing rooms and institutional and corporate clients on developments in global foreign exchange markets. Ray has 30 years experience as an economist and market strategist, obtained in roles working in London, Sydney and New York. Prior to joining NAB in 2012, he held a similar role at BNP Paribas, based in New York. He previously amassed considerable experience in research and strategy, being a joint founding partner for 4CAST limited, a leading independent economic and financial market research company. Prior to that, he worked for many years in senior roles at MMS International, also a leading on-line market research provider. He holds both Master and Bachelor of Science degrees in economics from the London School of Economics.