Markets Today: Groove Armada

US equities have come under pressure in the past few hours weighted down by a sharp fall in oil prices following reports of an increase in gasoline inventories.

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Meanwhile US Treasury yields are higher along the curve and the USD is stronger across the board probably reflecting a bit of ease in geopolitical tension as the Pentagon confirms it didn’t send an armada directly to North Korea.

US equities struggled for direction at the start of the session amid mixed earnings reports. IBM share fell after sales missed estimates and Morgan Stanley shares climbed more than 2% after the firm reported better profit and revenue figures. Later in the session, however, news that gasoline inventories rose by 1.54 m barrels last week against expectations of a modest decline triggered a selloff in the energy sector dragging the S&P and Dow Jones into negative territory.

Barring a few exceptions such as the Malaysian Ringgit and Peruvian Sol, the USD has been the outperformer with commodity linked currencies the biggest losers amongst G10, down between 0.75% and 0.85% while the Brazilian real and Mexican peso were the big EM underperformers, both down 1.37%.

Over the past 24hrs, the AUD has continued to lose ground against the USD, down 0.86% and it is back trading below the 75 cent mark. Recent softness in commodity prices has been a factor weighing on the currency and although iron ore recovered a bit of ground overnight, up 2.4% to $64.6, the slide in oil prices and softness in coal and aluminium have had a bigger dampening effect on the currency. Incidentally we would note that whilst there is a strong long term relationship between iron ore and the AUD, our analysis shows that big moves in iron ore prices are required in order to elicit a material move in the AUD. To that effect we would note that in the last twelve months, the correlation between AUD/USD and the iron ore price (using daily levels), is less than 0.2.

Looking at other currencies, GBP has given back some yesterday’s gains. It is down around 0.5% against the USD and it currently trades at 1.2777. Yesterday PM May called a snap election and overnight she won overwhelming parliamentary support to go ahead with the 8 June election. In her speech to parliament PM May noted that ““…every vote for the Conservatives will make it harder for those who want to stop me from getting the job done”.   We would suggest that GBP’s underperformance overnight is probably a combination of profit taking from those lucky enough to have benefited from yesterday’s move and the realisation that as much as a new election could strengthen PM May’s hand, as she would have a more united front when negotiating with the EU, this doesn’t mean she will get a better outcome as Europe still holds the stronger cards.

The Euro was the best performer in G10 currencies, down 0.20% against the USD . Overnight the final CPI figures for March confirmed the pull back in the headline inflation to 1.5% and core to 0.7%, easing the pressure on the ECB to change its policy guidance any time soon.

Lastly USDJPY has recovered a bit ground following the move higher in UST yields and is currently trading at ¥108.86, 20 pips higher in the past 24hrs. 10y UST are currently at 2.21%, up around 4bps relative to Sydney’s closing level.

Coming Up

Excluding the NZ CPI which is due for release this morning at 8:45am Sydney time we have another day of light data releases with Japan’s trade balance for March the other highlight in our time zone. Later in the day Germany releases its PPI figures (Mar) and the Euro zone gets construction output (Feb) as well as its advance reading for consumer confidence. Then tonight the US prints its weekly jobless claims along with the Philly Fed survey and index of leading.

In terms of NZ CPI our BNZ colleagues are looking for a 0.9% q/q print which would take the annual increase to 2.1% y/y (market 0.8% and2%). Such an outcome would be way above what the RBNZ expected as per its February Monetary Policy Statement, namely 0.3% for the quarter and 1.5% for the year. That said, more recently the Bank has inferred that its expectations are higher now and it has also noted that it doesn’t see annual CPI inflation holding up near 2% beyond the short term. This has reduced the prospect for a significant market reaction to a high inflation outturn.

Japan’s trade balance is expected to have shrank in March both in unadjusted ( ¥608bn vs ¥813bn prev)  and adjusted terms (¥172bn vs ¥608bn prev. ). The expected contraction in the trade balances is largely attributed to a payback effect from the jump in export in February due to the lunar New Year holiday in China. A number above consensus would be a pleasant surprise and support the view that export demand for Japanese good remains buoyant.

As for US data releases, jobless claims are expected to print at 240k, reinforcing the view that the slowdown in the March payrolls numbers was a one off due to weather effects. Meanwhile the solid Philly Fed March print suggest some payback should be expected in April (25.8 exp vs 32.8).

Overnight

On global stock markets, the S&P 500 was -0.17%. Bond markets saw US 10-years +4.61bp to 2.21%. In commodities, Brent crude oil -3.30% to $53.08, gold-0.8% to $1,281, iron ore +2.2% to $64.60, steam coal -0.3% to $84.10, met.coal -3.7% to $273.00. AUD is at 0.7494 and the range since yesterday 5pm Sydney time is 0.7492 to 0.7563.

Good luck.

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