Markets Today: Hate that I love you

Prospects of greater US fiscal spending (infrastructure and tax cuts) under a Trump Presidency continue to buoy equity markets, while US bond markets are sold on the prospects that such policies are inflationary.

By

Prospects of greater US fiscal spending (infrastructure and tax cuts) under a Trump Presidency continue to buoy equity markets, while US bond markets are sold on the prospects that such policies are inflationary. Markets are paying very close attention to what Trump rhetoric becomes possible, and then probable. Today his transition team said they will be working to dismantle the Dodd-Frank Act (a major piece of financial regulation post GFC) and replace it with “new policies to encourage economic growth and job growth”. We also found out that Trump was not seeking Fed chair Yellen’s resignation, but were also not nominating her for a second term. In summary it seems markets are buying the positives of an upcoming Trump administration – which is the song of today’s daily – Rihanna’s “Hate that I love you”.

US equities continue to surge, with the Dow hitting a record high overnight up 1.3%, and the S&P500 up 0.4%. Helping to drive that were financial stocks which were up an astounding 3.9% following indications that Trump was going to dismantle the Dodd-Frank act. Asian equities followed the US lead over the previous day, while European equities were unchanged to mostly lower with the DAX down 0.1% and the FITSE down 1.2%.

The Fed’s Bullard (voter) was out overnight emphasising that the election does not change the chance of a December rate hike, noting “we are basically on track the same way we were before the election”. That sees the OIS markets pricing an 84% chance of a December hike. As a hint to the Fed in 2017, Bullard also said the election “certainly breaks gridlock in Washington, which has been a key compliant of how the economy has operated”. To your scribe that suggests the possibility of a more hawkish Fed in 2017 then what we saw in 2016 (also note Trump will need to fill two vacant governor positions on the board with most of his economic advisors on a hawkish tilt).

Bond yields continue to be on the march. US Treasuries were up 3.7 basis points to be 2.09%. It’s worth noting that much of the rise in US bond yields is coming from higher inflation expectations. While nominal bond yields are up around 23bps since Trump’s victory, around 17bps is coming from a rise in 10-year breakeven inflation rates which are now hovering around 1.90%. US investors are pricing in the prospects of higher inflation. Other major sovereign bond markets followed the lead in Treasuries the previous day which saw Australia CGS up 27.7bps to 2.5%. European bond yields rose less, with Bunds up 7.1bps to 0.27% and UK Gilts up 8.5bps to 1.34%.

In the FX space it was again a story of US dollar strength up 0.2% overnight, with the US dollar now up 3% since its low point following Trump’s election victory. Most currencies were lower against the dollar except the British Pound which was up 1.2%. There hopes that greater US-UK trade may eventuate. At the bottom of the board is the Kiwi (-0.9%) and the Yen (-1.1%). The RBNZ cut rates yesterday and while most saw the cut as a “hawkish cut”, the usual concern around the currency was repeated: “A decline in the exchange rate is needed”.

In commodities, Iron ore rose 4.4% to be $US74.1 a tonne – its highest level since late 2014. Yesterday, iron ore futures in China surged by their 9% limit, with some attributing the increase to traders moving onto iron ore following the higher fees imposed on coking coal futures by the Dalian Commodity Exchange. For Australia’s other main commodities, coking coal was up 3.9% to be $US295 a tonne and thermal coal was down 0.6% to be $US111.4 a tonne. Positive sentiment globally also helped lift most other metals higher with copper up 3.5% and zinc up 1.4%.

Oil was the underperformer down 1% with WTI at $US44.8 a barrel. The International Energy Agency noted that for the oil market to rebalance in 2017 OPEC will need to move ahead with its mooted production cap (of between 32.5-33.0 mb/d). OPEC meets on 30 November and if no agreement is reached than the oil market will remain in surplus with the risk that oil prices will fall back.

Coming Up

A quiet day ahead datawise with the only major piece of data being the US Uni Michigan Consumer Sentiment Index for November. Given it was surveyed in the week prior to the presidential election, it will not incorporate any aftermath from the election and markets will have to wait a little bit longer to see what impact Trump’s victory will have on consumer and business confidence.

As for other data out today, in Australia there is only a speech by the RBA’s Debelle which is unlikely to be market sensitive given he is at a regulators’ forum. Across the ditch, we get the NZ PMI and Food Prices – both of which is likely to be overshadowed by global events. Elsewhere, Japan has the Tertiary Industry Index and the UK has Construction Output.

Overnight

On global stock markets, the S&P 500 was +0.42%. Bond markets saw US 10-years +3.69bp to 2.09%. In commodities, Brent crude oil -0.99% to $45.9, gold-0.6% to $1,266, iron ore +4.4% to $74.12. AUD is at 0.7623 and the range since yesterday 5pm Sydney time is 0.7572 to 0.7739.

For full analysis, download report

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets

Disclaimer