Markets Today: Higher Ground

Oil prices, of course, have a massive bearing on the rate of inflation throughout the world. That’s why the outcome of OPEC talks this week are crucial.

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US stocks finished at new record highs on Friday in thin post-Thanksgiving holiday trade, led by utilities but with energy stocks a drag. US bond yields were narrowly mixed and the dollar gave back a little of its recent strength.  AUD and NZD were the best FX performers, AUD aided by stronger metals prices and coking coal hitting $300 a tonne for the first time. CAD didn’t fare as well with oil prices off almost $2 after Saudi Arabia cancelled a meeting with non-OPEC producers due to the lack so far of any agreement on output cuts among OPEC nations themselves.

The S&P gained 0.39% to 2213.35.  The index also closed bang on the highs of the day. The Dow was +0.36% and the NASDAQ +0.34%. The VIX lost 0.09 to 12.34 and so -0.51 on the week. The Eurostoxx 50 closed 0.26% higher and the German Dax +0.09%

US bond markets saw 2s -0.5bp to 1.12% (+5bps on the week); 5s +0.3bp to 1.836% (+3.8bps on the week) and 10s +0.7bps to 2.358% so retracing all of the APAC session rise and up just 0.2bp on the week.  Both 10yr Bunds and gilts lost 1.9bps to 0.24% and 1.417% respectively. The ECB’s Stournaras said it was far too early to discuss QE tapering.

In FX, the US dollar rally stalled, DXY -0.21% to 101.49 and is just 0.3% higher on the week and the broader BBDXY -0.23% to also be +0.3% on the week. ADXY was +0.29% and -0.2% on the week. NZD/USD was the biggest gainer Friday, +0.59% to 0.7043 followed by AUD/USD +0.47% to 0.7443.  In contrast USD/CAD was +0.2% to 135.19 on lower oil. USD/JPY lost 0.1% to 113.22 and after the intra-day high of 113.90 in Asia. EUR/USD added 0.33% to 1.0589. GBP/USD gained 0.21% to 1.2477. ZAR was stronger on the day (+0.28%) despite Fitch revising its outlook on South Africa to negative (it reaffirmed the BBB rating).

In commodities, oil slumped on the Saudi news, Brent -$1.80 to $47.24 and WTI -$1.90 to $46.06.  Oil is still just up on the week (+$0.38/39). Lead and Zinc led the 0.53% rise in the LMEX index, iron ore added $2.7 as is back within touching distance of $80 where it was a week ago ($79.61). Coking coal ended at exactly $300, a new cycle high and up from $297.50 when last traded on Wednesday. Steaming coal out of Newcastle in contrast lost $2.20 to $103.75. Gold was down, another $11 to $1178.40.

CoreLogic’s weekend housing market summary reports a preliminary nationwide auction clearance rate of 76.0% up from a final 74.4% on higher volumes (3,367 vs. 2,987). Sydney cleared a preliminary 81.9% up from 79.6% and Melbourne 76.9% down from 79.4%.

Coming Up

It’s US non-farm payrolls Friday but this is not where the focus is this week (the numbers will have to be chronically weak to dissuade the Fed from lifting rates on December 14th).  Rather, OPEC on Wednesday in Vienna and the Italian referendum and Austrian presidential elections both on Sunday are likely to be the big global market drivers over the next week or two.

Why do we care about OPEC? Because whether oil is going to end 2016 at prices significantly higher in year-on-year terms will have enormous bearing on inflation and inflation expectations in 2017.  Oil is currently between 7% and 14% higher than a year ago so is already no longer a down force on inflation. A deal that pushes up oil back above $50 (so 10-20% up on a year ago) would be very significant in supporting higher inflation (globally).  In doing so it would add upside risk to the Fed’s policy track next year

Why do we care about Italy? Because if the government loses the referendum and PM Renzi resigns, we enter a new period of Italian political instability, potentially early elections and potentially the rise to power of the anti-establishment (and anti-euro) 5-Star movement.

Why do we care about Austria? Because if right wing (and anti-euro) Freedom Party candidate Norbert Hofer becomes President, for all that the role is ceremonial the President does has the power to dissolve parliament at a time when the current government is unstable and where polls suggest the Freedom party would be victorious (polls are not currently scheduled until 2018).

EUR/USD parity is a significant near term risk depending on the referendum/election outcomes.

These events aside, other points of interest this week internationally include China PMI data on Thursday as well as the US manufacturing ISM, payrolls on Friday and PCE/deflator data on Wednesday.

In Australia, the data calendar starts to thicken up again, with building approvals on Wednesday, Q3 Capex and the updated Capex survey on Thursday and October retail sales on Friday.

Overnight

On global stock markets, the S&P 500 was +0.39%. Bond markets saw US 10-years +0.74bp to 2.36%. In commodities, Brent crude oil -3.59% to $47.24, gold-0.9% to $1,178, iron ore +3.5% to $79.61. AUD is at 0.7447 and the range since Friday 5pm Sydney time is 0.7423 to 0.7464.

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