Markets Today: In Retreat

The AUDUSD dipped below the 72c mark overnight amid the ongoing weakness in oil and bulk commodities.

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The AUDUSD dipped below the 72c mark overnight amid the ongoing weakness in oil and bulk commodities. Just after midnight the currency traded down to 0.7192 at the same time that Brent crude fell below $40 a barrel for the first time since 2009. Later in the session, a rebound in the Brent oil to $40.7 helped the AUD recover some ground taking it back above 72c to the USD.

Looking at G10 currencies performance over the past 24 hrs, commodity linked currencies are sitting at the bottom of the leader board. The NOK is the worst performer, down 1.38% followed by the CAD and AUD at -0.74% and -0.72% respectively. Safe haven currencies have outperformed with the Swiss Franc and Euro, the strongest currencies.

Concerns about oversupply and waning demand for a range of commodities have weighed on core global equity indices with energy and mining stocks leading the selloff. China’s trade data released yesterday appears to have caught the markets attention. While imports fell by less than expected (-8.7% vs -11.9), more attention has been given to the weak exports numbers and its reflection of subdued foreign demand. These concerns were further compounded overnight with Anglo American announcement of a suspension of its dividend along with a cost cutting and restructuring plan amid soft demand for commodities and over supply. Rio Tinto also announced further cuts to capital expenditure. Following the news, shares in Anglo fell by more than 12% while Rio’s share dropped 8.4%.

Despite the weakness in equities, core global yields were little changed. 10y Bunds fell by 1.1bps to 0.569%, 10y UK Gilts were up by 1.9bps to 1.82% and relative to Sydney closing levels 10y US Treasuries have gained 2.8bps and are currently trading at 2.236%

Data wise, in Europe the second estimate of quarterly GDP growth confirmed the slowdown from 0.4% in Q2 to 0.3% in Q3. Weaker net exports were seen as the main culprit for the softer number. In the US, the NFIB index of small firms’ sentiment and activity fell to 94.8 from 96.1; below consensus of 96.4.The data suggest some loss of momentum, even though the labor market component has remained strong. In a similar vein, the October JOLTS job openings came at 5383, marginally below the 5500 expected, however it still remains close to historical highs suggesting demand for workers will remain robust over the medium term.

BoC Poloz said the central bank still forecasts the (Canadian) economy will continue to pick up speed in 2016 and 2017, with a projected return to capacity “around mid-2017.” Poloz speech comes amid growing concerns over Canada’s economy given recent weakens in oil and question marks on China’s economic prospect. Overnight index swaps suggest the market expects another 25bps cut by May 216, the benchmark rate is currently at 0.5% following two rate cuts this year.

Coming Up

In Australia we get ABS housing finance for October and the December W-MI Consumer sentiment reading. Industry reports point to a 0.5% decline in owner occupied loans while the ongoing cooling in Sydney and Melbourne housing markets suggest further softness in investment lending approvals.

This morning we also get Japan’s machinery orders (Oct). Consensus forecast is for a decline of -1.5% SA m/m, however the y/y figure is for a rise of 0.4% following a decline of 1.7& in September. The expected upward trend in the y/y figures suggests capital spending should continue to rise in the fourth quarter, however next week’s Tankan survey will present a more comprehensive picture in this regard.

This afternoon China releases its CPI figures for November. Expectations are for a rise of 1.4% y/y from 1.3%y/y in October. Food inflation is seen as the key driver for the expected uptick in inflation while non-food inflation is expected to remain stable. An outcome in line expectations should alleviate any concerns of deflationary risks.

It’s a quiet day for data releases in Europe and while we have two ECB speakers on the roster, given the nature of their speeches they are unlikely to cause any market ripples. Lautenschläger is speaking on regulatory issues in the Middle East and Nowotny is discussing Austria’s economic outlook.

Finally in the US we get mortgage applications and whole sale inventories (Oct). Inventories are expected to rise 0.2% in October following a rise of 0.5% in the previous month. The September pickup in wholesale inventories reflected a 1.9% jump in nondurable goods, so the risk is for a larger than expected pay back in this volatile component. Fed speakers take a break until post the FOMC meeting next week.

Overnight

On global stock markets, the S&P 500 was -0.60%. Bond markets saw US 10-years +0.53bp to 2.23%. On commodity markets, Brent crude oil -1.25% to $40.22, gold-0.3% to $1,074, iron ore -1.1% to $38.65. AUD is at 0.7207 and the range was 0.7187 to 0.7271

For full analysis, download report:

Markets Today: 9 December 2015 (PDF, 271KB)

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