Markets Today: June is alive

An improvement in risk appetite has helped global equity markets recovered some grown overnight with the Nikkei a notable exception. FOMC minutes revealed an April hike was discussed, but a cautious approach appears to be well entrenched. A pick up in oil prices contributed to the positive move, but the strength in the yen continues to weigh on Japan’s equity market.

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An improvement in risk appetite has helped global equity markets recovered some grown overnight with the Nikkei a notable exception. FOMC minutes revealed an April hike was discussed, but a cautious approach appears to be well entrenched. A pick up in oil prices contributed to the positive move, but the strength in the yen continues to weigh on Japan’s equity market.

The March FOMC minutes revealed that Fed officials debated an April hike, but “several expressed the view that a cautious approach to raising rates would be prudent or noted their concern that raising the target range as soon as April would signal a sense of urgency they did not think appropriate”. Overall and consistent with recent Fed officials’ commentary, the minutes gave the impression of a spilt committee and while an April hike looks to be off the table, a June hike is still live.

While Fed Chair Yellen appears to have strong support for her cautious approach with the minutes noting that a lower path of the federal funds rate “was broadly shared across participants, especially for the first two years of their forecasts”, the committee appears to be more split on the inflation and growth outlook. For now however the minutes gave the impression that a cautious approach is still well entrenched. The probability of a 25bps June hike is currently sitting at 17.5%, assuming a stable labour market, US inflation data and a recovery in global will dictate the timing of the next Fed hike.

The release of the FOMC minutes didn’t seem elicit an immediate reaction from US Equity and Treasury markets. That said, half an hour later US equity indices restarted their upward trend which as already in place earlier in the session. The S&P500 ended the day +1.05, DJ +.64% and NASDAQ +1.59%. Europe also closed in positive territory with the FTSE100 +1.16% while the EUR Stoxx index was +0.66%.
In currencies the Yen has continued its ascendency against the USD with USDJPY making a new 17 month low of ¥109.34. The Yen strengthening has occurred against a backdrop of improved risk appetite, suggesting the market may be losing confidence on the BoJ ability to reflate the Japanese economy. Commodity currencies lost some ground agains the big dollar, with the AUD -1 and NZXD -1.34%. The GBP is again at the bottom of the leader G10 leader, -1.77% . Brexit concerns continue to weigh on GBP.

Oil prices have continued their recent ascendency seemingly still buoyed by yesterday’s Kuwait’s comments that a production freeze deal was still a possibility. Iron ore ended the day unchanged at $54.8 and gold was down 0.4% at $ 1223.60.

Core global bond yield have ended the day a couple of bps higher. 10y UST are at 1.7566 and 10y Bunds closed at 0.117%, up 1.9bps.

Fed Bullard said a growth slowdown in the first quarter could weigh on the central bank’s plan to raise interest rates gradually, even as he noted inflation has picked up. Meanwhile Fed Mester noted that slow rate rises provide insurance against downside risks.

The RBA’s Assistant Governor (Economic) Chris Kent gave a speech in Tasmania last night and while not market moving, our economist Tapas Strickland picked up an interesting observation on inflation. RBA Kent said that RBA’s models of inflation incorporate the low inflation and low interest rates of other advanced economies with the models suggesting these influences are quite persistent. Tapas noted that Kent’s comments reinforce the notion of inflation being low and the uncertainty and risks over the inflation outlook highlighted in the RBA Statement.

Coming Up

In Australia today we only have second tier data releases. This morning we get the AiG Construction Index and job advertisement for February and this afternoon the RBA releases foreign reserves for March.

BoJ Kuroda is scheduled to speak in Tokyo and given the recent soft data as well as appreciation of the Yen, his comments will no doubt garner a fair bit of attention. Expectations for additional BoJ stimulatory actions at their next 28 April meeting have been gathering momentum and comments from Kuroda earlier in the week suggest that now the real question is about what this stimulatory actions will entail, rather than whether the Bank will move at all.

Later in the day we should get China’s foreign exchange reserve data for March. Market consensus is for a small drop of $6bn, a stark contrast to the $28.6 bn decline in February and $99.5 bn drop in January. A number close to expectations should help alleviate concerns over China’s financial stability while a halt in capital outflows should also serve to assuage downward pressure on the Yuan.

Today in Europe, ECB Draghi will give a speech in Portugal on the economic and financial situation in Europe. The ECB March minutes are also due for release, but given the raft of policy measures introduced at the last meeting we are unlikely to learn anything new, other than a potential sense of the number of dissenters.

The US releases consumer credit figures for February and we also get weekly jobless claims. As for Fed Speakers, Fed Bullard speaks at 8:30 am this morning followed by Fed Kaplan at 10:00 am. Note too that Fed Chair Yellen speaks tomorrow morning at 7:30am (all times are AEST).

Overnight

On global stock markets, the S&P 500 was +1.10%. Bond markets saw US 10-years +3.65bp to 1.76%. On commodity markets, Brent crude oil +4.89% to $39.72, gold-0.4% to $1,224, iron ore -0.1% to $54.75. AUD is at 0.7599 and the range was 0.7533 to 0.7619.

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