Markets Today: Mixed Messages

Mixed oil messages were the main source of market volatility overnight.

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Overnight, Nick Parsons, my colleague in London managed to write his daily note without mentioning oil until the very last sentence of his note, only to remark that that he managed to write the note without mentioning oil. Eight hours later, oil is back on the headlines and still driving markets. Oil prices spiked higher as Russia’s energy minister Novac was quoted saying that OPEC was trying to organise a meeting with OPEC and non-Opec countries in February to discuss a 5% output cut. However, later we had other headlines from OPEC delegates saying that there were no plans to hold talks, followed by another headline noting OPEC is willing to cooperate for any action to stabilise the oil market.

So mixed oil messages were the main source of market volatility overnight, and for now the hope of production cuts has boosted oil prices and it has also helped commodity related equities and currencies perform. That said, we would note that history tells us that when it comes to oil producing countries, is best to watch what they do rather than what they say.

European equities ended the day in negative territory despite an uplift from oil prices. The market was dragged lower by a weaker than expected consumer confidence reading (105vs 106.4 exp) with losses concentrated in the banking and healthcare sector. In the US, mixed data releases dragged equity markets lower, but a strong rebound in energy stocks (DJ energy  index +2.47%) in the later part of the session helped equity indices move back into positive territory. As we are about to press the send button, DJ is +0.96%, S&P500 is +0.7% and NASDAQ is +0.94%.

US weekly jobless claims printed at 278k, 16k lower than the previous week, however durable goods orders were a big missed (-5.1% vs -0.7% exp.) and pending home sales were softer too (0.1% vs 0.9% exp.).

In currencies, the USD is weaker against all G10 barring the JPY. Sterling is at the top of the leader board boosted by a solid Q4 GDP print (0.5%qoq in line with exp.) and tailed by commodity currencies. The AUD is currently trading at 0.7077, after trading as high as 0.7124 following the spike higher in oil prices. JPY underperformance against the USD is probably reflective of expectations of further easing from the BoJ today, however the resignation of Japan’s economy minister Amari over allegations he accepted a bribe, probably didn’t help the cause either.

In bonds, softer US data has overruled the oil led risk on sentiment in US equities. US treasury yields are lower and the curve is flatter led by longer dated maturities. Relative to Sydney closing levels, 10y UST are 3bps lower and currently trading at 1.98% and 30y UST are at 2.79%, 1.7bps lower.  In Europe, 10y Bunds and 10y UK gilts closed 4bps lower and ended the day 0.402% and 1.98% respectively.

In commodities, WTI and Brent oil are up nearly 3% at $33.48 and $34.01 respectively. Gold is unchanged at $1115.6 and iron ore is at $41.9, down 1.2% .

In other news, ECB Weidman warned that there is a significant risk of a long period of headline inflation undershooting the price stability target posing a challenge to the Bank’s credibility.

Coming up

This morning in Australia we get RBA credit figures for December. Our economists expect a 0.6% rebound in credit growth following the lower than expected 0.4% print in November. While a slowdown in housing credit is anticipated, this is expected to be outstripped by a stronger bounce in business credit growth.

Ahead of the BoJ announcement this afternoon, this morning we also get Japan’s CPI and industrial production, both for December. Crude oil weakness and falling equity markets since the start of 2016 have contributed to an increase in expectations of further BoJ easing. BoJ Governor Kuroda noted over the weekend that inflation expectations have taken a bit of a hit and that if necessary to reach its inflation target, the BoJ can expand QE. That said and in spite of its staunch rhetoric, we think the Bank remains reluctant to increase its current (¥80 tn. annual rate) QE programme and as such we expect the BoJ to stand pat today. In terms of inflation forecast, the 2% price stability target should remain in place, however we see inflation projections moving lower driven by a delay in the expected oil price rebound.

Europe releases preliminary inflation statistics (January) for France and Spain along with monetary aggregates for the Eurozone. And later in the US we’ll get the first estimate of US Q4 GDP on Friday. Market estimates have been tumbling in the past week or more, with the current consensus sitting at just 0.8% (annualised growth). Looking at Q4 earnings, Chevron’s results are the highlight as it is the first major within the broad energy sector to report Q4 results.

Overnight

On global stock markets, the S&P 500 was +0.60%. Bond markets saw US 10-years -1.05bp to 1.99%. On commodity markets, Brent crude oil +3.50% to $34.26, gold-0.0% to $1,115, iron ore -1.2% to $41.92. AUD is at 0.7085 and the range was 0.7008 to 0.7129.

Good luck

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