Markets Today: Muddy Waters

The global macro picture has been muddied by a rise in geopolitical tensions, economic data releases overnight have been largely ignored and safe haven assets have outperformed.

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North Korea has warned of nuclear strikes if provoked and Trump’s fingers have also played a role, tweeting “”North Korea is looking for trouble,” and “If China decides to help, that would be great. If not, we will solve the problem without them! U.S.A.”. US Secretary of State Tillerson has arrived in Russia with news headlines suggesting President Putin has hardened his support for the Syrian regime. Earlier in the night the G7 meeting concluded with a united message condemning the Syrian chemical attack, but there were clear divisions over possible next steps.

So the rise in political tensions has boosted the demand for safe haven assets. Gold is up 1.7% and in the process it has punched through its 200 day moving average. The yellow metal currently trades at $1272, its highest level since mid-November last year. Meanwhile, 10y US Treasury yields have rallied over 4bps and are now trading just under the 2.30% mark. The 2.30%-2.60% range in 10y UST held since the start of December last year is once again been tested to the downside.

The flight to safety and decline in US Treasury yields has seen JPY outperform all other currencies. USD/JPY is down 1.20%, the pair is now trading at ¥109.63, its lowest level in 5 months. From a technical perspective the move sub ¥110 means that USD/JPY has a fair bit of room to trade lower.

US equities have closed marginally in negative territory, but the spike in risk aversion has seen the VIX index climb above 15 for the first time since November 10. Notably and despite the rise in risk aversion, commodity linked currencies have managed to hold their ground. Overnight the AUD traded to an intraday low of 0.7474, but in the past few hours it has managed to settle around the 75c mark. The NZD is at 0.6959, 10pips above its average level over the past 3 days.

The euro is a little bit stronger against the USD and is back above the 106 level. The French election remains a concern for the political stability in the old continent, but the jump in German ZEW survey appears to have contributed to the euro performance overnight. The survey headline index bounced to 80.1 in April from 77.3 previously and now it is at its highest level since 2011.

GBP has also performed well against the USD overnight. It currently trades at 1.2492 ( +0.664%) with short covering probably a factor at play. UK Mar CPI came in as expected at 2.3% y/y, after rising +0.4% m/m. Food, alcohol and tobacco added to inflation while air fares and the Easter effect detracted (as they did in Europe two weeks ago). Our European strategist notes that these base effects should partially reverse next month, putting renewed upward pressure on inflation.

As for commodities, oil prices have continued to edge a little bit higher ( up 0.3%/0.4%), copper is -0.4%, but iron ore is -0.4%, steam coal is -2.2% and met coal is -5.8%. So a mixed to soft picture for AU related commodities.

Coming Up

Australia’s monthly consumer confidence reading is out this morning. Yesterday the weekly measure of confidence had a decent jump, but prior readings suggests a downtrend could be emerging, so it will be interesting to see if a similar pattern becomes evident in the monthly reading.

Japan’s Machine orders are also out this morning. The monthly and yearly series can be quite volatile, but if one looks at the actual order rather than rate of change they can provide a good indication on the trend in capex. The market is looking for a 3.6% rise in February which would be consistent with the pick-up in capex expenditure suggested in the Tankan survey.

China’s CPI reading for March is due for release half an hour before midday Sydney time and the market is looking for a 1%yoy rise, 2 tenth higher than in February. PPI data is also out and the consensus forecast is at 7.4% down from 7.8% previously.

The UK labour force report is the highlight in Europe. The market is looking for an unchanged outcome in the 3 month unemployment rate (4.7%) and the average weekly earnings is also expected to remain unchanged at 2.2%. BoE Carney will be speaking as the numbers are released (18:30 Sydney time) and it will be interesting to see if he offers any comments on the decline in real wages and the outlook for the economy.

The US gets export and import prices along with the monthly budget update. Fed Kashkari will attend a 45min Q&A session and the Bank of Canada gives its policy rate announcement. While a no change is broadly expected by the market, the improvement in recent data releases as well as the pick-up in oil prices has motivated some market participant to suggest the Bank could change its policy guidance. We think a change in guidance is premature and suggest the Bank is likely to err on the side of caution, noting the spare capacity in the economy and US policy uncertainty.

Overnight

On global stock markets, the S&P 500 was -0.14%. Bond markets saw US 10-years -6.99bp to 2.30%. In commodities, Brent crude oil +0.27% to $56.13, gold+1.7% to $1,273, iron ore -0.4% to $74.38, steam coal -2.2% to $84.85, met.coal -5.8% to $266.25. AUD is at 0.7496 and the range since yesterday 5pm Sydney time is 0.7474 to 0.7515.

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