Markets Today: Parting Shot

US equities have reversed about half of yesterday’s post Fed rally, the USD is a little bit softer and UST yields are a little bit higher.

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The softness in US equities has been driven by declines in the healthcare and energy sectors. The Republican health plan approval by the House Budget Committee has increased uncertainty for health-care companies while lingering concerns over the near term outlook for oil appears to be weighing on the energy sector.

Although the USD has performed against commodity linked currencies, probably aided by the rise in US yields overnight, the USD index is lower amid yet another rise in the British pound and a late EUR rally. Overnight the BoE left its policy rate unchanged, but in a parting shot, Kristin Forbes who leaves the Bank in a few months dissented and voted for a hike. Other members who voted for an unchanged outcome said that it wouldn’t take much more strength in inflation or growth for them to also shift their view. GBP jumped one big figure on the news to 1.2368 and now trades about 10 pips below this level.

Over the past hour the EUR has also been rallying jumping 60 pips to 1.0767 following reports that ECB Nowotny said rate increase may be on the way, noting that the ECB might move away from loose monetary policy in a different way than Fed. Nowotny added that the U.S. model was to finish bond purchases first, but this model might not transfer well to Europe.

Meanwhile AUD and NZD are at the bottom of the G10 leader board, both still affected by yesterday’s softer data releases. Australia’s February labour force report was disappointing and although details showed much of the weakness came from Queensland (a recently volatile component in the survey), the fact that the unemployment rate rose to 5.9% from 5.7% raises some concerns of a soft underbelly in the labour market. After trading above 77c post yesterday’s Fed hike decision, the AUD spent the whole overnight session under the big figure and now trades at 0.7676. Meanwhile, yesterday’s softer than expected NZ Q4-16 GDP figure continued to weight on the NZD/USD and the currency pair is now back below the 70c mark.

Somewhat surprising market reaction to President Trump budget outline ( released yesterday) has been fairly muted. While the outline is just a proposal for spending measure with the revenue side and incentives (such as corporate tax cuts ) still to be announced, the fact that there was nothing on infrastructure spending goes against the big moves in markets since Trumps presidential election win. Of course Congress still needs to approve any proposal, but at the minimum the budget outline suggests Trumps actions are going to be a belated and diluted version of his pre-election rhetoric and at worse it could suggest that not a lot will come from his actions. This is a theme worth keeping an eye as the so call Trump trade could be at risk of an unwind.

Coming Up

After a pretty busy couple of days full of risk events, we have a relatively light calendar to close the week. US industrial production and consumer sentiment are the main data highlights, President Trump hosts German Chancellor Merkel at the White House and G-20 finance ministers and central bank governors gather today in Baden-Baden (Germany) for a two day meeting.

In our time zone China releases property prices for February and then Europe gets trade data for January.

US industrial production is expected to have risen in February to 0.4%mom from -0.2% previously, however the warmer weather suggests utilities were a production drag in the month. Meanwhile the market is looking for a small uptick in US consumer sentiment with the U. of Michigan reading expected to climb from 96.3 to 97.   The inflation expectations reading in the survey is also likely to be of market interest, particularly given the small dip to 2.5% in February.

President Trump and Chancelor Merkel will be given a joint press conference at 1pm EDT (4:00am Sydney time) and no doubt it will be a friendly affair, but given the US is Germany’s biggest exporting market at ~€107bn of goods while Germany only imports around €58bn, there is still a possibility for some tension, particularly if President Trump takes a similar line to his trade advisor Peter Navarro who just under two weeks ago accused Germany of “currency manipulation and other forms of trade cheating”.

Usually G20 finance ministers and central bank chiefs summits are not that exciting, but given the US threat of protectionism and accusation of currency manipulation this time around the gathering could be more relevant for markets as it might provide some hints on what to expect in terms of US trade policy and a US border tax adjustment in particular.

Overnight

On global stock markets, the S&P 500 was -0.16%. Bond markets saw US 10-years -0.17bp to 2.53%. In commodities, Brent crude oil -0.10% to $51.76, gold+2.1% to $1,226, iron ore +1.8% to $92.61, steam coal -0.7% to $81.10, met.coal -0.2% to $158.75. AUD is at 0.768 and the range since yesterday 5pm Sydney time is 0.7664 to 0.7716.

Good luck

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