Markets Today: Riders on the storm

On another day, news of a near 300k rise in US payrolls, still quite benign earnings growth and a steady but near-full employment unemployment rate (5.0%), might have sent equities and the dollar to the moon and bond yield higher.

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On another day, news of a near 300k rise in US payrolls, still quite benign earnings growth and a steady but near-full employment unemployment rate (5.0%), might have sent equities and the dollar to the moon and bond yield higher. As it was, market reactions seemed more consistent with a view that the report plays with the grain of a firmer USD/CNY in particular and USD-Asia/EM FX in general and as such this in turn will likely blow back in the form of weaker EM equities and risk markets more broadly.

One key, though perhaps trite, observation on last week’s markets is that China can’t let its currency move south against the US dollar without causing ructions in global currency and risk asset markets. No matter that the primary focus of policy makers is now supposed to be on the trade-weighted RMB, not USD/RMB per se.

A good summary of the state of play five working days into 2016 is that the narrow DXY index is 0.26% lower – testament to the safe-haven/funding currency qualities of the JPY and EUR – while the broader BBDXY dollar index is 0.62% higher and led by USD/Asia where the ADXY is 1.49% lower. On Friday alone the DXY was +0.1%, BBDXY +0.3% and ADXY -0.3%.

In G10, AUD was Friday’s biggest loser, (-0.84% to 0.6953) closely followed by NZD (-0.82% to 0.6545) and GBP (-0.69% to 1.4517). We’ve seen some attempt at a rally in both the Aussie and Kiwi so far Monday morning. Year to date, AUD is the biggest loser in G10, -4.35% followed by NZD (-4.11%). The VIX was up another two points on Friday to 27 and versus 19 on New Year’s Eve (+42%). We should probably be more focused on this than intraday commodity price moves in explaining day-to-day commodity currency under performance.

In equities, an early US-session rally attempt quickly petered out and indices finished Friday on the lows of the day: S&P500 -1.08% to 1,922, the Dow -1.02% and the NASDAQ -0.98%. Overall global equity market performance in the first week of the year is reckoned to be the worst in two decades.

Treasury yields fell across the curve in conjunction with equity market weakness, led by the belly where the 5yr lost 4.0bps to 1.56% and 10s -3bps to 2.12%. Year to date, the 10year note has now fallen by 15bps to 2.12%.
In commodities, both WTI and Brent lost another 30-40 cents, to $32.92 and $33.34 respectively and both are down just over $4 or 11%+ YTD. LMEX traded flat but is still -4% YTD, iron ore -50 cents or 1.2% to $42.13 and copper another 0.9% Gold lost $5 on the day to $1104 but is still 4% or $43 up on the week.

As for the data, on Saturday, China December CPI rose to 1.6% from 1.5% as expected, while PPI deflation remained at 5.9% (-5.8% expected). Both pretty irrelevant in terms of the various concerns/policy speculations surrounding all things China – confirming the absence of any inflation constraint to easier monetary (including FX) policy.

US non-farm payrolls jumped by 292k (200k expected) with November revised up to 252k from 211k and October up by 9k to 307k (the second upward revision to a number originally reported at +271k). The unemployment rate held at 5% as expected but only because the participation rate rose to 62.6% from 62.5% (a second successive rise). The U6 underemployment measure held steady at 9.9%.

Average hourly earnings were unchanged on the month, though may have been depressed by a statistical quirk whereby those paid twice-monthly will not have had their second pay check of the month counted in the total. This should reverse next month, though the rise in annual average earnings of 2.5% from 2.3% was all on favourable base effects from January 2015 and so is not necessarily indicative of a firming trend.

The Atlanta Fed’s latest ‘GDPNow’ estimate came down to 0.8% on Friday from 1.0% on Wednesday, following the wholesale trade report which showed sales down 1% on the month and inventories contracting by 0.3%. The average of the bottom 10 market forecasts for Q4 GDP, in contrast, currently sits at +1.5%.

Coming Up

Beyond China currency and stock watching – and where Wednesday’s trade data will be important – US corporate earnings season kicks off with Alcoa getting the show on the road with its December quarter earnings after the close on Monday – so early tomorrow morning our time. Among the major household names, Intel and JP Morgan report on Thursday, Citigroup, BlackRock and Wells Fargo on Friday.

Locally, Thursday’s employment report should be the highlight. Second tier data otherwise with ANZ Job Ads Monday and Housing Finance Friday

Internationally, as well as China trade, latest money supply and lending stats are due during the week. In the US, retail sales and Industrial production Friday are the highlights, along with a plethora of Fed speakers. The BoE meets Thursday with eyes open for any comments on recent Chinese developments

Overnight

On global stock markets, the S&P 500 was -1.10%. Bond markets saw US 10-years -3.0bps to 2.12%. On commodity markets, Brent crude oil -0.59% to $33.55, gold-0.9% to $1,098, iron ore -1.2% to $42.13. AUD is since Friday’s local close has been 0.6951 to 0.7061.

For full analysis, download report:
Markets Today: 11 January 2016 (PDF, 273KB)

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