Markets Today: Southern Hemisphere Supremacy

Friday was largely a lower beta replica of Thursday and where, recall, the higher US core CPI and further drop in US jobless claims were the key market drivers. Momentum carried though to Friday’s session, and wasn’t undermined by US industrial/manufacturing production data that was soft.

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Certain rugby game just concluded in favour of Australia proved more gripping than anything Friday night’s markets had to offer. My (kiwi) boss will also be happy, now owning tickets for the All Blacks-South Africa semi-final.
Friday’s was largely a lower beta replica of Thursday and where, recall, the higher US core CPI and further drop in US jobless claims were the key market drivers. Momentum carried though to Friday’s session, and wasn’t undermined by US industrial/manufacturing production data that was soft but no worse than expected, while the University of Michigan’s preliminary October consumer sentiment reading jumped to 92.1 from 87.2.

The dollar modestly extended Thursday’s rally. The narrow DXY finished +0.18% at 94.54 and the broader BBDXY +0.37%. Asian EM currencies lost 0.29% on average led by MYR (-1.37%). The biggest EM casualty Friday was Brazil, the Real plunging 3.2% on speculation Finance Minister Joaquim Levy was about to resign. In the event he agreed to stay, so BRL should be due a rebound on Monday.
In G10, AUD was the biggest loser, -0.89% to 0.7264 so slightly extending local session weakness and which came in part on comments from the RBA in the Financial Stability review suggesting signs of moderation in Sydney and Melbourne property price inflation and risk of price falls from impending oversupply in the apartment sectors. In this respect, CoreLogic RP data yesterday reported Sydney’s weekend auction clearance rate falling to 66.6% – its lowest this year and a third successive week sub-70%.

Despite the strong AUD rally on Wednesday through Friday the week before last, Friday’s CFTC/IMM positioning data for the week through last Tuesday showed that net shorts in AUD only came in to 33.7k from 40.8k – a notional A$3.4bn and a smaller reduction than the week before. This highlights the scope for another squeeze higher if the USD sets back again and/or the recent heightened speculation on a November RBA rate cut suffers a set-back. The IMM also still carried a sizeable speculative short in The Euro (-80,600 contracts or a notional €10bn.)
US equities managed modest gains, the S&P500 finishing +0.46%, with the VIX losing another point to 15.05, a drop of two points on the week. Treasury yields were higher across the curve by no more than 2bps (the 10 year +1.6bps to 2.0334%).

Friday’s August US TICS data allowed us to quantify the scale of foreign central banks selling of Treasuries in August. The data shows foreign official institutions sold $41.12bn worth of Treasuries and which was only partially offset by $9 bn. worth of buying by the foreign private sector.

In prior months, official selling has been more than offset by private sector foreign buying.

The numbers shows China sold a net $22,62bn, with very little activity (gross or net) reported out of Belgium, which in prior months was suggested to be synonymous with Chinese selling (Belgium reported net sales of just $295mn).
Overall net long term portfolio flows (from foreign net activity in Treasuries, Agencies, corporate bonds and stocks less US net activity in foreign stocks and bonds) was a net inflow of $20.4bn after +$7.7bn in July – both weak numbers in relation to the size of the US current account deficit that needs to be funded and as such a background a negative US dollar influence.

In commodities, gold lost $5.80 to $1177.3. Oil was up, WTI +$0.88 to 47.26 (-$2.37 on the week) and Brent +$0.73 to $50.46 (-$2.17 on the week). Iron ore was -$1.38 to $53.74 and the LMEX index -0.32%.

Coming Up

In what is a generally quiet week for scheduled data and events that includes ECB and BOC meetings, a Canadian general election (today, and with a high chance seen for a ‘hung’ parliament) and RBA minutes, Monday’s China GDP and September monthly activity data looms large.

Market consensus on GDP is 6.8% y/y and it would be very surprising if it didn’t print at 6.8% with more risk of 6.9% than sub-6.8%, based on patterns of the past few years. That said, over the weekend Chinese premier Li was quoted saying achieving growth of 7% this is ‘no easy’, according to Reuters, which could be a hint at a mild downside surprise today.

They’ll be almost if not more attention to the monthly activity readings, where retail sales growth is seen holding steady at 10.8% Y/Y, industrial production is seen slipping to 6.0% from 6.1% (but unchanged at 6.32% YTD) and fixed asset investment is expected to slip to 10.8% from 10.9%.

Overnight

  • On global stock markets, the S&P 500 was +0.50%. Bond markets saw US 10-years +1.59bp to 2.03%. On commodity markets, Brent crude oil +1.47% to $50.46, gold -0.4% to $1,184, iron ore -2.5% to $53.74. AUD is at 0.7257 and the range was 0.7254 to 0.7278.
  • US Sep industrial production -0.2% (-0.2%E, August revised to -0.1% from -0.4%; manufacturing production -0.1% (-0.2% E, August -0.4% revised from -0.5%).
  • University of Michigan preliminary October consumer sentiment 92.1 (89.0E, 87.2P).
  • US JOLTS (job openings) -5.3% (after a downward revised +6.5% in July).

For full analysis, download report:

Markets Today: 19 October 2015 (PDF, 328KB)

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