Markets Today: The only way is up

Risky assets have continued to benefit from an improvement in sentiment. Bank stocks have led the surge in equity markets and most commodities have also enjoyed some gains, despite of a pullback in oil prices.

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Risky assets have continued to benefit from an improvement in sentiment. Bank stocks have led the surge in equity markets and most commodities have also enjoyed some gains, despite of a pullback in oil prices. The USD is broadly stronger with safe haven currencies the underperformers.

The Nikkei’s solid rebound and China’s better than expected trade data boosted Asian equity markets and this positive tone carried into the European session. Financials once again led the way with the deal to support Italian banks (announced earlier in the week) seemingly still having a positive effect in the sector. The Euro stoxx index ended the day +3.30% and theFTS100 was +1.93%. Better than expected earnings results from JPMorgan Chase dictated the tone in Wall street with the S&P 500 financials sector gaining 2.25%. The DJ closed +1.06%, S&P500 +1.00% and Nasdaq was +1.55%.

Oil prices fell as scepticism of a ”Freeze” agreement rose following comments from Saudi oil minister ruling out a production cut while U.S. industry data showed crude stockpiles expanded last week. Still, other commodities had a good night, boosted by the better than expected trade data from China. Iron ore gained another 2.1% to be up by nearly 12% since Friday. Copper was +1.3%, Nickel +1.4% and with the lack safe haven demand, gold fell 1.0% to $1246.8.

The NZD was the G10 outperformer overnight managing to stay practically unchanged against the USD. The big dollar was stronger across the board with safe haven CHF at the bottom of the leader board, down 1.11%. The CAD lost 0.42%, pulled down by the decline in oil prices notwithstanding the fact that the BoC was a bit more upbeat on the outlook of the Canadian economy. The Bank left rates unchanged as expected, but it brought forward the closing of the output gap to H2 2017 from end 2017. JPY lost 0.69% against the USD, dragged lower by the 2.8% rally in the Nikkei and rumours that the Japanese government is considering low rate infrastructure loans. The AUD had a quiet night, it traded in a narrow range and is currently at 0.7652, little changed from Sydney’s closing level.

The buoyancy of the equity markets meant that softer US data releases were relegated to the back seat overnight. March retail sales fell 0.2%, below the consensus, +0.1% and the March PPI fell 0.1%, below the consensus, +0.2%. The Fed Beige book noted US economic activity expanded with several regions seeing a pickup in wage growth.

Looking at core global yields, despite of the risk on environment 10y Bunds dropped 3.6bps to 0.127% and 10y UST fell 1.8bps to 1.76%. A strong 10y UST auction and softer data kept UST yields lower.

Lastly, ECB Nowotny was speaking in New York and noted that if there is no clear improvement in inflation then there is no room for changes to monetary policy.

Coming Up

Australia’s March labour force report will be released this morning at 11:30am. In their preview, our economists wrote that the RBA has tied the outlook for the cash rate to the labour market and they also noted Governor Stevens’ description of recent labour data as ambiguous. Today’s report could provide the opportunity to see if this ambiguity is resolved.

In terms of the numbers, the market is expecting the unemployment rate to rise to 5.9% and for employment growth to be +17k. NAB expects the unemployment rate to be unchanged at 5.8% and for employment to print considerably stronger at +40k. This rather “unbelievable” number is by and large a function of sample rotation rather than a marked pick-up in the pace of job creation.

The market is currently pricing a 23% chance of an RBA May rate cut and 27.4bps of rate cuts over the coming year. A strong number as expected by NAB should result in a pullback on these expectations. However, given the RBA easing bias and global back drop of low/negative rates we think this pullback is likely to be limited.

The AUD/USD has been tracking higher since last Friday aided by an oil price induced improvement in sentiment. Our fair value model suggests the AUD/USD is currently trading pretty close to fair value and it shows that sentiment (measured by the VIX in our model) has been the main driver for the currency appreciation so far this year. Notably too, over this period RBA cash rate expectations have only had a minor influence on the currency. All else equal, given the current risk on sentiment, we think that we will need to see a significantly softer than expected report in order to have an enduring negative impact on the currency while a better than expected outcome could be the catalyst for the AUD/USD to make a move towards the 78 cent mark.

Looking at offshore markets, in New Zealand this morning we get BNZ manufacturing PMI. Europe prints its final CPI for March and the UK releases RIC house prices. The Bank of England makes its rate announcement and a no change in policy is unanimously expected. Nevertheless, it will be interesting to learn what the BoE’s near term outlook is on the economy, particularly given the EU referendum late in June.

All that being said the big event in terms of data releases comes from the US with the March CPI numbers slotted for release at 10.30pm (AEST). Gas prices are expected to provide a lift to headline inflation, but undoubtedly the focus will be in the core reading following the strong prints over the previous two months (both at 0.3%). Market consensus is at 0.2% and a softer than expected number would vindicate the Fed’s more dovish stand at its March meeting. Conversely a stronger than expected outcome would serve as an additional piece of evidence that the economy is starting to heat up at a faster rate than what the Fed is expecting.

In terms of central bank speakers, BoE’s Shafik speaks at the IMF. Fed’s Lockhart speaks in Chicago and Fed’s Powell Appears before the Senate Banking Committee.

Overnight

On global stock markets, the S&P 500 was +1.00%. Bond markets saw US 10-years -1.22bp to 1.76%. On commodity markets, Brent crude oil -1.83% to $43.87, gold-1.2% to $1,244, iron ore +2.1% to $60.48. AUD is at 0.7655 and the range was 0.7652 to 0.7657.

Good luck

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