Markets Today: Turbulence

Turbulence, a little known track by American pop punk band Bowling for Soup appears to be an appropriate title for today’s note. The song was written by Jaret Reddick after he asked a pilot whether he found turbulence frightening.

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Turbulence, a little known track by American pop punk band Bowling for Soup appears to be an appropriate title for today’s note. The song was written by Jaret Reddick after he asked a pilot whether he found turbulence frightening. Well, price action overnight is probably best described as choppy or turbulent. US equities have fluctuated between gains and losses amid mixed earnings results while in Europe equities have ended the day in negative territory with uncertainty surrounding the ECB bond buying programme a lingering concern. Meanwhile after steady gains since the beginning of the month, the USD has lost a bit of ground despite the fact that US yields are higher and US data releases beat expectations.

US equities were down at the open after Apple reported its first annual revenue decline in 15 years. Tech Stocks and the NASDAQ index traded heavy in response, but news that Boeing had raised its full year guidance boosted industrial stocks with the Dow Jones currently the only US equity index trading in positive territory.

Core global yields are higher with European yields leading the way. 10y Bunds closed up by 5.5bps and 10y UK Gilts +6.3bps. The move higher in Bunds appears to have been triggered by a Reuters report suggesting the “ECB is almost certain to keep buying bonds beyond March”. The article, however, failed to provide more colour on whether or not bond purchases will be “tapered” after March. ECB tapering uncertainty remains a sensitive factor for both bonds and equities in Europe. Yesterday’s remarks by Governor Carney re limits to the BoE’s tolerance for higher inflation also appear to have been a contributing factor for Gilts underperformance. US Treasury yields have also steadily risen overnight with the move led by the back end of the curve amid better than expected data releases. US September trade data showed a reduction in the trade deficit from $59bn to $56bn prompting many economists to upgrade their Q3 GDP number.

In currencies, GBP sits at the top of the G10 leader board seemingly supported by the ramp up in UK yields following a pullback in expectations of further easing by the BoE. The AUD has erased all of yesterday’s post CPI gains and is currently trading at 0.7643, essentially unchanged over the past 24 hrs. Our economists noted that the strong headline inflation (at 0.7%q/q  vs 0.5% exp.) should be helpful in reducing RBA concern of low inflationary expectations and may mark the broad low point for y/y headline inflation. Ahead of the CPI print the market was pricing a 15% chance of a rate cut by the RBA next week and 12bps of cuts over the coming 12 months. Now the probability of a rate cut next week sits at 5% and there are 9bps for the year ahead.

JPY has lost a bit more ground against the USD and continues to trade in the higher ¥104s. NZD is a little lower at 0.715 and the CAD has followed the move in oil, temporarily gaining some ground amid a surprise drop in US stock oil piles, but as oil resumed its downward trend, the CAD also lost ground against the USD.

Coming Up

This morning New Zealand releases its trade figures for September and our BNZ colleagues expect the value of both exports (-7%y/y) and imports (-2%y/y) to be lower than a year earlier, as the lagged effects of a strengthening NZD and soft commodity prices work their way through the economy. Also this morning, in Australia, economists and currency gigs like yours truly will be looking at the Q3 release of merchandise export and import prices in order to get a guide to what appears to be a likely lift to the terms of trade in Q3 ( due out next month). The market expects a 3% lift in this merchandise measure of the terms of trade, export prices up 2% and import prices down 0.8%.
Later in the day China releases industrial profits figures for September and New Zealand gets new residential lending figures, also for September. None of these data releases are expected to be market moving.
In Europe, the September M3 money supply report should garner some attention, particularly given the weakening in the credit impulse in August. That said the data highlight for the day should be the UK Q3 GDP advanced figures. This will be the first GDP reading post the EU referendum, market expectations are for a 0.3% print, down from the 0.7% seen in the previous quarter, but probably not as bad as initially feared. Details in the report are also going to be important with many expecting an expansion in the services sector

Durable goods orders for September are the notable US data release for the day. Weak foreign and domestic demand has been the theme in recent months so it will be interesting to see if there are any signs of a trend reversal in September. Weekly jobless claims are also out today along with pending home sales and the Kansas City Fed. Manufacturing activity index.

Overnight

On global stock markets, the S&P 500 was +0.17%. Bond markets saw US 10-years +3.54bp to 1.79%. In commodities, Brent crude oil -1.87% to $49.84, gold-0.6% to $1,265, iron ore +1.8% to $63.07. AUD is at 0.7643 and the range since yesterday 5pm Sydney time is 0.7639 to 0.7704.

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