Markets Today: Under Pressure

Today’s title is not only fitting to what has transpired in markets over the past 24 hrs, but it also serves as a tribute to the passing of a music legend.

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Today’s title is not only fitting to what has transpired in markets over the past 24 hrs, but it also serves as a tribute to the passing of a music legend. Freddie Mercury and Queen wrote the original version of the song, but were not satisfied. David Bowie added his magic to the tunes and lyrics in a jam session and the 1981 hit was born. ( Not hunky dory was the alternative title to today’s note)

Yesterday’s flat fix of the USDCNY along with the increase in cost of the CNH on the interbank market ( up to 13.39% vs daily average of 4.54%) helped stabilised the currency. After trading to a high of 6.7078 before mid-day, the USD/CNH has been on a downward trend since and over the past hour it looks to be settling around 6.5976, its lowest level since Monday last week. USD/CNY has also drifted lower and it currently trading at 6.5711.The stabilisation in the currency, however, did little to calm the Chinese equity market. In another volatile session the Shanghai and Shenzhen composite indices ended the day down -5.33% and 6.60% respectively.

Asian equity markets also ended the day in negative territory and while initially European and US equity indices appeared to have regained a stronger footing, lingering concerns over China’s growth outlook and a selloff in commodities dragged equity markets lower with resource companies leading the slide. The start of the Q4 earnings reporting season has also been a contributing factor as investors choose to wait and see to what degree company profits and outlooks have changed over the past quarter. In Europe the FTSE100 ended the day -0.69% and the Eurostock index closed at -0.2% .Across the Atlantic, US equity indices look set to end the day down between -0.30% and 1.0%.

In currencies, the AUD has been the G10 outperformer over the past 24 hrs, up 0.33% against the USD and currently trading at 0.6977. The AUD has benefited by a stabilisation in the CNY while at the same time oil related currencies have come under renewed pressure following the decline in oil prices. Notably too, Yen is marginally lower against the USD after outperforming every day last week.

Core global yield have given back some of the gains from last week. 10y Bunds are up 2.7bps to 0.539% and relative to Sydney closing levels 10y UST are up 4.5bps and currently trading at 2.16%. Planned new issuance of US Treasury bonds this week has probably contributed to their underperformance.

In commodities, WTI and Brent are down 5.8% and 6.4% respectively. Gold is almost unchanged at $1094 and iron ore fell 2.0% to $41.3.

As for the data releases, the Eurozone Sentix investor confidence index fell to 9.6 in January from 11.4 in the previous month. The decline in the index was in line with expectations given the softness in equity indices at start of the year. In the US, the Fed labor market conditions index climbed to 2.9 in December after advancing a similarly strong 2.7 points in November and 2.9 points in October.

In other news, the chief economist at PBoC’s Research Bureau Ma Jun said that the CNY will be more tied to a basket of currencies rather than the USD and that the PBoC would “appropriately limit” daily USD/CNY volatility.

Overnight, Fed Lockhart said he favours continued tightening of monetary policy this year, and a global selloff in stock markets is unlikely to affect the U.S. economy

Coming Up

China remains at the centre of investors mind and after two small positive USD/CNY fixes and still soft equity market, it would be interesting to see where the PBoC sets the USD/CNY today. Note that today (or later this week) we could also get China’s money supply and lending stats.

Looking at data releases scheduled for today. In Australia we have a quiet day with the Weekly Consumer Confidence index the only highlight.

Japan releases its current account balance data for November and Bloomberg is showing consensus expectations are at ¥895bn surplus versus ¥1.46tn in the previous month. The expected surplus decline is largely a function of an anticipated deterioration in the trade balance (¥200.2tn for ¥158.7tn) driven by a slowdown in Asian demand for Japan’s exports.

In Europe we get French business sentiment indicator for December and UK industrial production for November. Both data releases are unlikely to trouble the scores. Meanwhile, in the US we get the January reading for the NFIB small business optimism and the November Jolts report. Given low inflation and falling energy costs along with a rebound in key labour market numbers, the headline NFIB index is expected to rise to 96 in December from 94.8 in January. Beacuse the healthy state in the labour market, the JOLTS report is unlikely to get too much attention, however another reading close to or above 5440k should help confirm the pace of hiring will remain at a healthy level over the medium term.

Finally, the US corporate earnings season should unofficially get underway within the next hour as Alcoa delivers its Q4 report after the bell. US Fed Fisher and Lacker speak tonight.

Overnight

On global stock markets, the S&P 500 was -0.40%. Bond markets saw US 10-years +4.57bp to 2.16%. On commodity markets, Brent crude oil -6.44% to $31.39, gold-0.3% to $1,094, iron ore -2.0% to $41.31. AUD is at 0.6982 and the range was 0.6928 to 0.7036.

Good luck

For full analysis, download report:
Markets Today: 12 January 2016 (PDF, 274KB)

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