Markets Today: Uneasy

Yesterday Brainard’s comments appeased fears of an imminent hike in September, but concerns of a rising belief within the Fed that the benefit of keeping monetary policy accommodative is waning appears have left markets uneasy

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Yesterday Brainard’s comments appeased fears of an imminent hike in September, but concerns of a rising belief within the Fed that the benefit of keeping monetary policy accommodative is waning appears have left markets uneasy. Other themes also seem to be evolving, core longer dated yields have not retraced their moves higher seen post the ECB decision to leave its asset buying programme unchanged last week, reflecting a growing concern that policy makers no longer think the benefits from flatter curves are outweighing the costs. In addition, now that the northern hemisphere summer is over and most investors are back from holidays, there is also a sense that equity valuations are looking lofty, particularly if further stimulatory policies are not forthcoming. Lastly, concerns of oversupply in the oil market continue to emerge on a regular basis.

So the overarching theme is one of uneasiness with both equity and core bond yields under pressure. US and European equities are down between 0.4% and 1.5% with energy stocks leading the way following a sharp fall in oil prices. WTI and Brent are down just over 2% on the wake of a report from the IEA predicting global oil oversupply will extend into 2017. Meanwhile the VIX index is up to 17.85 and it has effectively reverse the 2 point decline post Brainard’s speech yesterday.

The risk off move has helped the USD performed across the board with the Bloomberg USD index up 0.7%. The EUR is at the top of the G10 leader board, down just 0.2% while the AUD and NZD are at the bottom of the pile, down 1.47% and 1.37% respectively. Unsurprisingly the spike in risk off sentiment has weighed more on antipodean currencies. Overnight the AUD traded down to a low of 0.7442 and now it trades at 0.7465. Meanwhile the NZD is at 0.7249 and it has effectively erased all the gains seen so far in September.

GBP is down 1.09% and somewhat unusually, the Yen failed to make gains under the risk off environment overnight. The currency was under a bit of pressure following a Nikkei report that noted the BoJ is likely to conclude that the benefits of a negative deposit rate outweighs the costs and the Board will also discuss a policy of trimming long bond purchases in favour of short-term bonds. The report is consistent with our expectations for the BoJ to cut the deposit rate to -0.2% from -0.1% and take a flexible approach to it bond buying programme at its policy meeting next week.

Looking at core bond yields, concerns of another taper tantrum look to be emerging with 10y UST climbing 6.4bps to 1.727%, their highest levels since 23 June. Meanwhile in Europe, 10y Bunds climbed 3.3bps to 0.068% and 10y Gilts closed +4.6bps at 0.9191%.

Looking at data releases, UK inflation data showed little sign from GBP depreciation.  Consensus was looking for August CPI to climb from 0.6%yoy to 0.7%. We still expect that UK inflation to head higher in the wake of the Brexit vote as higher import costs are passed on to the consumer ( see chart of the day below).

The German Zew survey was weaker than expected, falling to 55.1 vs 56 exp and 57.6 prev. That said the index is still a couple of points higher than the average monthly reading thus far in 2016..

Coming Up

This morning Australia gets its monthly consumer confidence reading and the June quarter residential vacancy and rental report from the Real Estate Institute is also due for release. The latter is not expected to be market moving, however it will be interesting to see if there are any changes to the trends of well-above average vacancies in WA and NT and below average vacancies in NSW and Victoria.

RBA Debelle speaks in London tonight and although there are no details on the RBA website, given that his recent speeches have been focused on FX regulation the chances are that we get more of the same.

Looking at offshore markets, Japan releases industrial production (final) and capacity utilisation figures for July. Later in the day, the Euro area also gets  its industrial production numbers for July and given the declines in German and French IP, a contraction in output for the whole European area is expected ( -1.%).

Across the English Channel, the UK unemployment is seen to have remained unchanged at 4.9% in July, however jobless claims and vacancy figures will also be important. Vacancies have been on a downward trend since the start of the year and it will be interesting to see if that trend has intensified given the increase in uncertainty post the UK decision to leave the EU.

Lastly import prices are out in the US and Bank of Canada’s Wilkins gives speaks in London.

Overnight

On global stock markets, the S&P 500 was -1.48%. Bond markets saw US 10-years +6.42bp to 1.73%. In commodities, Brent crude oil -1.99% to $47.19, gold-0.7% to $1,318, iron ore -2.9% to $56.09. AUD is at 0.7465 and the range since yesterday 5pm Sydney time is 0.7447 to 0.7539.

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