Markets Today: Wait and see mode

In what was a quiet night for markets the softness in oil prices spread into other commodities and it has weighted on the AUD and other commodity related currencies.

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In what was a quiet night for markets the softness in oil prices spread into other commodities and it has weighted on the AUD and other commodity related currencies.

With China and Hong Kong closed yesterday, Asian equity markets struggled for direction and this theme was carried over into the overnight session. Last week’s boost to equities from the Fed Yellen’s message of lower rates for longer appears to be running out of steam with the market seemingly in a wait and see mode ahead of the earnings reporting season which begins later this week. On that score, market’s woes in Q1 suggest that for many companies and banks in particular, the start of 2016 should be one to forget.

US equities have ended the day marginally lower (between -0.30% and -0.46%) while European stocks posted small gains with both the Eurostoxx and FTSE100 indices closing at 0.3%. For US stocks, the fall in oil and other commodity prices dragged energy and material shares lower overshadowing the gains in the healthcare sector.

Ahead of the 17 April oil producers meeting, scepticism is building that a meaningful deal will be reached. WTI Oil fell by 2.6% overnight and now is back below the $36 mark for the first time since 3 March. The fall in commodity prices has been broad based, with copper down 1.6%, gold -0.5% and the CRB index -1.3%.

Given this backdrop, commodity related currencies were the G10 underperformers overnight. The NZD is down 1.01% against the USD followed closely by the AUD at – 0.94%.The JPY sits at the top of the leader board, up 0.31% on the day and nearly 2% over the past 5 days. Doubts over the BoJ reflation strategy appears to be weighing on the Nikkei, pushing the Yen higher against the USD.

In what was a quiet night for bonds, 10y UK gilts were the most volatile, moving 1.9bps higher and ending the day at 1.49%. 10y Bunds closed the day -0.4bps lower at 0.129% and 10y UST treasury yields are at 1.768%, 1bps higher than yesterday Sydney’s’ closing level.

Data release had little impact on markets direction overnight. The UK construction PMI printed in line with expectations (54.2), Europe’s unemployment drifted a little bit lower to 10.3% in February from 10.4% in March and in the US, durable goods order were a touch worse than expected.

ECB’s Praet was on the wires warning that the central bank can forcefully act if needed and Boston Fed president Rosengren said that market expectations for one rate increase each this year and next “could prove too pessimistic”. Both comments had little lasting effect on markets.

Coming Up

We have a busy day of events domestically and in offshore markets. This morning in Australia we get the weekly consumer confidence reading and February’s trade balance. Our economists expect a narrowing in the deficit to $2.6bn, from $2.9bn in January, largely driven by higher iron ore exports.

The RBA board also meets today and at 2.30pm the Governor’s statement is release. The Bank is unanimously expected to leave the cash rate unchanged however given the sharp AUD/USD appreciation over the past month (+/- 5 cents) comments on the currency will be closely watched. Because some of the recent AUD appreciation can be explained through fundamental drivers (higher commodity prices, slower pace of Fed tightening), we don’t expect the RBA will aim to jawbone the currency. Instead of explicitly stating that the currency is overvalued, we think we are more likely to get a comment along the lines of “a lower AUD would be helpful for the ongoing rebalancing of the economy”.

Looking at offshore markets, this morning New Zealand releases its Quarterly Survey of Business Opinion (QSBO) and this afternoon we get ANZ commodity export price indices for March. Our BNZ colleagues note that the QSBO is likely to show a stronger print than the ANZ business survey, simply because the QSBO is less weighted to farmers. Staying with farmers, the dairy auction is also due tonight. BNZ remains cautious on international dairy prices and if the recent softness in commodity prices are any guide, is hard to foresee a solid auction tonight

Europe releases its final March readings for its services and composite PMIs and we also get February’s German factory orders. The UK service sector PMI is also due out and given the service sector accounts for three quarters of British GDP, the numbers will be closely watched by the market as well as policy makers.

The US gets trade balance (Feb), JOLTS report (Feb) and the ISM non-manufacturing survey (Mar). The ISM non-manufacturing survey has been lagging the rate of growth of core retail sales and for many analysts this is the reason for the expected uptick of 54.1 in March from 53.4 in the previous month. Other commentators have pointed to the correlation between the manufacturing and non-manufacturing ISMs and as such suggest that the risk is for a soft number which would help close the gap between the two series (see chart below).

Today we also have a couple of Fed speakers. Minneapolis Fed President Kashkari holds a town hall on the topic of too-big-to-fail financial institutions (9.00am AEST) and Chicago Fed President Evans (non-voter) speaks on the economy and monetary policy in Hong Kong (15.00 AEST).

Overnight

On global stock markets, the S&P 500 was -0.30%. Bond markets saw US 10-years -0.87bp to 1.76%. On commodity markets, Brent crude oil -2.97% to $37.52, gold-0.5% to $1,216, iron ore clsd% to $54.80. AUD is at 0.7606 and the range was 0.7604 to 0.7608.

The 2016 Euromoney FX poll is now open for voting and may be accessed at www.euromoney.com/FX2016

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