February 9, 2016

Markets Today: Carnage

Yeap, the heading says it all. We had a brutal price action overnight with risk assets hammered while safe haven assets were bid.

Yeap, the heading says it all. We had a brutal price action overnight with risk assets hammered while safe haven assets were bid.  There was no clear catalyst for the sell-off, however market uncertainty has remained high. Question marks still remain over China’s ability to control its currency, even though the fall in FX reserves released over the weekend was smaller than expected. Central banks’ ability to stem the rot has also been questioned, the BoJ move into negative territory has not had a lasting effect and this lack of belief was little help by the Bank’s release of “summary of opinions” from its last policy meeting. The comments revealed that some members within the committee feared negative rates could backfire as financial institutions worried about the risk of further cuts with one member noting that the BoJ’s introduction of negative rates could “lead to a competition with other central banks in other countries”. To this point, a few hours ago SNB’s Jordan was quoted saying that the current -0.75% rate could go “lower than where we are now”.

Equity markets on both side of the Atlantic fell between 2% and 4.7% led by sharp drops in banks as well as industrial shares in Europe and materials in the US. In Europe Deutsche bank and Commerzbank shares both tumbled by 9.5% dragging the DAX down to 3.3%. The DAX is now officially in bear market territory, down 21% from its late November high. In the US, Goldman Sachs and Morgan Stanley were also hit hard (down over 5%) while shares in construction materials dropped below 6%.

In bond markets, core global bond yields have moved sharply lower. Relative to Sydney’s closing levels, 10y UST yields are down 13bps to 1.73% while the curve has bull flattened with the 2y10y slope down 5.2bps to 107bps while the 5y30 curve is 2bps lower at 140.8bps. In Europe, 10y Bunds ended the day 7.8bps lower at 0.216%, Italian and Spanish 10y yields closed 12bps and 10bps higher at 1.675% and 1.744% respectively and 10y yields in Greece jumped a whopping 61.8bps to 9.947%.

Looking at currencies, not surprisingly the JPY sits at the top of the leader, up 1.17% against the USD. Somewhat surprising and showing some resilience in a risk off environment, the AUD is second up 0.33% while the NOK and GBP are at the biggest losers, down 0.4 and 0.6% respectively.

In commodities, Brent and WTI oil fell just over 3% to be at $32.89 and $29.9 respectively.  The LMEX index lost another 1.74% and iron ore is practically unchanged at $45.7.  Gold gained 3.3% and is currently trading at $1196.2

Coming Up

This morning in Australia we get the NAB Business survey for January. In December both business conditions and confidence remained above average, however relative to November both indices were a little bit softer. Conditions fell from 10 to 7 while confidence dropped from 5 to 3.

The December survey was run in early January and at the time we had heightened concerns over the global economic outlook triggered by China’s CNY devaluation which was further compounded by renewed weakness in oil and sharp falls in equity markets. The January survey was run late in month into early February and while still volatile the global outlook was a little bit brighter thanks to: 1) a stable CNY 2) hints of potential easing by the ECB and 3) the BoJ move into negative territory. Domestically, data releases held up OK in January, retail sales were soft but the labour force report was better than expected. That said, uncertainty over the global outlook was still prevalent and as such it is hard to imagine a rebound in the survey in January.

In terms of monetary policy, no doubt the RBA would have noted the December ease back in business conditions from its +10 reading in November. Looking ahead, and as our economist Tapas Strickland has noted, it will be crucial to watch business conditions remain above average (+1 since 1989) in order for them to support the RBA’s assessment of firming “reasonable” prospects in the domestic economy.

In offshore markets, Japan releases it preliminary January reading for machine tool orders and in Europe German industrial production is the main release for the day.

The NFIB Small Business Survey for January is released in the US and the soft print in the hiring intentions component released last week suggests the headline index will dip to 94.5 from 95.2. We also get the JOLTS survey where the number of hiring is expected to have remained unchanged, but still at elevated levels. Wholesale inventories (Dec)are also due and with stockpiles growing at a greater pace than sales another soft print is expected (-0.1% vs -0.33% prev).


On global stock markets, the S&P 500 was -2.50%. Bond markets saw US 10-years -10.11bp to 1.73%. On commodity markets, Brent crude oil -3.44% to $32.89, gold+3.3% to $1,196, iron ore +0.5% to $45.73. AUD is at 0.7086 and the range was 0.7051 to 0.7129.

Good Luck

For full analysis, download report:
Markets Today: 9 February 2016, (PDF 1MB)

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets


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