March 31, 2016

Markets Today: Afterglow

Equities and non-US dollar currencies continue to bask in the afterglow of Janet Yellen’s Tuesday night speech.

Equities and non-US dollar currencies continue to bask in the afterglow of Janet Yellen’s Tuesday night speech and the associated re-pricing of Fed tightening expectations. The US money market now has less than one 25-point increase in the Fed Funds target range priced in by end-2016. Shorter dated US yields and money market rates are lower with 2 and 5 year Treasury yields off over 2bps, but 10s are about 2bps higher versus Tuesday’s close.

Extension of Tuesday’s US equity market gains is fairly broad based with IT and financials leading the way and utilities the only sector in the red. All the main US indices are closing up by about 0.5%+/- and bringing the gains since Yellen’s speech hit the tapes to 1.5% for the S&P.

Economic news has been sparse. The ADP US employment survey came in at 200k versus a market expectation for 195k, which does nothing to dislodge expectations for a non-farm payroll print tomorrow night of close to 200k. Catching a little attention though was the German inflation data where the HICP measure lifted to 0.1% y/y from -0.2% in February and above the 0.0% expected. This is though unlikely to prove enough to lift pan-Eurozone CPI out of negative territory later today (it was -0.2% last month and expected to remain at that level in March).

In currencies, the German data did give a very temporary lift to a euro that was already travelling north in the context of broad-based US dollar loses, but lost ground temporarily alongside most other currencies in mid-afternoon London time – for no apparent reason. It is the commodity and higher yielding EM currencies that dominate the FX leader board. The New Zealand dollar is the standout in G10, up 1.26% and quickly racing ahead when NZD/USD broke onto a 0.69 handle very soon after the Sydney market closed last night. It has been out-bid by only four other currencies, namely the Rand, Ringgit and Columbian and Chilean pesos.

Outperformance by commodity-linked currencies might seem slightly surprising given that commodity prices are for the most part a little softer, albeit oil received a small boost from a smaller than expected rise in US inventories in the past week. Rather than look at commodity prices, we are better off simply observing that as US equities move ahead, the VIX measure of downside volatility risk in the S&P 500 continues to leak lower. Having broken below 14 post-Yellen, it has flirted with a 12 handle overnight. At 13.06 it is at its lowest since late October 2015. This readily explains the latest move higher in AUD/USD, which has (briefly) spent time above 0.77 overnight (currently 0.7670).

Coming Up

It’s not a day of top-drawer data or events, rather one best described as ‘Super Friday Eve’ with US payrolls, the US manufacturing ISM and China’s PMI data all due on Friday. We do have Fed vice Chair and ‘Yellen-ite’ Bill Dudley speaking in Lexington, but he shouldn’t hit the wires before 8:00 AEDT on Friday.

Data wise, some local interest in latest RBA private sector credit numbers and where the main feature of late has been the acceleration in business credit growth (see Chart of the Day ion the attached pdf). There’s a smattering of data in Europa and US, none-of which is likely to be particularly market sensitive, save perhaps for Eurozone CPI after yesterday’s upside surprise in the German numbers (see calendar on p.3 of the pdf).

Being month (and well as quarter) end, there will inevitably be chatter in the FX world about potential hedge- adjustment by fund managers. Here, the presumption is likely to be that since US stocks have performed so well in March (S&P500 +7%) then those managers who only make adjustments at month-end will find themselves under-hedged and needing to sell US dollars for AUD. The historical evidence supporting this line of argument is patchy at best, but suffice to say that if AUD/USD does move further ahead in the coming 24 hours, part of the blame is likely to be laid at the floor of ‘month-end rebalancing’.


On global stock markets, the S&P 500 was +0.40%. Bond markets saw US 10-years +1.76bp to 1.82%. On commodity markets, Brent crude oil +0.20% to $39.22, gold-0.8% to $1,226, iron ore -1.7% to $54.18. AUD is at 0.7669 and the range was 0.7615 to 0.7709.

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