January 4, 2016

Markets Today: Bring it on

Investors ended 2015 in a defensive stance. Following the risk aversion tone seen in the previous day, equity markets were sold on Thursday while core global bonds benefited from a safe haven bid.

Happy new year and best wishes for 2016. Please note a full version of Markets Today will resume next Monday.

Investors ended 2015 in a defensive stance. Following the risk aversion tone seen in the previous day, equity markets were sold on Thursday while core global bonds benefited from a safe haven bid.

In a trading session characterized as choppy and thin, European and US equity indices closed 2015 with negative returns for the last day of the year.  In Europe, losses for the day were driven by oil related companies which were not able to benefit from the spike in oil prices later in the session (see more below) while in the US the negative sentiment was also affected by a large jump (20k) in weekly jobless claims to 287k. The Eurostoxx 50 index fell 0.6% on Thursday closing 2015 with a gain of 3.8% for the year while the DAX was unchanged on the day ending 2015 up by 9.6%. The S&P500 fell 0.9%, ending the year at 2044 and gaining a return of 0.7% for the year, its worst annual performance since the GFC in 2008. The Dow lost 1%, trimming its annual return for 2015 to 2.2% and the tech heavy NASDAQ index fell 1.25%, edging its performance for the year to 5.7%.

In currencies, the US dollar was broadly stronger with DXY and BBDXY up 0.5% and 0.1% respectively. Against G10, the CAD was the outperformer boosted by the late run in oil prices and the Yen was the only other outperformer up 0.25%. The AUD was practically unchanged at 0.7286 and CHF was the biggest loser, down 1.33% with a big USD/CHF buy order reported late in the day. The Euro and GBP also lost ground against the USD, down 0.65% and 0.54 % respectively. Looking at 2015 performance, the DXY and BBDXY closed the year with annual returns of  9.3% and 9.0% respectively and the USD was stronger against all other G10 currencies. JPY and CHF were the best underperformers, -0.4% and -0.78% respectively, the Euro and AUD fell by 10.2% and 10.9% correspondingly and the CAD was the biggest underperformer down 16% and followed closely by the NOK at -15.73%. In EM currencies a combination of soft commodities and political turmoil saw the ZAR drop 33% against the USD in 2015, TRY followed closely at -25% and the RUB was down -19.4%.

An overall risk off tone, soft data and month end demand helped US treasury performed in the last day of 2015. 2y and 10y UST yields fell 2.3bps and 2.5bps respectively, ending the day at 1.05% and 2.27%. In Europe 10y Bunds were unchanged at 0.629% and 10y UK Gilts yields declined by 2.8bps to 1.96%.  Relative to end 2014 levels, 2y UST climbed 38bps in 2015 aided by eventual start of the Fed tightening cycle while moves higher in yields further out the curve were more subdued, partly due to a sluggish global growth outlook and the sharp decline in crude oil prices.  10y UST ended the year 9.8bps higher than where they started and 30y UST climbed 26.4bps ending 2015 at 3.01%.

In commodities, oil prices posted gains in the last day of 2015 (WTI +0.7%, Brent 2.5%) with the move largely attributed to short covering and uncertainty on Iran’s ability to increase its oil exporting output given newly planned US sanctions. That said, oil performance for the year was one to forget. WTI fell 31% in 2015, a second straight year of annual losses while Brent fell for a third year in a row, losing 34.7% in 2015. Looking at other commodities, Iron ore managed to close last year with a small gain of 0.3% on Dec 31st , hardly a consolation when considering its fall of 39% for the entire year. Meanwhile, Gold was practically unchanged on Thursday, ending 2015 at $1060.5 and down 10.4% for the year (see table below for a more detailed performance breakdown across asset classes).

Looking at data releases, US weekly jobless claims jumped 20k to 287K, its highest level since July 2015, however many analysts warned that the rise could have been caused by the challenges in seasonality adjustments at this time of the year. Chicago’s PMI December reading fell to 42.9 from 48.7 in the previous month. Consensus was for a rise to 50 in December, instead the index fell to its lowest level since July 2009. China’s PMI data released 1 Jan revealed the manufacturing sector contracted for a fifth consecutive month in December ( in line with expectations) while the service sector ended 2015 in a stronger footing.  The official manufacturing PMI printed at 49.7 in December from 49.6 previously while the nonmanufacturing PMI rose to 54.4 in December from 53.6 in November.

Lastly Fed Fisher was speaking overnight and he reiterated his support for higher rates if markets overheat. However he noted that the first line of defense should be the use of regulatory tools to prevent bubbles from developing.

Week Ahead

It’s a quiet start to 2016 domestically with trade balance (Thursday) and retail sales (Friday) probably the two major data highlights. In Europe,  CPI December figures due for release on Tuesday are the ones to watch, particularly given the ECB commitment to lift inflation in the Eurozone . That being said, this week is all about the US. The ISM Manufacturing December reading kicks off the week on Monday, the index reading in November hit a six-year low and if the soft Chicago PMI print is any guide, the US manufacturing sector has probably not yet hit the lows for this cycle. The Fed releases minutes of its December 15-16 meeting on Wednesday and we also have a number of Fed officials speaking during the week. And last, but not least, the December payrolls numbers closes the week on Friday.

Australia: Trade balance, building approvals Thursday and retail sales Friday.

NZ: Dairy auction Tuesday.

China: Foreign Reserves Thursday,

US: Construction Spending and ISM manufacturing (Monday). Durable Goods Orders, Trade Balance, ISM Non-Manf. Composite, Factory Orders and Fed Minutes, all on Wednesday, payrolls and Wholesale Friday. Fed speakers – Williams ( Monday, Friday), Lacker (Thursday and Friday) and Evans (Thursday).

Japan: Industrial production, retail sales.

Euro: Markit Eurozone Manufacturing PMI (Monday), Eurozone CPI (Tuesday), Markit Eurozone Services PMI (Wednesday), Eurozone Retail sales (Thursday), German Industrial Production (Friday).

UK: Mortgage Approvals and Markit PMI Manufacturing (Monday), Markit/CIPS UK Services PMI (Wednesday), Trade Balance (Friday).

Canada: December Employment/Unemployment (Friday).

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