September 6, 2016

Markets Today: Britain’s Got Talent

In offshore markets depleted by the absence of the United States off for Labor Day, latest UK economic data and gyrations in the oil price captured most of the overnight headlines.

In offshore markets depleted by the absence of the United States off for Labor Day, latest UK economic data and gyrations in the oil price captured most of the overnight headlines. That said much of the initial sharp spike higher in oil (on latest mumblings about a Saudi Arabia- Russia pact to freeze oil production) and the Pound (on the biggest ever monthly gain in its service sector PMI) were later given back.  Thus Brent crude jumped by $2 to $46.50 only to fall back to $45.0 on digestion of the full comments from officials and which appeared much more equivocal about prospects for a production freeze as early as this month when OPEC officials meet in Algeria. GBP/USD is ending New York just 0.1% higher, having earlier jumped about three-quarters of cent.

As for the UK data, the services PMI print of 52.9 up from 47.4 in July shows the sector rebounding from the late June Brexit shock with even more alacrity than the manufacturing sector. Just glancing at some UK trade statistic on the way in, we see that Britain runs a surplus with the rest of the work in services in the order of £50bn a year or close to A$100bn. While we instinctively think of Premier League football TV rights and global syndication of Britain’s Got Talent, the fact is some 70% of the UK services surplus is in financial services. This is the sector most at risk from any failure of the UK government to negotiate a ‘soft’ Brexit that preserves the ability of financial services firms based in the UK to ‘passport’ in to the rest of Europe (and in which respect Japan issued a fairly stern warning to the UK in front of the G20 meetings).

Yesterday’s Australian Business Indicators (a GDP partial) suggested that inventories could add 0.2%points to Q2 GDP. NAB had expected no contribution so this presents upside risks to our forecast of a GDP print of 0.3% q/q.

The big FX movers during our time zone were the NZD and JPY. The kiwi underwent something of a stealth rally through the APAC session on no real news (save that risk sentiment ended last Friday in fine fettle). The yen gained ground steadily following a speech by BoJ Governor Kuroda at a Kyodo news event.  Kuroda defended the use of negative interest rates if the broader economic benefits to society were seen to outweigh the costs (in terms of damage to the profitability of the financial sector). He also repeated what he said at Jackson Hole, namely that the BoJ has ample scope to ease further in ‘all three dimensions’. Yet the speech is being interpreted as meaning that the BoJ has become increasingly uneasy over the use of negative rates and probably won’t do much or indeed anything when it convenes later this month (21 September).

Coming Up

There’s a lot on the economic and events calendar today and where the most market sensitive release should be the US non-manufacturing ISM.  Following the unexpected fall to 49.4 from 52.6, the service sector version is also expected to have fallen but by a much smaller amount and from much better levels (55.0 from 55.5).  Also due tonight is the Fed’s Labor Market Conditions Index (derived from 19 separate labour market indicators) and reported as just a monthly change (up meaning tighter, down meaning easier). It was up by 1% in July. There is no survey median for this.

Locally it’s RBA day of course, but with money markets ascribing just a 3% chance to another rate  cut – the RBA having cut just last month – and it being Glenn Stevens’ last meeting, interest is running pretty low. Whether or not the post-meeting statement reveals any sort of ‘easing bias’ will probably be the main point of market interest. If it doesn’t, the AUD will probably trade firmer out of the 2:30pm AEST announcement.

Data wise, it’s the Q2 Balance of Payments and the estimated contribution to GDP from net exports. This is expected by NAB and the market consensus to be flat, after the out-sized 1.1% positive contribution to Q1 growth. As for the bank of payments itself, this is expected to record a deficit in the order of A$20bn.


On global stock markets, the S&P 500 was +0.00%. Bond markets saw US 10-years +0.00bp to 1.60%. In commodities, Brent crude oil +1.71% to $47.63, gold+0.3% to $1,327, iron ore -0.3% to $59.24. AUD is at 0.7585 and the range since yesterday 5pm Sydney time is 0.7576 to 0.7604.

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