European and US equity markets started the week in a positive tone boosted by a commodity led improvement in risk sentiment. Oil prices surged higher (Brent 5.3% to $34.77 and WTI Oil 7.8% to $31.94) following the IEA released of its Medium Term Oil Market Report. IEA expects the global oil market will begin rebalancing in 2017, thanks to an anticipated decline in US output over the coming year. The report also noted that “oil prices should start to rise gradually once the market begins rebalancing, however the availability of resources that can be easily and quickly tapped will limit the scope of rallies – at least in the near term”.

The surge in oil prices was also aided by comments from Russia’s oil minister saying that discussions on a deal to cap oil production levels must be completed by the end of this month. The CERAWeek Conference (aka the Davos of the energy industry) is currently underway in Houston, so the likelihood is that we are going to get similar headlines over the coming days. However, whether a meaningful deal gets done, is still anyone’s guess. Note that Saudi Arabia’s oil minister will speak tonight.

The overnight surge in commodity prices was not limited to oil, metal prices also had a good night with copper and iron ore gaining 1.1% and 6.2% respectively. The FTSE100 climbed 1.5% with mining stocks leading the way while across the Atlantic, US equity indices looks set to end the day in positive territory (all up around 1.4%) with energy and materials shares the biggest winners.

The commodity led risk on sentiment has propelled commodity currencies to the top of the G10 leader board. The AUD followed by the NZD and CAD are the top performers against the USD over the past 24hrs. After reaching a low of 0.7070 during the New York session on Friday, the AUD is now trading at 0.7230, having traded to an overnight high of 0.7247, its highest level in over a month. A rise in commodity prices, an improvement in risk sentiment and still well anchored Fed hike expectations are the perfect combo for the AUD. Our fair value model suggests the AUD still has more upside and now a 73c handle looks well within sight.

Fears of Brexit have relegated the GBP to the bottom of the leader board, down 1.74% against the USD. Data was also not helpful with the UK CBI survey showing continued weakness in the manufacturing sector, printing on the low side of expectations(12 vs16 prev.). The Euro was also an underperformer down 0.97% against the USD, suggesting the market is expressing some concerns for the Euro if the UK chooses to leave the Union. Euro-zone PMI’s also came in of the soft side of expectations with German manufacturing pulling back sharply to 50.2 from 52.3 while  France’s services PMI dipped back below 50 (49.8 from 50.3).

Looking at core global yields, 10y US treasuries have remained contained within their recent 1.72%-1.78% range, up 1bps to 1.76%. 10y Bunds dipped 2.3bps to 0.174% and 10y UK Gilts fell by 2bps to 1.392%.

In other news, Fed Williams noted in an LA times interview that “the gradual pace approach” is still right. Williams decline to say whether he would support a rate increase at the March 15-16 meeting.

Coming Up

It a quiet day of data releases in Australia with the weekly consumer confidence reading the only scheduled release. RBA’s Tony Richards is speaking at a Payments System Conference, but we don’t expect any market moving comments.

In Europe, we get the German ifo survey for as well as the final Q4 GDP reading (0.3%, no change expected). The ifo survey is a helpful leading indicator of German economic activity. In January the survey showed a weakening of expectations due to a decline in export and it will be interesting to see if we see an improvement in February.

Later in the US we get Case-shiller Home Prices (Dec), Conference Board Consumer Confidence (Feb), Richmond Fed Manufact. Index (Feb) and Existing Home Sales (Jan). Consumer confidence is expected to remain elevated given the improving labour market while for existing home sales a small pay back is expected ( -2.2%), after the large jump recorded  in December (14.7%).

We have a busy day of central banks speakers. BoE Governor Carney testifies to lawmakers about the outlook for the UK economy and monetary policy. Later, and also in London, ECB Nouy speaks at a capital conference. Finally in the US, Fed Vice Chair Fischer gives a speech on developments in monetary policy, followed by an audience Q&A.

Overnight

On global stock markets, the S&P 500 was +1.30%. Bond markets saw US 10-years +1.38bp to 1.76%. On commodity markets, Brent crude oil +5.33% to $34.77, gold-1.7% to $1,210, iron ore +6.2% to $51.52. AUD is at 0.7229 and the range was 0.7136 to 0.7247

Good luck,

For full analysis, download report

• Markets Today: 23 February 2016 (PDF, 1MB)

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

Disclaimer