June 20, 2017

Markets Today: Easy

On my way home last night I thought the Spice Girls were a strong candidate for a song title today. Brexit negotiations started overnight and Wannabe (“Tell me what you want”) would have been a good option.

On my way home last night I thought the Spice Girls were a strong candidate for a song title today. Brexit negotiations started overnight and Wannabe (“Tell me what you want”) would have been a good option. In the end, not much came out of the first EU-UK Brexit meeting, instead “Easy” by the Commodores is a more fitting tittle following upbeat comments from Fed Dudley noting that financial conditions remain easy and that there is a need to “tighten monetary policy very judiciously “. His comments boosted the USD and lifted US Treasury yields. Meanwhile, equity markets have regained their mojo with technology shares leading the way in the US while materials and energy sectors where the outperformers in Europe.

Speaking in New York, Fed Dudley gave a pretty upbeat assessment on the US economy noting that the outlook was “pretty good” and was optimistic that tight labour market will eventually lead to higher inflation. Dudley also noted that “we haven’t tightened financial conditions to any significant degree” and it was important for the Fed to “very judiciously” withdraw monetary policy accommodation in order to avoid having to move so rapidly in the future that tightening might cause a recession.

Dudley’s comments boosted the USD across the board with both BBDXY and DXY indices climbing 0.40%. US Treasury yields also rose with the move led by the back end of the curve. 10y UST yield climbed from an overnight low of 2.1391% to 2.1879% currently.

The decent jump in US yields dragged the yen to the bottom of the G10 leader board, down 0.61% over the past 24 hrs. USD/JPY is currently trading at ¥111.53, a few pips below its early June highs. European currencies are also close to the bottom of the leader board with NOK down 0.50% and EUR -0.44%.

The EU and UK have agreed Brexit negotiations priorities moving the exit bill and citizen rights for both EU and UK citizens to the top of the agenda. Early days, but it seems that the UK has yielded on Brussels long standing demands for the sequencing of negotiations. GBP drifted lower during the London session and then continued its downward path after Dudley’s comments. The pound is currently trading at 1.2735, after trading to an overnight high of 1.2809.

Around six O’clock last night news on Moody’s decision to cut the credit rating of the big four Australian banks to AA3 from AA2 triggered a small AUD sell off, but the move was quickly reversed as Moody’s decision effectively aligns its rating with S&P ( AA-). Moody’s rationale for its downgrade reflects “elevated risks in the household sector which heighten the sensitivity of the banks’ credit profiles to an adverse shock”.  The AUD traded to an overnight low of 0.7585 on the news, it recovered all the lost ground during the London session, but the USD resurgence after Dudley’s speech dragged the pair down again and now it trade on the figure at 0.76.

Looking at commodities, oil prices dropped over 1% on the back of a stronger USD and news of yet more oil been pumped out. US drillers added oil rigs for the 22nd consecutive week and Libya is pumping the most oil in four years after a deal with Wintershall AG enabled at least two fields to resume production. Meanwhile iron ore had a good night, up 1% to $56.3, gold was down 1% and copper climbed 1.1%.

Coming Up

Well is another quiet day of data releases, but central banks are the theme for the day. Fed Evans is the first cab off the rank speaking in New York this morning (9:00 am Sydney time) and it will be interesting to see how committed he is to another hike this year or whether like Fed Kaplan he emphasises the need for higher inflation data as a prerequisite. The June RBA minutes are released this afternoon and then tonight we have Fed Fischer and Rosengren. The GDT auction early tomorrow morning is expected to show little change in prices, although recent trend has been for positive surprises.

BoE Governor Carney also speaks tonight and after last week’s unexpected 5-3 vote to keep the cash rate on hold, comments from the Governor will be closely monitored. With annual CPI at 2.9% and well above target, clearly some MPC members believe there is no longer a positive trade-off between supporting jobs and activity during Brexit versus returning inflation back to target. Knowing where Governor Carney’s sits on this debate would be of great interest for markets and GBP in particular.

As for the June RBA Meeting Minutes, we don’t expect any surprises. The Meeting produced another “no change” decision on the cash rate as the Bank weighs up an economy still growing within its potential against lingering growth concerns over the housing market.  NAB continues to expect the cash rate to remain on hold for the foreseeable future.


On global stock markets, the S&P 500 was +0.83%. Bond markets saw US 10-years +3.65bp to 2.19%. In commodities, Brent crude oil -0.99% to $46.9, gold-1.0% to $1,242, iron ore +1.0% to $56.30, steam coal +0.4% to $81.20, met. coal +0.7% to $145.00. AUD is at 0.7604 and the range since yesterday 5pm Sydney time is 0.7585 to 0.7629.

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