November 15, 2016

Markets Today: For what is worth

Leonard Cohen passed away last week and on my way in I was listening to a mix of folk tunes with the hope of finding one of his songs as a title for today’s note.

Leonard Cohen passed away last week and on my way in I was listening to a mix of folk tunes with the hope of finding one of his songs as a title for today’s note. The Partisan could have been an option if Donald Trump had appointed another senior Republican to his government or Hallelujah would have been ideal if there was any sign of an end to the bond selloff. In the end, Buffalo Springfield “For what is worth” started playing and I just couldn’t get passed it.

“There is something happening here. What it is ain’t exactly clear”…The US Treasury led bonds sell off has continued overnight buoyed by investors’ expectations of higher US growth and higher inflation under a Donald Trump US presidency. For now expectations of higher growth appear to be outweighing any concerns of equity valuation effects from higher yields, the key question now however is how much further can this bond sell off go before we start to see some destabilising effects across markets. In December last year the Fed lifted the Funds rate by 25bps and the rise in US Treasury yields that followed coupled with a stronger USD triggered a China equity led sell off in January. Hence is probably worth watching how EM markets cope with the rise in UST yields this time around.

The selloff in US treasury yields look set to extend for a sixth consecutive day.  On November 4, 10y UST were trading at 1.77%, now they are 45bps higher at 2.22%. Volatility has also remained elevated,10y UST trading n a 12bps. 10y  Bunds and Gilts have followed the move in UST yields,  closing the day at 1.5 and 4bps higher.

The move higher in US yields has also seen a repricing of Fed rate hike expectations with the market now assigning a 95% probability to a December hike, up from 83% yesterday. Another hike is now more than fully priced next year.

The USD has benefited from the rise in Fed hike expectations with the DXY index back above the 100 mark for the first time this year. The BoJ’s yield curve control policy has helped the deprecation of the Yen amid the rise in core global yield ( JPY -1.30% overnight) and the Euro has broken below the 1.08 mark as concerns over Europe’s political stability intensify with the Italian referendum and Austrian election due in just under three weeks.

Meanwhile commodity linked currencies have coped relatively well. NZD is down 0.36% and trading just below the 72c mark with initial impressions suggesting yesterday’s earthquake is unlikely to be as damaging as the 2011 Canterbury earthquakes .The CAD is -0.10% supported by a mini rally in oil prices over the past few hours and the AUD is the start performer, little changed at 0.7546.

Other commodities have taken a breather with iron ore down 2.6%, steam coal -4.1% and gold -0.4%.

ECB Constancio cautioned on Monday that a Trump presidency could mean higher US growth, but Europe and emerging countries could actually suffer from protectionism in the US.

Coming Up

We have quite a few events and data releases that should keep us busy today, in addition of course to any policy or appointment news from Donald Trump . In Australia, the November RBA minutes are released this morning, however given they pre date the Statement of Monetary Policy the Minutes are unlikely to add anything new. Of more interest, tonight RBA Governor Lowe gives a speech titled “Buffers and Options” and our economists suggest the title could imply some coverage of how low rates go and an assessment of their effectiveness.

Looking at other markets, Germany gets the November Zew survey and its first Q3 GDP reading. The market is looking for a GDP print of 0.3% just below the 0.4% recorded in Q2. The UK releases CPI figures for October and the core CPI reading is expected to print at 1.4%, marginally below the 1.5% print in September. Components to the CPI number are likely to garner some attention, particularly for signs of inflationary pressures from the weaker Pound. BoE Governor Carney is also due to face the Parliament’s Treasury Committee for an in-depth chat on the latest inflation numbers.

Later in the day, the US gets the November Empire manufacturing survey, business inventory (Sep) and advance retail sales (Oct). The market is looking for a US consumer rebound with retail sales ex auto and gas expected to print at 0.3% while the control group is seen at 0.4% vs 0.1% previously.

Finally Fed speakers are out in force today with Lacker speaking in Washington this morning (9am Sydney time), followed by Williams at 10:30am and then tonight, Fed Rosengren, Tarullo, Fischer and Kaplan are also due to speak


On global stock markets, the S&P 500 was +0.13%. Bond markets saw US 10-years +7.76bp to 2.23%. In commodities, Brent crude oil -0.49% to $44.53, gold-0.4% to $1,219, iron ore -2.6% to $77.77. AUD is at 0.7548 and the range since yesterday 5pm Sydney time is 0.7526 to 0.7563.

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