A further slowing in growth
There was a spark of confidence in the markets overnight as equities rose in the US, along with a bounce back in oil and a rise in Treasury yields.
After showing the Thriller video to my seven year old son, the little man has embarked on a Michael Jackson journey hence I could get passed “Heal the world” for a title today…. Northern Hemisphere markets have begun the new week in a positive mood with main European and US equity indices showing gains above 1%, a rebound in oil prices has been one factor for the good vibes while positive Italian budget sound bites have also helped. Barring JPY weakness, currency moves have been fairly muted with the USD a tad stronger supported by higher UST yields.
IT, financials and consumer discretionary shares have led the rebound in US equities overnight while the energy sector also looks set to have a good day. The S&P500 is currently up 1.37%, NASDAQ is +1.68% and the Dow is 1.28%.
Amazon has been one of the big performers overnight, up over 3% reflecting the positive vibes within retailers after Thanksgiving sales. According to the WSJ, Amazon is expected to account for nearly a fifth of holiday sales this year. GM shares jumped over 7%, after the company announced plans to cut more than 14,000 salaried staff and factory workers and close seven factories worldwide by the end of next year. According to Bloomberg, the company is downsizing as U.S. demand slides from a record in 2016 while sales in China – GM’s other profit centre – are also in a slump.
USD indices are a tad stronger with DXY +0.11% and BBDXY +0.18%. A closer look at G10 currencies shows that USD strength within the majors has been primarily driven by JPY weakness (USD/JPY -0.55%) weighted down by the uplift in DM equities and higher UST yields. NOK is up 0.18%, reflecting the improvement in oil prices.
The AUD story over the past 24hrs has been one of Hero to Zero. The improvement in risk appetite that began during our APAC session yesterday initially boosted the AUD to the top of the G10 leader board with the pair trading to an overnight high of 0.7276 early in the evening session. All these gains were latter reverse despite gains in European and US equities. Hard to pinpoint the catalyst other than suggest a somewhat belated reaction to the decline in iron prices which began during our APAC session yesterday. Iron ore prices opened the week under pressure amid reports of lower steel prices in China, weakening profitability at mills. Based on Friday night closing level both the Dalian Futures and Singapore futures are down close to 7%.
Prospect of an Italian budget compromise with the government reportedly mulling a reduction to the 2019 deficit goal to 2-2.1% from 2.4%, initially helped the euro, boosting the pair to an overnight high of 1.1380, but then the pair drifted lower over the course of the session and now currently trades at 1.1380.
There was little impact from ECB President Draghi’s comments to the European parliament, in which he reaffirmed that the ECB expects to end its QE programme at the end of the year, despite the recent softening in European growth. Draghi said the slow-down in growth was normal, as the expansion matured. The ECB president acknowledged that “measures of underlying inflation” continue to be “muted”, but stressed that there are indications that the economy will strengthen. The President then noted that the governing council continues to anticipate an end to net asset purchases by the end of 2018 with the caveat of upcoming data confirming the ECB’s medium term inflation outlook. Other Fed officials were also speaking last night and worth highlighting ECB Lautenschlaeger remarks that the ECB could raise rates in Summer or Fall of 2019 – so a little pushing out of the rate hike guidance perhaps?
A 14bps rally in 10y Italian BTPS is the rates highlight from the overnight session. Hints of a budget compromise the catalyst here. That said as it is often the case while three appears to be some willingness to reduce the 2019 deficit to 2.1% from the planned 2.4%, it is still unclear whether this will be enough to satisfy the EU Commission demands. In addition as one commentator noted overnight, reducing the headline defict number is a lot easier than negotiating cuts to individual programs. Both Five star and League have made big expenditure promises, now we have to see whether the alliance can reach an internal compromise.
UST yields are up between 2 and 3bps along the curve with the 30y tenor lagging the move up only 1bps. The 10y rate now trades at 3.06% and the 2 year rates sits at 2.835%.
Oil prices are again the big movers in commodities with Brent +2.76% and WTI +2.16%. Commentaries from OPEC members appear to have been the catalyst for the rebound with Ecuador the latest member to express support to an OPEC production cut at the upcoming meeting.
Copper (-0.56%), lead (-1.27%) and zinc (-1.27%) have joined iron ore as the underperformers at the start of this week.
Germany: Small miss on overall IFO, with Business Climate 102.0 against expectations of 102.3. However, Current Assessment was ok at 105.4 against 105.3 expected.
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