May 26, 2017

Markets Today: What goes on

It’s been a night where oil news took centre stage in the lead up to the end of the week with liquidity likely thinner today/tonight into the US long weekend with the US Memorial Day holiday on Monday.

OPEC had their formal meeting, and what they agreed to do was extend the 1mbpd cut for another nine months.  Clearly the market was expecting/hoping for more, both WTI and Brent crude down around $2.75/bbl (both over 5%) with futures curves across tenors also down similarly.

Saudi Oil Minister Khalid Al-Falih said “we’ve said we’ll do whatever is necessary” after the meeting.  But clearly what was announced has not been enough, for now anyway.  Spot WTI is back down to levels in the middle of the month, before the stories started to grow louder about extending the cuts.  What’s been announced bears little resemblance to the 4.8mbp cuts announced in the Asia crisis and during the GFC.

Not unexpectedly, the Canadian dollar has been softer in the session, retracing back up from below 1.34 reached during the APAC session yesterday to over 1.3480 as we go to press this morning.  A larger casualty for the overnight session has been the AUD, down from over 0.75 yesterday – levels it has not been able to crack and hold decisively this week – to around 0.7450/60.

Moody’s downgrade of China earlier this week, no new clear direction on iron ore (down $0.28/t overnight) and a somewhat softer than expected Construction Work Done print have been neutral to mild headwinds.  And in the wake of FOMC Minutes that failed to inspire any new buying of the USD, the market at the end of the day continues to price in the high likelihood of the FOMC hiking rates again at the June 15 meeting and the even money odds of another before year end.

Overnight, US jobless claims continued at very low levels (234k after 233k), a pointer to continued employment growth, counterbalanced by a wider than expected good trade deficit for April and a larger than expected decline in wholesale inventories.  Little to no market impact was the result, but it’s a sign that the GDP bounceback in Q2 might need to be trimmed a little.

On the Fed speakers’ front, Fed Governor Lael Brainard was speaking again, this time at a global economy event and sounding quite positive on the world economic outlook, noting a stabilisation in Japan and that the outlook in Europe was solidifying.  The view from outside Europe though appeared not to be wholly endorsed by ECB Vice President Vitor Constancio (ex Governor, Banco de Portugal) who, while noting the “very positive evolution” in the Portuguese economy also said that overall risks remain tilted to the downside, an attempt, the market could presume,  to curtail expectations of the ECB winding back QE soon.  Through all this, the Euro has eased back in a night of indecisive currency moves.  US equities have closed with the Dow up 0.34%, the S&P +0.44% and interestingly, despite the 1.79% decline in energy stocks.  US bond yields are little changed.

RBA Governor Guy Debelle was speaking in London overnight and did not stray from the purpose of his visit which was to speak at the Launch of the FX Global Code of Conduct.  He was speaking how the Code is a principles-centred approach rather than rules-based.

Coming Up

Japan’s monthly CPI reports (9.30 AEST) are always watched for any progress in lifting Japanese inflation.  This one for April (coming with the May figures for Tokyo) would see headline inflation inching up to 0.4% y/y from 0.2%, with a broadly similar rise in core rates also tipped.

Also in our time zone, Fed President Bullard is speaking on the US economy in Tokyo, at midday AEST.  The market is well aware of his views of steady rates but the Fed beginning to wind down its bloated balance sheet as consistent, in his view, with the Fed’s gradual removal of policy accommodation strategy.  Also today, RBA Head of Payments Policy Tony Richards is on a panel at a Retail Banking Conference: there’s always the potential for some comments on the economy, housing and banking matters, including because of his past role as a senior economist at the RBA. NZ Finance Minister Steven Joyce is at the podium twice today (once already in Auckland earlier at a breakfast function), selling yesterday’s Budget, speaking again in Wellington at 10.00 AEST.

Tonight first sees the second estimate of Q1 US GDP along with the Durable Goods Orders report for April, with a modest 0.5% rise in core orders expected, followed by the late-month UoM Consumer Sentiment report for May.  The durable goods orders report will be important in updating the progress of business capex into Q2 and its contribution to GDP.  The Atlanta Fed’s GDPNow estimate for Q2 currently stands at 4.1%, a seasonal rebound after the soft 0.9% Q1 result.  (It wasn’t updated overnight.)

There’s also the wire service stories from the G7 leaders’ summit in Italy that concludes tomorrow.  It will be interesting to see the Communique on trade and currencies.


On global stock markets, the S&P 500 was +0.44%. Bond markets saw US 10-years +0.52bp to 2.26%. In commodities, Brent crude oil -4.86% to $51.34, gold+0.2% to $1,255, iron ore -0.5% to $60.24, steam coal +0.0% to $74.45, met. coal -0.1% to $174.15. AUD is at 0.7456 and the range since yesterday 5pm Sydney time is 0.7451 to 0.7516.

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