Fed's Waller inches open the US rate cut door
In 1979 President Carter endorsed a bill to have a holiday in honour of Martin Luther King (MLK), but a Conservative Congress at the time refused to pass the bill. Eventually President Reagan signed the holiday into law in 1983 and it was first observed three years later.
When thinking of songs honouring MLK, U2 “Pride In The Name Of Love” was the first one that popped into my head, but then I remembered learning about Stevie Wonder’s involvement in the campaign to have a holiday recognising the birth of Dr King. The 1981 hit “Happy Birthday” was written and performed by Stevie Wonder in order to raise awareness for the cause, it failed to reach the Billboard hot 100, but it was Wonder’s biggest hit in the UK, reaching no 2 in the charts in August 1981.
Well with the US celebrating MLK’s birthday, unsurprisingly we have had a relatively quiet session overnight. That said the risk off mode seen in Asia yesterday dominated proceedings with all European indices closing in negative territory while core European yields ended the day a touch lower. Gold has gained just under 1% and over the past 24 hrs, JPY, the preeminent safe haven currency, has been the only G10 currency that has outperformed the USD.
News over the weekend reporting PM Theresa May will deliver a speech today outlining the UK plans to exit the EU and regain control of immigration triggered a selloff in the pound and has been the main catalyst for the risk aversion seen in Asia yesterday and Europe overnight. That said, Donald Trump comments over the past few days have done little to ease market concerns, while the president elect comment that he wouldn’t name China as a currency manipulator on “day one” was seen as a positive, he also said that his adherence to the One China policy depends on progress by China on trade issues. Given Beijing sensitivity on this latter issue, Trump’s comments have not been seen as conducive to ease tension between the two countries. Similarly, Trump’s prediction that other countries will follow Britain exiting the bloc while also labelling the EU a “vehicle for Germany” have raised concerns over the future transatlantic alliance.
Looking at currencies in more detail, the USD is stronger across the board with DXY +0.38% and BBDXY +0.30%. As noted above, the risk aversion tone has also benefited the yen. After yesterday’s Sydney’s close, USDJPY traded down to ¥113.63 and since then it has spent most of the overnight session just above ¥114. GBP/USD has also been pretty steady, after yesterday’s big drop from 1.2199 to 1.1988, the currency pair has managed to trade above 1.20 for most of the overnight session. The risk off tone overnight has seen the AUD and NZD trade a little bit softer, but very much in line with other major currencies. The AUD is currently trading at 0.7475, down 0.36% and NZD is at 0.7105, down 0.38%.
With the US market closed, US Treasury futures have traded sideways in a very tight range and core European yields are a little bit lower. 10y Bunds closed -1.5bps at 0.319% and 10y UK gilts ended -5.2bps at 1.308%. The rally in UK Gilts suggests risk aversion has supported the bid, however we can help but think that inflationary concerns from a softer currency will turn to be a negative. Incidentally, over the past hour BoE governor Carney has been on the wires noting that policy makers will be monitoring developments closely as the impact of the weakening pound starts to feed through into prices. The Governor reiterated that BOE has limited tolerance for inflation.
Today’s big event will be Theresa May’s speech on her strategy for negotiating Britain’s exit from the European Union and to add more drama to the event time and location of the speech has not yet been announced.
The PM is expected to walk a fine line between providing enough information on the government’s intentions without necessarily showing too much of Britain’s negotiating hand ahead of official discussions with the EU. That said, the key take away is that the central scenario is shifting towards pricing a fast and potentially disorderly Brexit. Accordingly, we have nudged our GBP forecast lower to reflect this view and now we see GBP heading towards 116 over the coming months as a fast and disorderly Brexit has not yet been fully discounted by the market.
The UK Supreme Court decision on whether the government must defer to parliament before triggering article 50 (due out any day now), may provide GBP some respite (assuming the court rules against the government), however the Court decision is unlikely to change the path to Brexit. Either way, GBP volatility is likely to remain elevated.
As for data releases, this morning Australia gets housing finance figures for November and Japan publishes its final industrial production reading (also for November). The UK releases CPI and PPI readings for December and Germany’s ZEW survey (January) is also out today. There are no US data releases, but Fed Dudley (voter, dove) and Fed Williams (non-voter, centrist) are on the speaking roster. Tonight also sees the second GDT dairy auction for the year. NZ Farmers will be hoping for a better result than the chunky fall seen in pricing last fortnight.
On global stock markets, the S&P 500 was +0.00%. Bond markets saw US 10-years +0.00bp to 2.40%. In commodities, Brent crude oil +0.40% to $55.67, gold+0.5% to $1,203, iron ore +3.9% to $83.65, St. Coal -0.7% to $82.90, Met. Coal -2.6% to $190.00. AUD is at 0.7476 and the range since yesterday 5pm Sydney time is 0.746 to 0.7484.
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