March 27, 2019

Markets Today: Hope supports shares & the AUD

The US stock market has rebounded helping the Aussie dollar.

Today’s podcast

Overview: She’s lost control

  • AUD best performing G10 currency on improved risk sentiment, higher oil
  • Better showing by stocks despite US data disappointment (Consumer Confidence, Housing Starts)
  • Sterling up on news ERG group can support May’s Brexit deal, down on news DUP still can’t
  • RBNZ decision at 12:00 AEDT; host of ECB speakers tonight

Confusion in her eyes that says it all. She’s lost control.  And she’s clinging to the nearest passer-by. She’s lost control.  Joy Division

This time yesterday, the UK parliament effectively stripped the Prime Minister of her authority to control the Brexit process, setting the stage for a series of indicative votes later tonight on possible ways forward out of the Brexit morass.  Chances are there will not be majority support for any single proposal, as a result of which the PM seems intent on trying to bring her withdrawal agreement back to the floor of the House on Thursday for the third time – so called MV3 (if the Speaker allows, of course).  Here, the ERG group of Eurosceptic MPs are indicating they will now support it (Jacob Rees Mogg and Boris Johnson have both said so). Yet without the support of the Northern Irish DUP, who still say they are opposed without substantial changes to the Irish backstop provision, it still looks dead in the water.

Sterling enjoyed a bit of support on news that the ERG group could be ready to back the deal, in the spirit not so much of ‘not letting the perfect be the enemy of the good’ as not letting the perfect be the enemy of no Brexit at all.  But most of the gains have since been retraced (GBP/USD back to 1.3203 from a high of 1.3262) given the ongoing lack of public support for May’s deal from the DUP.  The biggest fear for GBP traders incidentally, in not so much a ‘hard’ Brexit on April 12, which we can still pretty safely rule out, as an early General Election and the risk of a change of government.

In FX elsewhere, the little Aussie battler has come out on top in the last 24 hours, currently up 0.4% on Monday’s New York close to 0.7140.  Here we’d note both the recovery in risk sentiment, that sees US stock indices closing up by between 0.6% and 0.7% – including a late day ‘hour of power’ surge – with the VIX back down closer to 15 from nearer 18 on Monday, and the rise in oil prices with WTI crude up $1.20 and Brent $0.86.  New from Russia claiming it is meeting its commitment to OPEC+ to curb production is reportedly a factor here.  The oil price news has meant that energy stocks were the best performing S&P sector (+1.5%) but with all 11 subsectors finishing comfortably in the green.

CAD and NZD have also both received a bit of support from either oil prices (CAD) or the slipstream of a firmer AUD (NZD) while the JPY sits firmly at the bottom of the G10 scoreboard, consistent with it being a risk-on 24 hours and with US Treasury yields slightly higher versus Monday’s close, albeit 10yr Treasuries are less than 2bps higher at 2.418%.

It’s fair to say the two main pieces of US economic news released overnight have been summarily ignored.  The Conference Board measure of consumer confidence dropped sharply (124.1 from 131.4) while the survey’s labour market differential, which measures the difference between those reporting jobs are “plentiful” versus those saying jobs are “hard to get”, dropped from +34 to +28.3, indicative of some softening in the labour market.  We would note however that the Conference Board confidence measure remains at a historically elevated level and the University of Michigan’s confidence survey showed a strong rise earlier this month.  Meanwhile, US housing starts also dropped sharply, -8.7%, but from an upwardly revised level in January (to now be 11.7% up on December). Perhaps more revealing, the less volatile building permits data was only slightly weaker than expected and the even less volatile single-family permits number unchanged.

Data summary

German GfK consumer confidence, Apr: 10.4 vs 10.8 exp.

US: Housing starts (m/m%), Feb: -8.7% vs. -1.6 exp.

US: Building permits (m/m%), Feb: -1.6% vs. -0.9 exp.

US: Conference Board consumer confidence, Mar: 124.1 vs. 132.5 exp.

US Richmond Fed index, Mar: 10 vs 10 exp.

Coming up

  • From 9am AEDT, the UK House of Commons will be voting on 3 amendments to UK PM May’s ‘neutral’ motion (that parliament has considered a statement made by May on March 15 which set out the government’s next steps on Brexit, including its plan to seek a delay).

Passage of these will further reduce the risks of a ‘no deal’ Brexit on April 12, though in order to delay Brexit beyond this still requires that the UK accepts it will be participating in EU elections in late May.  Wednesday (i.e. later tonight) should see a series of indicative votes on what form of Brexit members can live with, which may or may not (probably not) offer a way forward in terms of agreeing a deal that can mean the UK leaves the EU on May 22nd.  Assuming so, there’s also a possibility Theresa May brings her withdrawal agreement back to the Commons on Thursday, but (so far) lacking the support of the DUP, it stands little chance of gaining approval.

  • The RBNZ announces the results if it’s latest OCR review at the new time of 2pm NZT (12:00 AEDT).  We expect the RBNZ to maintain a reasonably balanced policy outlook, while keeping its cash rate at 1.75%. In our view, the RBNZ is likely to keep the cash rate steady for a good while yet as it monitors risks – both negative and positive – to the labour market and the trajectory for inflation. We don’t see a clear reason for the RBNZ to ease monetary policy, particularly when NZ wholesale rates have already shifted lower, alongside recent global moves.
  • RBA assistant Governor Chris Kent will be appearing on an “Ask Me Anything” session on FX with regulators at the FX Week conference in Sydney at 10:10 (the other panellist is from ASIC).  Doubtless far more scintillating will be a panel two hours later that yours truly will be moderating, on the “fate of the US dollar”.
  • China industrial profits are due at 12:30 AEDT.
  • The main interest offshore will be a succession of ECB speakers starting at 19:00 AEDT with President Draghi., and later chief economist peter Praet, VP de Guindos, and Governing Council member Yves Mersch and Villeroy de Galhau.
  • The Q4 Current account deficit is the main US economic event but not typically a market mover.

Market prices

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