December 8, 2016

Markets Today: I love the way you lie [GDP]?

Sterling was the worst performing G10 currency overnight, in part because of worst than expected industrial production figures.

Lies: lies, damned lies, and statistics so said Mark Twain and that other great modern-day philosopher Eminem (in collaboration with Rihanna) “I love the way you lie”. That’s certainly how markets have interpreted Australia’s GDP figures yesterday. Despite GDP growth coming in at -0.5% q/q (well below expectations of -0.1%) and being the lowest quarterly figure since the 2008 financial crisis, market reaction was mooted. Declines in the Aussie reversed and actually ended the day up 0.2% while the OIS market has only marginally extended pricing of RBA rate cuts by July/August next year to 30% (from 20% just prior to the release). While the headline decline was affected by one-offs such as weather affected construction, NAB does see some broad-based weakness which will prompt the RBA to reassess their forecasts for growth and inflation in 2017.

Internationally, there was broad-based optimism in anticipation of the ECB extending its asset purchase program tonight (more on that later). European equities surged, with the EuroStoxx up 1.3% and the FTSE up 1.8%. US equities performed similarly and reached a new record high of 2233, up 1.1% in a broad based rally. The exception to that being Health Care stocks which actually fell 0.9% following comments by US President-elect Trump that he is “going to bring down drug prices…I don’t like what’s happened with drug prices”. Co-incidentally, Time magazine named him its Man of the Year.

In the FX space, there was slight US dollar weakness down 0.25% across the board. The British Pound was the clear underperformer, down 0.5% following a very weak UK industrial production number. Industrial Production declined by 1.3% m/m, the weakest read in four years. Although a lot of the decline was due to a temporary shutdown of the Buzzard Oil Field in the North Sea, the read does serve as a reminder of likely weakness ahead once the formal Brexit mechanisms are activated – still likely to be in March 2017 according to Prime Minister May. In other political news, Italian PM Renzi has said he will step down on Wednesday and the Italian Senate approved the 2017 Budget.

For Australia, while a weak GDP figure might have been expected to have a long-lasting effect on the Aussie, this was not to be the case. The Aussie clawed back its losses following the release (initially down 0.6%) to end the day up 0.2%. Other currency moves broadly followed the movements in the US dollar with the Euro up 0.3% and the Kiwi a little better at +0.5%.

In a possible redux to the start of the year, China’s foreign reserves showed their largest monthly decline since January – down $69.1bn. Some of that relates to USD movements but the takeaway is that Chinese authorities have been selling down reserves in order to maintain a stabilising force on the Yuan from large capital outflows; note reserves currently stand at $3.1 trillion. NAB’s view is that recent capital control measures should be enough to avoid the panic of January when capital outflows surged and the CNY came under pressure. This will be crucial to monitor for the Aussie in the months ahead – if you recall the AUD/USD went sub $0.70 in the event.

As for rates, there was little data to react to. US Treasury yields fell 4 bps in a quiet session to 2.35%. Australia CGS fell 2.5 bps to 2.80%, with similar moves in Bunds which were down 2.6 bps to 0.35%. UK Gilts rallied a bit more, down 5.9 bps, likely helped by that weak industrial production read, and are at 1.36%.

In commodities, oil declined 2.2% to $49.81 a barrel (WTI measure). The oil market appears to be getting a reality check following the optimism of the OPEC production ceiling. Although OPEC hopes to get oil into a $55-60 a barrel range, non-OPEC producers are not part of the deal and OPEC has invited 14 non-OPEC countries to meet on 10 December. The most significant swing producer, US shale oil producers are not at the meeting, and given they have a breakeven production cost of $40-50 a barrel, the oil price is likely to remain in the $40-50 a range for some time.

Finally in central bank news. The Canada left rates on hold as expected. The Statement was neutral, but reinforced they are unlikely to follow the US in lifting rates any time soon. As we go to print the RBNZ Governor hit the wires in what our NZ colleagues characterise as a fairly upbeat speech and reinforcing the view that rates are on hold until mid-2018.

Coming Up

The big event coming up is the ECB meeting. Market focus will be on whether the current asset purchase program is extended beyond March and assuming an extension of the timeline any potential tapering of asset purchases in 2017. NAB’s view is an extension is guaranteed with the question on whether the extension is done at the same rate or a tapering of purchases occurs. There a number of issues here involved, including the scarcity of bonds which will need to be addressed.

Beyond the ECB meeting most focus will be on the trade figures being released by Japan, Australia and China. The pick will be the Australian and Chinese numbers, the former for how much impact the recent rise in commodity prices has, and the later for how momentum is going in the Chinese economy.

For the Australia’s trade figures, the market is expecting a deficit of $0.6bn (also where NAB is), well down from the $1.2bn deficit in October. For your scribe, the recent lift in commodity prices, in particular coal, presents upside risks with the prospect of Australia’s first trade surplus since March 2014 a very real possibility.

Other important data release today is the Eco Watchers survey in Japan.


On global stock markets, the S&P 500 was +0.95%. Bond markets saw US 10-years -4.14bp to 2.35%. In commodities, Brent crude oil -1.72% to $53, gold+0.6% to $1,175, iron ore +3.2% to $82.25, St. Coal -1.2% to $83.00, Met. Coal +0.0% to $285.00. AUD is at 0.7478 and the range since yesterday 5pm Sydney time is 0.742 to 0.7483.

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