Markets Today: I’m waiting for the man

It has been a quiet start to the week in the Northern Hemisphere, but of note the USD is slightly stronger across the board and commodities also had a good night.

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Higher UST yields have contributed to the USD outperformance and US equities managed to eke out another day of positive returns boosted by financial and energy shares. Meanwhile, whether Winston Peters is a fan of the Velvet Underground we will probably never know (my guess is that he is not), but New Zealand is still waiting for the man.

USD indices have now completely reversed Friday’s CPI decline with DXY comfortably trading back above the 93 mark (DXY +0.25% and BBDXY +0.33%). The USD has been supported by a combination of factors: concerns over NAFTA negotiations have weighed on CAD (-0.38%) and MXN (-0.77%), reports of a breakdown in UK-EU Brexit negotiations has ended  GBP’s five day winning streak (-0.38%) and after failing to clarify Catalonia’s position, Catalonia’s president, Carles Puigdemont, now has until Thursday  to back down, alternatively the Spanish government will move ahead with the process of suspending self-rule. The latest development has weighed on the euro (-0.23%) and Spanish equities (IBEX 35, -0.75%).

Somewhat puzzling, the AUD is the worst G10 performing currency over the past 24hrs, down 0.46% and currently trading at 0.7846. AUD underperformance has occurred despite the fact that risk sentiment has remained buoyant (VIX Index is below the 10 mark) and commodities had a decent night. One factor that could explain some of the AUD underperformance could be linked to the AU-US spread differentials. The 10y spread widened on Friday immediately after the soft US CPI print, but since then it has been on a steady narrowing trend, currently trading around 50.5bps, about 3 bps tighter relative to Friday’s peak.

Oil and copper are the stand out performers in the commodity space. The rise in WTI (0.8%) and Brent (+1.2%) has been associated with supply concerns amid rising tensions between Iraqi forces and Kurds. Meanwhile Copper rose above the $7000m/t mark and jumped 3.8% on the back of stronger than expected PPI figures from China. Nickel (+1.7%) and iron ore (0.7%) also had a good night, but soft commodities underperformed with wheat, sugar, cotton and coffee all down on the day.

10y US Treasury yields are currently trading just under the 2.30% mark after briefly trading above the figure overnight. Relative to Friday’s close 10y UST yields are up 2bps to 2.995% and the US 2-year rate closed up by 3bps to 1.525%. Price action in US Treasuries has been a little bit choppy amid speculative reports over the prospects for different Fed Chair candidates. Reports that John Taylor made a favourable impression on Trump saw UST yields trade higher, but then news that Trump will meet current Fed Chair Yanet Yellen later this week weighed on 10y UST yields later in the day. Another factor playing into the higher UST yields theme overnight could be linked to Fed Chair Yellen’s comments on Sunday that implied the weak inflation result hadn’t changed her expectation of inflation picking up or policy outlook.

Coming Up

We have a pretty full calendar today with important data releases and events during our time zone as well as in Europe and the US. New Zealand’s Q3 Inflation report is the first cab off the rank followed by the RBA Minutes from the October meeting. Also this morning, RBA Ellis speaks in a panel at an investment conference and Australia gets motor vehicles sales and weekly consumer confidence reading.

Inflation data are also due out in the UK (Sep) and Europe (Sep, second reading) and around the same time Governor Carney testifies before UK lawmakers and ECB Constancio speaks in Lisbon. The ZEW survey is out in Germany and later this evening the US gets industrial production (Sep), NAHB Housing Index and Fed Harker speaks on equitable transit.

Our BNZ colleagues expect the inflation report should print a quarterly gain of 0.4% marginally below the 0.5% expected by consensus. Either way the yoy reading should climb to 1.9% or 1.8%, higher than the RBNZ’s estimate of 1.6%.  Inflation is running stronger than the Bank projected in August and this is probably largely due to higher oil and food prices. that said, we need to see core inflation measures move a lot higher to get the RBNZ’s attention, which will likely take more time.

As for the RBA Minutes we think the text is likely to reflect a positive assessment of both global and domestic economies, but also note that low domestic wages and price inflation are still prevalent.

Lastly with the US earnings reporting season well underway Morgan Stanley, Goldman Sachs and IBM are on the roster today.

Overnight

On global stock markets, the S&P 500 was +0.10%. Bond markets saw US 10-years +3.04bp to 2.30%. In commodities, Brent crude oil +1.17% to $57.84, gold-0.3% to $1,298, iron ore +0.7% to $62.94, steam coal +0.4% to $96.15, met. coal +0.0% to $181.50. AUD is at 0.7851 and the range since yesterday 5pm Sydney time is 0.7849 to 0.789.

Good luck.

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