After what has been a solid month for equities and bond investors, month end flows have probably play their part in the price action overnight, US equities have lost momentum, UST have led a rise in core global bond yields and the USD is stronger. US and European inflation releases favoured the notion the Fed and ECB are done with their respective tightening cycles.
Markets Today: In Monetary Policy We Trust
Friday’s sharp improvement in global risk sentiment sparked by the Bank of Japan’s largely unexpected decision to join the ECB, Danish and Swiss National Banks
Friday’s sharp improvement in global risk sentiment sparked by the Bank of Japan’s largely unexpected decision to join the ECB, Danish and Swiss National Banks and Sweden’s Riksbank, in taking interest rates into negative territory, extended throughout the western hemisphere sessions.
Yields fell in every major bond market alongside 2%+ bounces in all major bourses. So it was the spectre of more monetary accommodation globally (or in the case of the Fed, ‘lower for longer’), rather that safe-haven considerations, driving price action across asset classes. Another (modest) rise in oil prices played with the grain (Russia still making overtures about production cuts alongside OPEC), while gold’s further rise ($3 to $1118) is more reflective of the further fall in the opportunity cost of owning a yield-less asset than a symptom of risk aversion.
In currencies, DXY (+1%) outperformed broader dollar indices thanks to the former’s higher (13.6%) weighting for the yen and also the 1% drop in EUR/USD and which carried a 57.6% weight. DXY +1.04% to 99.61 (its highest level of the year to date). BBDXY +0.62% while Asia EM index (ADXY) actually rose by 0.15%, the improvement in risk sentiment engendered by the BoJ outweighing contagion effects from the weaker yen.
USD/JPY ended in NY +1.92% at Y121.14, having been as high as 121.66 mid-afternoon London time. EUR/USD -1.0% to 1.0831 with confidence in more monetary accommodation from the ECB on 10 March bolstered by the BoJ’s actions. AUD ended flat on the day at 0.7084 (so no evidence of strongly skewed month-end hedge adjustment flows) and NZD +0.06% at 0.6484.
In equities, after the Nikkei closed 2.8% higher (and +3.3% on the week) the S&P and Dow both rose by 2.5%, reducing January’s overall loses to 5.1% (S&P) and 5.5% (Dow). The NASDAQ +2.4% for -7.9% YTD, Eurostoxx 50 +2.2% and the German Dax +1.6%. The VIX lost 2.2 to 20.2.
In US Treasuries, 2s fell by 4.35bps to 0.7737% and 10s by 5.8bps to 1.92%. 10yr Bunds earlier finished a full 10bps lower at 0.32% and UK gilts an even bigger 11bps to 1.557% with Short Sterling contracts now pricing for some 10bp of cuts from the BoE by the summer.
Commodities saw Brent crude +$0.85 to $34.74 and WTI +$0.52 to $33.74. The LMEX index added 1.06% while iron ore lost $0.20 to $41.72.
On the data front, US Q4 GDP came in at 0.7%, just beneath the 0.8% consensus – the latter one that had been continually lowered in the days leading up to the release and so limiting market disappointment. Somewhat encouragingly, consumption expenditure rose by 2.2%.
Another big week ahead, beginning with the official China PMIs today as well as the Caixin manufacturing version. China’s January FX reserves data should come later in the week, ahead of the Chinese New Year holidays that run from 8-12 Feb. A much smaller fall that December (some $150bn after adjusting for FX valuation effects) will likely be supportive of risk sentiment (or another outsized fall the opposite).
The US calendar is book-ended by manufacturing ISM tonight and payrolls on Friday. Nothing due out of Japan but after Friday’s BoJ news, Japanese stock watching will be a popular (global) pass-time.
Australia has the RBA board meeting Tuesday and Monetary Policy Statement Friday. The full suite of early month of data releases beckons retail sales Friday, trade and building approvals Wednesday the most market sensitive.
In NZ RBNZ Governor Wheeler speaks Wednesday and the RBNZ’s McDermott on Thursday; Q4 labour market report Wednesday; ANZ commodity price index Tuesday with the dairy auction that night.
Google reports its earnings tonight and Exxon Mobil tomorrow.
On global stock markets, the S&P 500 was +2.50%. Bond markets saw US 10-years -5.75bp to 1.92%. On commodity markets, Brent crude oil +3.42% to $35.99, gold +0.1% to $1,116, iron ore -0.5% to $41.72. AUD is at 0.7084 and the range since Friday’s local close was 0.7060 to 0.7140.
- The final University of Michigan’s final January consumer sentiment index fell back to 92.0 from the 93.3 preliminary and 93.0 expected.
- EZ January CPI +0.4% up from 0.2% in December and as expected with the core HICP measure rising to 1.0% from 0.9% (0.9% expected).
- A wholly unbelievable surge in the Chicago PMI (55.6 from 42.9 and 45.3 expected). Safely ignored, though outsized rises (and falls) have often seen the subsequent nationwide manufacturing ISM index more modestly exceed (or fall short of) expectations.
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