China’s decision to reduce the required reserve ratio on major banks (-50bps) set the tone in yesterday’s Asian session and it helped the market look through a set of soft PMI throughout the region. Against this backdrop, European equities opened firmer and then a better than expected set of US data releases provided an additional boost to risk appetite, pushing equity indices higher on both side of the Atlantic.

Major European equity indices ended the day up between 0.9% and 2.3% and US equity indices look set to end the day between 2.0% and 2.7% higher. While US auto sales for February and construction spending for January beat expectations, the big data surprise overnight was the stronger than expected rebound in the ISM Manufacturing survey. The February reading saw a bigger rebound to 49.5 vs 48.5 exp. and although it remains in contractionary mode, this was a second consecutive monthly gain and it has certainly alleviated fears of a manufacturing recession. That being said, we would note that the improvement in the survey has occurred in an environment of softer USD and stable to higher oil prices. A reversal on either or both could well reignite downward pressures on the troubled sector.

In currencies, the risk on sentiment has relegated the Yen to the bottom of the leader board with the currency down 1.18% against the USD over the past 24 hrs. The improvement in sentiment has also provided a lift to commodity prices and as a result commodity related currencies have outperformed. The CAD is at the top of the leader board, up 1.01% with the NZD and AUD close second and third, up 0.52% and 0.49% respectively.

Looking at commodities, Brent and WTI oil are up 0.7% and 2.1% respectively. Iron ore gained 3.7% to $51.4, the CRB index is up 0.5% and gold is almost unchanged at $1230.5.

Not surprisingly, the risk on mood has pushed core global yields higher. 10y US Treasury yields are back above 1.80% for the first time since February 18 while in Europe 10y Bunds ended the day +4bps at 0.145% and 10y UK Gilts closed +6bps at 1.395%.

Looking at other data releases, European manufacturing PMI’s printed more or less in line with expectations, but the fall in the Eurozone unemployment rate to 10.3% from 10.4% was a welcomed surprise.

Ahead of the ECB meeting next week, in a letter to MEP Jonas Fernandez published overnight, ECB president Draghi increased the expectation of a significant stimulus package. In the letter Draghi noted that the ECB’s review of its stimulus measures “has to be seen against the background of increased downside risks to the earlier outlook” and “In this environment, euro-area inflation dynamics continue to be weaker than expected”.

Coming Up

This morning in Australia we get GDP growth figures for Q4-2015. Yesterday’s net export contribution to GDP was far weaker than expected (0.0% vs 0.3% exp), however the strong government spending in the quarter (1.6%) on the back of greater defence spending suggest the drag from soft net exports has somewhat been offset by public investment in defence.

Combining yesterday’s income and inventories figures along with last week’s investment numbers, NAB economists have pencilled a  0.6% q/q and 2.7% y/y Q4 GDP print. In their view, net exports and inventories present downside risks to the expenditure measure of GDP, however a better than expected terms of trade outcome and solid employment growth in Q4 provide upside risk to the income measure.

Looking at offshore markets it’s a pretty quiet day in terms of data releases. Europe prints January PPI figures and the UK releases its construction PMI for February.  Ahead of the all-important US non-farm payrolls report on Friday, tonight we get the ADP employment report. Despite the fact that the survey is highly affected by the previous non-farm payrolls report, it still has the ability to move the market. Current expectations are for a 188k print, however some commentators have noted that the pace of private job creation could have soften in February given the large number of job cuts announced by several household names, including Yahoo and Goldman Sachs amongst many others.

Tonight the Fed releases its Beige book, this report is a gathering of “anecdotal” evidence on current economic conditions by each Federal Reserve Bank and it will be interesting to see what extent the strength of the dollar and tightening of financial conditions is reflected in the survey.

Fed Williams speaks in LA and given his known close relationship with Chair Yellen, the market will no doubt be on the lookout for any new insights.

Overnight

On global stock markets, the S&P 500 was +2.00%. Bond markets saw US 10-years +8.50bp to 1.82%. On commodity markets, Brent crude oil +0.71% to $36.83, gold-0.3% to $1,231, iron ore +3.7% to $51.44. AUD is at 0.7175 and the range was 0.7109 to 0.7192.

Good Luck,

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• Markets Today: 2 March 2016 (PDF, 1MB)

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