February 10, 2016

Markets Today: It must have been supply

When the IEA released its monthly report last month, it caused quite a flurry warning “the oil market could drown in over-supply”.

When the IEA released its monthly report last month, it caused quite a flurry warning “the oil market could drown in over-supply”.  More of the same last night in essence with estimates of continuing stockpile builds, higher OPEC output in Jan cf Dec and trimming oil demand estimates. In essence, the fundamentals continue to weigh on prices, and that’s pretty much what happened on the market last night with WIT trading with a $28 handle this morning with Brent below $31/bbl.  European banks came in for more selling, with the E600 Banks index down a cool 3.97% and the wider E600 index off 1.58%, setting the tone for the US market.  S&P 500 US energy stocks are down 2.45% into the last hour of trade with the wider market currently tracking toward a net gain for the session.

The US Small Business Optimism eased further in January to the lowest in two years but JOLTs Job Openings (something Yellen tracks) revealed more hirings (positive labour demand) and increased job quitters, a sign of confidence in the ability to get other work.  On the other side of the Atlantic, German Industrial production surprised on the low side in December.  Any signs of industrial sector weakness will not be lost on the ECB; French ECB Governing Council Member Villeroy on the wires overnight implicitly talking prospects of more ECB action saying that it’s too risky to give in to deflationary forces.

For Euro-zone deflation risk, the further weakness in oil prices is being compounded right now by the rebound in the Euro in this “risk-off” environment, trading up toward 1.13 in the overnight session.  Similarly, USD/JPY is trading below 115 this morning in what’s been a seven big figure range in the past 10 days.  The Nikkei and Topix were crushed by 5½% yesterday.  There has also been buying of the Swiss Franc, notwithstanding the SNB’s Jordan saying the central bank is not yet at the rock bottom on deposit rates and that the Franc is overvalued.  (Of course, for all three, the drop in oil will, in time, have a positive economic growth/income benefit, through a higher terms of trade.)

It’s been an interesting whipsaw session for commodity currencies that were initially sold lower as has been the case in like commodity/oil sell downs but recovered later in the session.  The AUD traded below 0.70, but is sitting back at around 0.7055/60 as this goes to print.

Bloomberg headlines also cited seeing an EU/G20 planning document that among other things called for more use of fiscal policy, presumably also to reassure markets given Yellen tonight is not going to be over-blowing downside risks.

Coming Up

First up this morning we have the NZ card spending data, followed by the monthly Westpac consumer sentiment index for February (another smallish hit from market volatility?), followed by HIA new home sales for December (sales have been more sluggish through late 2015, especially for apartments), and NAB’s Commercial Property survey for the December quarter, the market sensitive a very handy reading on non-residential property sentiment and conditions across sectors and the country.

It’s still the Lunar Year celebrations, so it’s all aboard the Yellen train with the first of her two part Congressional testimony (House tonight), kicking off at 2 AM.  San Francisco Fed President John Williams’ also speaks, later.

We imagine that she will be, as usual, very careful with the words that she selects, noting that there are various uncertainties and risks around the outlook for the US and global economy that have been generally accumulating this year.  Even so, this writer expects her to note that while the momentum of the US economy slowed late last year, she remains cautiously optimistic about prospects for US economic growth, of some further gradual improvement in the labour market together with the likelihood that US consumer inflation will move towards 2%, the Fed’s target.

The market knows that she is taking guidance from the flow of hard economic data (and certainly not overreacting to market volatility on a daily basis) and not wanting to scuttle market sentiment, a difficult balance.  One aspect of recent financial market volatility that the Fed will be watching closely is some tightening in US financial conditions (a higher US dollar and increased credit spreads) that could impinge on economic growth prospects.  The bottom line is that she will not wish to lock the Fed in or out of any particular policy options, and thus there will be something in the testimony and the following Q&A session for those looking for a fed worried about the outlook and those expecting more monetary tightening this year, NAB’s view.


On global stock markets, the S&P 500 was +0.40%. Bond markets saw US 10-years -1.72bp to 1.73%. On commodity markets, Brent crude oil -6.63% to $30.71, gold-0.7% to $1,190, iron ore closed. AUD is at 0.7058 and the range was 0.6974 to 0.7096.

Good luck.

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