November 26, 2015

Markets Today: It’s all relative

It’s 100 years ago today that Albert Einstein formally presented the results of his eight year study into gravity – the general theory of relativity. Good on you Albert.

It’s 100 years ago today that Albert Einstein formally presented the results of his eight year study into gravity – the general theory of relativity.  Good on you Albert.

Meanwhile in the marginally less complex world of financial markets, the relativities of Fed and ECB policy dispositions remain a key driver. EUR/USD has made a new post-March 2015 low at 1.0566 and the 2yr benchmark German bond yields a new record low of -0.424% (down some 4bps).  The proximate cause has been a Reuters report suggesting that the ECB is looking at a tiered system for the negative deposit rate(s) to be charged to banks posting excess cash at the central bank. This is interpreted as implying that that the headline Deposit Rate could be cut beyond -0.3% (from -0.2% currently) and which is the current consensus view.

The dollar, as measured by the euro-centric DXY index (the euro has a 57.6% weight) has spent time back above 100.0 for the first time since March, though has since slipped back to be only 0.3% higher on the day. We’ve had a cart load of US economic data, concertinaed into Wednesday ahead of today’s Thanksgiving holiday, and which while mixed has overall proved dollar supportive and prevented US yields from being pulled down by the across-the-curve declines in Eurozone yields.  US stock meanwhile look like heading into Thanksgiving with very small gains.

The data highlights have included some disappointment that October personal spending – in both real and nominal terms – fell short of the 0.2% expected outcomes at 0.1% for both, with the PCE deflators (whether headline or core) also  1/10% lower than expected  (headline is just 0.2% y/y, and core +1.3% – the latter unchanged from September). The final University of Michigan consumer Sentiment Index also disappointed, slipping to 91.3 from the 93.1 preliminary. In contrast, October durable goods orders posted a strong 3% gain (+1.4% expected) with capital goods orders excluding the lumpy defence and aircraft sub-components +1.3% against +0.2% expected. October New Home Sales meanwhile  jumped 10.7% on the month, stronger than expected but only because of a big downward revision to September (now -12.9%). The level of new homes sales 495k was just beneath the 500k consensus.  Markit’s version of US services PMI rose to 56.5 from 54.8 – better than the 55.1 expected, while jobless claims fell to 260k from 272k.

RBA assistant governor Guy Debelle spoke in London overnight, but on benchmarks and the Conduct -0 pretty much a rehash of his speech to the Bloomberg Summit last week. Best we can see there was no Q&A.

As for the AUD, it failed to hold its Sydney-day gains overnight, losing about 30 points to 0.7253. Yesterday’s local gains came in part on suspicions of M&A support for the AUD following news that the winning bidder for the NSW Trans-Grid power sell-off has a 65% offshore component.  Iron ore prices meanwhile – and where Tuesday’s plunge to new 9-year lows went ignored by the FX market – have stabilised overnight around $44.0.

Coming Up

Being Thanksgiving today and the US effectively out for the rest of the week, and little to note in Europe tonight, Asia-Pacific markets look like being left to their own devices.

The local (known) highlight Thursday is undoubtedly the Q3 Capex survey. This provides an estimate of capital expenditure for the September quarter but perhaps more importantly an updated estimate of planned capital expenditure for the year ahead.

With mining investment unwinding and non-mining investment still relatively subdued, NAB forecasts Q3 capital expenditure in total will decline by 4.0% q/q. Our figure is slightly weaker than the market consensus of -2.9%, but we feel this is justified given the extent of the mining unwind now occurring.

For the Capex survey for planned capital expenditure for 2015/16, we look for a fourth estimate of $124bn, down from the fourth estimate last year of $152bn. The market consensus is for a smaller figure of $120bn.

Adjusting our estimate of 2015-16 spend by its historical realisation ratio, results in a similar pace of decline to what was flagged in the last release – namely a 17% decline in nominal investment for 2015-16, driven by a 32% decline in mining investment, while non-mining investment is expected to improve from the last survey, but still show a small decline


On global stock markets, the S&P 500 was +0.10%. Bond markets saw US 10-years -0.71bp to 2.23%. On commodity markets, Brent crude oil -0.26% to $46, gold-0.4% to $1,070, iron ore +0.4% to $44.07. AUD is at 0.7252 and the range was 0.7227 to 0.7283.

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