May 8, 2017

Markets Today: “Let’s Love France”

There wasn’t a whole lot of market movement on Friday in the wake of the April US employment report showing a 211k rise in non-farm payrolls and a drop in the unemployment rate to 4.4% from 4.5%.

My stock of suitable French song title being almost non-existent, we’ll go with newly elected French President Emmanuel Macron’s rallying cry, after confirmation of his victory (or rather acknowledgement of defeat by his opponent Marine Le Pen) within just 15 minutes or so after the polls closed. Besides, maybe it’s a future Eurovision song contest winner, next year if not later this month.

Exit polls put the vote at 65/35% in Macron’s favour, though incoming Interior Ministry figures are currently more like 61/39% (though if you recall two weeks ago, Macron’s final showing proved to be better than earlier official counting suggested). Market reaction so far has been muted, though EUR/USD has pushed clean above 1.10 (high of 1.1023) for the first time since November 8th 2016 (so exactly six months ago), having just kissed 1.10 late on Friday to close in New York at 1.0998.

The question now is whether real money investors, hesitant to commit more to Eurozone assets ‘just in case’, will now do so with more gusto. If the euro is to move higher they will need to, in so far as last Friday’s FX futures market positioning data from the CFTC showed the previous net short position in EUR/USD all but eliminated last week. We do expect that the Euro can grind higher in coming weeks and months (NAB FX Strategy’s year-end target is 1.13) partly in anticipation of the ECB now expressing more confidence that downside risks to the Eurozone economy and inflation have further receded. We’ll hear from Mr. Draghi later in the week (he speaks to the Dutch parliament on Wednesday).

There wasn’t a whole lot of market movement on Friday in the wake of the April US employment report showing a 211k rise in non-farm payrolls and a drop in the unemployment rate to 4.4% from 4.5% (back to the levels of late 2006/early 2007 and last lower way back in May2001). Market impact was neutralised by average hourly growth down to 2.5% (back to where it was in August 2016) thanks to downward revisions to prior months. Market-implied odds on a June rate rise lifted slightly (to around 75% from 70%).  Bearing in mind Fed Vice-chair Stan Fischer has spoken of the desire to see wages growth of at least 3% to be consistent with the inflation target and with two CPI reports and another payrolls/earnings report to be seen before the Fed hands down their next decision, markets are understandably hesitant in pushing pricing much closer to 100% for June.

None of the various Fed speakers on Friday offered up their views on June, but several of them expressed their enthusiasm to start shrinking the balance sheet before the end of the year. The biggest story of the week turned out to be commodity prices, where another fall for iron ore on Friday means it is down 10% on the week. Oil’s minor bounce Friday still leaves crude 5-6% lower and gold is off over $40 or 3.3% on a week ago. This proved much more negative for AUD than other commodity currencies, though AUD/USD did manage to pull back up through 0.74 on Friday to close the week -0.9% at 0.7424, well up on its 0.7368 intra-day low. This was aided by a small bounce back in oil, and the Dalian iron ore futures price jumping by about 3% in the Friday night session.

Stock markets went out on Friday with the S&P500 +0.41% to 2399.29 – a new record closing high and 0.6% higher on the week. The Dow ended +0.26% and the NASDAQ +0.42%. The VIX added 0.11 to 10.57 but is still down by a quarter point or 2.3% on the week. Earlier the Eurostoxx 50 gained 0.85% to be 2.8% on the week, continuing its impressive run since the results of the first round of the French elections (now +6.4%), with the likelihood being that these gains extent when Europe come in later today.

In US rates markets, 2 year Treasuries finished 0.4bp higher at 1.312% and 4.8bps up on the week and the 10-year -0.5bp to 2.35% (+6.9bps on the week). The 10yr Bund added another 2.4bps to 0.418% to be 10.1bps higher on a week ago. Here, the risk is that Bunds yields continue rising while French yields fall, alongside euro-peripheral bond markets. Residual Eurozone political risk now lies largely with Italy, but that should not be until next year.

Coming Up

With the French election out of the way and US payrolls not moving the dial significantly on June Fed tightening risk, there will be a bit more of domestic flavour to Australian markets this week, courtesy of the NAB business survey today and the Budget tomorrow (NAB survey bought forward a day because of that) and on the data front, building approvals today and retail sales tomorrow. See out What to Watch publication for a full run-down on the Budget and data, though on building approvals today the market looks for a fall of 4% (NAB 2%) as partial payback for last month’s 8.3% jump.

Also of interest to Australian markets will be today’s Chinese April trade figures, which should be a clean read after the Lunar new year distortions in February and March, and then later in the week PPI and CPI.  US CPI and retail sales, both on Thursday, are the US highlights, along with a whole host of additional Fed speakers (none of whom said much on rates on Friday). The language surrounding what will be an unchanged RBNZ decision on Thursday. Commodities are bound to remain a key focus as well


On global stock markets, the S&P 500 was +0.41%. Bond markets saw US 10-years -0.54bp to 2.35%. In commodities, Brent crude oil +1.49% to $49.1, gold-0.1% to $1,227, iron ore -5.3% to $61.73, steam coal +0.0% to $78.00, met.coal -0.6% to $174.50. AUD is at 0.7414 and the range since Friday 5pm Sydney time is 0.7368 to 0.7437.

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