Markets Today: May caves in, Trump takes sides and China woos Europe

Trump in Helsinki and the EU in Beijing didn’t really move markets but the dissent in the UK has weakened the pound.

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Today’s podcast:

Overview: There is no depression in New Zealand

  • Financial lead US stocks to small gains after BAML results; Netflix plunges 13% after-hours on big revenue miss
  • AUD flat vs. Friday’s NY close, USD dollar weaker elsewhere led by SEK, CHF and NZD
  • GBP reverses gains after May accepts Brexiteer amendments to Customs Bills
  • Oil down 4% on reports Saudi  offering more supply
  • Still nothing to see in US bonds
  • NZ Q2 CPI, RBA Minutes, Powell testimony all due

Good morning

My boss Peter Jolly made the front page of the AFR yesterday for his excellent analysis of the rise in short-end funding costs in the Australian money market, which NAB and BNZ clients will of course read avidly at the end of last week. As a result, I bestowed on him the honour of selecting a song title for today’s Markets Today missive and am hoping it isn’t going to make the front pages of tomorrow’s papers, for all the wrong reasons.

Peter’s a kiwi and reckons 50 people people will ‘get it’ – but whether that’s across the NAB/BNZ client base or the whole of New Zealand, I’m not quite sure.  Anyway, its NZ CPI day, so it somehow seems appropriate. Besides, unlike the Arctic Monkeys; who have managed to weave “Quantitative Easing” into the lyrics of their recently released (excellent) new album, Blam Blam Blam didn’t pen anything on stagflation back in the 1980s as best I know and which I might otherwise have used.

Equities

US stocks markets have just closed with small losses, at least for the S&P500 (-0.1%) and NASDAQ (-0.3%), though the Dow is up 0.2%. Sector wise, a surge in financials (1.8%) led what gains there have been in the indices, led by a 4.3% gain for BAML after its EPS of 64 cents came in above the top end of the range of analysts’ estimates and revenue was reported half a billion dollar more than consensus. JP Morgan and Citgroup, whose share prices both fell on Friday despite beating their street estimates on both profits and revenue, gained 4% and 3.7% today respectively. Goldman Sachs reports tonight.  Most other S&P500 sectors finished in the red.

Netflix has just reported (after the bell) with EPS of 85 cents against 79 cents expected but revenue some 10% less than expected at $3.097bn. The latter has seen its share price crunch 13% lower in after-market trade.

Bonds

It continues to be a case of ‘nothing to seer here’ as far as the 10-year segment of the US treasury market is concerned.  UST10s are again ending the New York session close to 2.85%, continuing to meander within an effective 2.83-2.87% range. 2-year USTs are up again though, by 1.6bps to 2.6% and meaning that the 2/10s curve is almost 2bps flatter on where we left it yesterday evening, though about 1bp steeper on Friday’s NY close.  Jay Powell’s Congressional testimony tonight will provide the next steer.

Currencies

The Australian Dollar is virtually flat on where it was at on Friday as New York closed at 0.7420, confined inside a 0.740-0.7450 range since the weekend. We did see a brief dip yesterday after the China Q2 GDP and June activity reading and where industrial production slipped to a 6.0% year-on-year growth rate from 6.8% in May and 6.5% expected, losses which were subsequently fully retraced. RBA Minutes this morning will be of some interest (see Coming Up below)

Elsewhere, the US dollar is weaker across the board, with the SEK the standout winner (+0.7%) followed by the CHF (0.5%) and NZD (+0.3%). The latter is largely just holding the gains seen during out time zone and which were chalked up despite a particularly soft NZ BNZ-Business NZ service sector PMI yesterday (52.8 down from 57.1 in May). The DXY dollar index is down 0.17% on Friday’s close.

GBP/USD lost half a cent (retracing an earlier half cent gain). This is after Theresa May accepted four amendments to the Customs Bill from her Conservative Brexiteer contingent.  It’s not an exaggeration to say UK politics is a shambles.  Only last week, the UK released its White Paper outlining what it wanted from a future trading relationship with the EU.  But amidst cabinet resignations and what was likely to have been a rebellion among Brexiteers to her bill, May has shifted stance already.  The key amendment she accepted was that the UK would not collect duties or VAT on behalf of the EU (one of the cornerstones of her “facilitated customs arrangement”) unless the EU reciprocated.  May claims the amendment is still consistent with the White Paper, but the view of the Brexiteers is that the EU would never agree to such a demand and that the proposal contained within the White Paper is now unworkable.

Commodities

Oil has been a big mover, down more than 4% on reports that Saudi Arabia is offering more supply to some Asian customers (following through on its pledge to increase production for OPEC) while speculation continues to swirl that the US is considering releasing barrels from its Strategic Petroleum Reserve ahead of the US mid-term elections.  This follows news last week that Libyan supply was set to resume after ports were re-opened.  Brent crude fell to its lowest level since April although it still remains up almost 7% this year.

Elsewhere there’s virtually no movement in precious metals while industrial metals are all lower bar aluminium (+1.2%) led by a 4% drop in zinc. The LMEX index is down 0.8%, bringing its loss since its 7th June year to date high to almost 15%.

Economics

US data was a mixed bag. Headline retail sales came in as expected at 0.5% but with core sales disappointed expectations but prior months were revised up. The Atlanta Fed GDPNow estimate of Q2 growth (released next week) rose from 4.1% to a very healthy 4.5% after the retail sales release, with the upward revisions dominating. The US Empire Manufacturing survey dipped to 22.6 from 25.0, better than the 21.0 expected though the detail was not so flash.

 Coming up

  • NZ CPI at 08:45 AEST: While New Zealand’s CPI release is always closely watched, there is an added interest, and nervousness, about this week’s one – Tuesday’s update for the June quarter. The median expectation of analysts is for an increase of 0.5%. This would lift annual CPI inflation to 1.6% from the 1.1% it dipped to in Q1. For comparison, the RBNZ’s May Monetary Policy Statement expected a quarterly increase of 0.4%, for 1.5% y/y. For the record, we anticipate 0.6% q/q, for annual CPI inflation of 1.7% (and on course for 2.2% by end-2018).
  • RBA Board minutes.  Focus this month is likely to be on any fuller discussion on the short-term funding pressures afflicting Australian short-term markets. Markets will also be alert to any RBA thoughts on how current trade tensions between the US and China might affect the Australian economy and RBA’s forecasts. And with the Bank this month dropping the phraseology that an appreciating currency would restrain economic growth and slow the return of inflation to target, we will scour the Minutes for any insight as to the rationale for this change.
  • Fed chair Jay Powell delivers his semi-annual testimony to Congress, tonight (mid-night AEST) to the Senate banking Committee, with a rerun before the House Financial services Committee on Wednesday.
  • Goldman Sachs and Johnson & Johnson are the biggest household names reporting Q2 earnings tonight

 Market prices

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