October 25, 2016

Markets Today: Merger Monday

While European markets started the week in a lethargic mood, trading sideways for most of the day, US stocks opened higher following a series of merger announcements with the market also getting a boost from better than expected earnings reports.

While European markets started the week in a lethargic mood, trading sideways for most of the day, US stocks opened higher following a series of merger announcements with the market also getting a boost from better than expected earnings reports. In currencies, the USD is stronger across the board amid an improvement in risk appetite and better than expected data releases. These factors also contributed to a steeping in the US Treasury curve with the move led by longer dated bonds.

US equities look set to end the day up between 0.4% – 1% after Rockwell Collins Inc. said it would buy B/E Aerospace for $6.4bn and TD Ameritrade will acquire Scottrade’s brokerage operations. Meanwhile both AT&T and Time Warner shares slipped around 2% amid scepticism from investors on the benefits from a vertical integration and growing objections by politicians. T-Mobile US Inc. jumped on better than estimated results.

As for data releases we have had a good start to the week with better than expected preliminary PMI readings across the board. Yesterday Japan’s PMI rose for a second successive month, Germany overturned the pullback seen in September with its manufacturing index climbing to 55.1 from 54.4 previously. The Eurozone composite PMI also climbed in October and in the US the Markit Manufacturing PMI recorded its highest reading in a year, climbing to 53.2 in October from 51.5 previously.

The positive start to the US equity market and better than expected US data releases has seen the USD perform against all G10 currencies. NZD and JPY are at the bottom of the pile, down 0.43% and 0.41% respectively.  The CAD is down 0.4% with news that Canada’s EU trade deal is on the verge of collapsing probably a factor at play. After seven years of negotiations, the overdrawn affair was already raising concerns over the EU’s ability to strike a trade deal and it is an ominous sign of the difficulties the U.K. faces if it wants to negotiate a post Brexit trade deal with the EU. After trading to an overnight high of 0.7641, the AUD is now flirting with a move sub 76c amid a stronger USD and steady commodity prices.

We had quite a few Fed speakers overnight and the general message appears to be that there is a growing consensus amongst officials that a December hike looks more likely than not. Fed voter and dove Bullard says there is no urgency to raise rates, but December is ‘most likely’. Fed Evans (dove and voter next year) said that “we need to get the level of the federal funds rate up to a sustainable level as soon as the economy will allow it”. Evans thinks the Fed will need to hike three times between now and the end of next year

Coming Up

We have a light day of mostly second tier data releases with the ANZ Roy Morgan Australian Weekly Consumer Confidence Index kicking off proceedings for the day. Last week Australia’s monthly consumer confidence reading rose 1.1% and both the weekly and monthly surveys have been trending higher since the second half of last year. Although the weekly reading can be quite volatile it will be interesting to see if the upward trend remains intact.

German IFO survey is the data highlight in Europe. In September the expectations index jumped to 104.64 from 100 in the previous month. Recent German data releases have been quite healthy (including last night preliminary PMI reading for October) suggesting another solid IFO print should be in the offing. BoE Governor Carney will be speaking to the House of Lords Economic Committee and ECB President speaks in Berlin

There are quite a lot of US data releases, but none are likely to trouble the scorers. For choice, however, the Conference Board Consumer Confidence reading should be worth a look. The market is expecting the headline index to drop to 101 in October from 104 previously.  Hurricane Matthews early in the month had a big impact in economic activity and as a result a dampening effect in consumer confidence is also expected.

The Richmond manufacturing index is also due out along with FHFA and S&P Corelogic house price indices. Fed Lockhart (non-voter) is the last Fed speaker before we enter the pre FOMC hiatus ahead of the 3 November meeting.  Lockhart’s speech is on community development so on paper we are unlikely to get any monetary policy comments. That said, Lockhart will be stepping down from the Atlanta Fed presidency in February, so he might take the opportunity to share his economic and policy views nonetheless. Finally, is a busy day of US earnings reports with Apple heading the list which includes AT&T and Fiat-Chrysler.


On global stock markets, the S&P 500 was +0.43%. Bond markets saw US 10-years +2.65bp to 1.76%. In commodities, Brent crude oil -0.75% to $51.53, gold-0.3% to $1,262, iron ore +1.0% to $59.28. AUD is at 0.7602 and the range since yesterday 5pm Sydney time is 0.7596 to 0.7641.

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