April 18, 2016

Markets Today: No dice

Regardless of whether an agreement yesterday by major producers to freeze oil production would have had any meaningful impact on oil prices beyond the psychological boost it might have provided.

Regardless of whether an agreement yesterday by major producers to freeze oil production would have had any meaningful impact on oil prices beyond the psychological boost it might have provided, the failure of the Doha talks to agree anything serves to underscore the ongoing global supply/demand imbalance and which the fall-off in US shale oil output does little to correct.

Anticipation of a sharp drop in crude oil futures today (the CME Globex Sunday night session is about to begin) sees the CAD, AUD and NZD all smartly lower at the Wellington open, in that order (-1.0%, -0.8% and -0.4% respectively). If non-oil hard commodity prices follow oil down this morning, expect more weakness over the course of the day. And if the energy sector then leads US stocks lower tonight (and this was the worst performing sector on Friday) expect higher volatility (read VIX) to also come into play.

On Friday, markets weren’t put off too much by more poor incoming US data. It’s not clear whether this is because of the comfort it provides to risk markets that the Fed is not going to lifting rates again anytime soon, or because they are already looking forward to the likelihood of a much-improved second quarter (and with the seasonal tendency for Q1 to be the worse quarter of the US year increasingly appreciated).

US March industrial production fell by a bigger than expected 0.6% (-0.1%E). The Michigan April preliminary consumer sentiment index disappointed expectations for 92.0, dropping to 89.7 from 91.0P. Perhaps more troubling for the Fed, its 5-10yr inflation expectations reading fell to 2.5% from 2.7% (the 1-year read-out was unchanged at 2.7%). At least the Empire (NY) manufacturing survey came in strong, +9.5 from +0.62 and well above the 2.0 expected.

Also to note on the data front and sneaked out late Friday, China said that Q1 GDP was just 1.1% on a seasonally adjusted basis, well below the 1.5% expected and Q4 2015’s 1.5% (revised down from 1.6%).

US stocks closed very slightly weaker on Friday though the VIX was flat, the US dollar was a bit softer and Treasury yields were lower but still very much in the middle of the effective 1.6%-2.0% (10yr) range of the past two months. Oil slipped a little (+/- $1) in front of the (now failed) Doha meeting of major producers. Iron ore lost 1.85% or $1.10 to $58.28 while the LMEX index was 0.31% lower.

US dollar indices closed with the DXY -0.22% but a fairly cool 2.6% lower on the week. AUD closed in NY at 0.7725, +0.4% on the day but is 0.7670 now.  USD/JPY was 0.59% lower at Y108.76 at the NY close.  This pair has moved lower again in early trade, after G20 officials (most prominently US Treasury Secretary Jack Lew) made clear at G20/IMF gatherings beginning on Friday that they do not support BoJ intervention to try weakening the Yen. Anticipation of a ‘risk-off’ morning post the failed Doha talks also looks to be weighing. Note though that Friday’s CFTC data shows speculative yen longs on the IMM to have reached a record (or at last a post-1992 high) in the week ended last Tuesday.

In stocks on Friday, the S&P 500 was -0.1% at 2082.78, with the Dow and NASDAQ both -0.16%. Citi Group beat its $1.03 EPS street consensus at $1.10 (on deeper cost cuts than forecast) but the stock still finished -0.13%. Utilities (+0.66%) were the best performing S&P sector and energy shares (-1.26%) the worse. Financials finished -0.29% with Citi actually the least bad performer amongst the banks.

Coming Up

Oil prices looks should be centre stage today and for much of the week in what is otherwise a fairly uninspiring data and events calendar in the week ahead.

The key Australian and New Zealand events look like being firstly, today’s Q1 NZ CPI report, coming ahead of next Thursday’s RBNZ meeting and for which our BNZ colleagues are picking another 25-point cut to the OCR to 2%. Then on Tuesday we’ll get the minutes of the RBA’s 5 April Board meeting but hopefully more interesting, a speech from RBA Governor Glenn Stevens in New York later that evening (11:30pm AEST). There is as yet no title on the RBA’s website.

There is no data of particular note in either Australia or The United States, though for the latter there’ll be some interest in Tuesday’s housing starts, Wednesday’s existing home sales, and Thursday’s weekly jobless claims (after they fell to a 41-year low last week) and the Philadelphia Fed business outlook.


On global stock markets, the S&P 500 was -0.10%. Bond markets saw US 10-years -4.01bp to 1.75%. On commodity markets, Brent crude oil -1.69% to $43.1, gold+0.1% to $1,234, iron ore -1.9% to $58.28. AUD is at 0.7666 and the range since Friday local close has been 0.7594 to 0.7733.

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