Today’s podcast

https://soundcloud.com/user-291029717/no-love-to-share-at-the-end-of-thanksgiving

Overview: Alive and kicking

• Oil slips up again and technical picture looks dire
• Another round of softer than expected EU PMIs challenges temporary growth slowdown theory
• USD stronger, winning the least ugly contest
• UST curve flattens led by the 5 and 10y part of the curve
• AUD and NZD lose ground on Friday and are amongst the biggest losers for the week
• Slower growth/demand concerns outweigh Saudi Arabia/OPEC potential compromise to cut oil production
• Early Black Friday reports suggest US consumer is in rude health. Cyber Monday now the focus
• EU leaders approve UK withdrawal agreement, now UK Parliament approval is the big test

It seems that there is still plenty of life in the good old greenback. Despite concerns over the US housing sector, volatile equity markets, tighter financial conditions and a potential blink by the Fed, the US continues to win the least ugly contest with other major economies showing a greater degree of sensitivity to trade tensions and economic growth slowdown. Softer EU preliminary November PMI’s on Friday have confirmed that the current slowdown is more than just a temporary auto driven story. In November EZ Business activity grew at its weakest rate in nearly four years and worryingly leading sub-indices suggest the slowdown still has some legs. The Markit EZ report revealed a slower order book growth and falling exports were accompanied by deteriorating optimism about the outlook, as well as rising costs and prices. Speculation on whether ECB guidance could turn dovish in December is now on the rise.  Meanwhile the oil slide continues with prices falling between 6% and 8%, prospects of an OPEC and friends’ production cuts have been overwhelmed by increasing global growth anxieties.

Currencies

Amid softer European activity readings and sharp declines in oil prices, the USD was the outperformer on Friday erasing some of the losses incurred earlier in the week. A Brexit resolution boosting GBP and EUR is one potential negative near term USD driver and after resolving the Gibraltar objections with Spain late Saturday, overnight PM May secured EU leaders approval for the deal, now the major obstacle remains UK Parliament approval. Weekend news suggests this remains either very difficult or not possible at this stage.

The narrow DXY index gained 0.21% and ended the week just below the 97 mark at 96.94. The broader BBDX index climbed 0.39%, closing the week at 1207.5 while ADXY (-0.12%) and EM FX (0.42%) also gave back some of their recent gains. European currencies were the big losers on the day with EUR (-0.58%) closing the week at 1.1337.

Unsurprisingly amid a softer commodity backdrop, wobbly equity market and disappointing EU activity readings, the AUD (-0.29%) and NZD (0.48%) traded with a softer tone on Friday. On the week both currencies lost ground against the USD, AUD ended the week at 0.7232, leaving the pair around the middle of its 0.7164-0.7338 range held since early November. Meanwhile NZD closed the week at 0.6782, so about one big figure from the 0.6884 high reached mid-month, but still about 3 and a half big figures above the lows reached mid in October.

Commodities

Oil remains the focus in commodities. News of a potential Opec and Friends production cut (see below for more) did little to stem the decline in prices ( Brent -6.07%, WTI -7.71%) with demand concerns dominating amid disappointing (EU) economic activity readings. WTI prices closed at $50.47, comfortably through the 50% retracement level of $51.47, now technical resistance for prices to trade into the high 40s looks pretty flimsy and once through, many will start pondering a move into the low $40s.

On the week oil prices are down between 10%-12%, iron ore closed 1.1% lower, but at $74.2 prices remain elevated.

Rates

UST Yields drifted lower on Friday with the 5 and 10y tenors leading the decline, flattening the curve. 10Y UST traded down to an intraday low of 3.03%, following the move lower in oil prices, before recovering somewhat to close the week at 3.04%. On the week 10y BTPS are the outperformers (-8.5bps to 3.40%) while all core yields drifted lower a few bps.

Equities

The Shanghai Comp was the big loser on Friday (-2.49%) with IT and communication sectors suffering the most. US equities closed mixed with minor gains (NASDAQ)/losses (S&P 500) amid light volumes suggesting a Thanksgiving hangover or a Friday holiday for many.

On the week, US equities were the distinct underperformers with DJ (-4.4%), NASDAQ (-4.26%) and S&P500 (-3.79%) at the bottom of the pile.

Central Bank/Political Speak

• The WSJ reports that President Trump has expressed dissatisfaction with Treasury Secretary Steven Mnuchin, blaming him for the appointment of a Federal Reserve chairman who has been raising interest rates, a move Mr. Trump worries will jeopardize economic gains as his 2020 re-election campaign approaches.
• In a media brief in Beijing, China’s Vice Minister of Commerce Wang Shouwen said China “hopes the Xi-Trump meeting goes smoothly,” adding that “Chinese and U.S. trade teams have been in close touch”.
• Arlene Foster, the DUP leader, said the DUP’s agreement of confidence and supply with the UK Conservative party would have to be revisited if Theresa May’s Brexit deal passes through parliament. “If this is not going to deliver on Brexit then of course that brings us to the situation of looking again at the confidence and supply deal. “But we are not there yet,” she said.
• According to a WSJ report, Saudi Arabia and OPEC are considering “A production cut that doesn’t look like a production cut”. The idea would be to announce plans to retain current output targets, first set in 2016 meaning Saudi Arabia is overproducing by nearly 1m b/.
• The Labor Party has emphatically won the Victorian state election and looks set to secure at least 60 seats out 88.

Economics/data

• French Manufacturing PMI at 50.7 against expectations of 51.2. Goods producers reported weakness in auto demand, while there were also mentions of competitive pressures and lower client investment.
• German Manufacturing PMI weaker at 51.6 against expectations of 52.2. The report notes that weakness in external markets are acting as a restraining factor with reports of falling sales to China, Italy and Turkey. So a bit of EM weakness spillover and also Italy specific dragging on Germany.
• EZ Manufacturing PMI softer than expected at 51.5 against 52 expected. The slowdown in new business inflows is a big driver, which is now the lowest since the start of 2015. Manufacturers are citing subdued global demand, rising political and economic uncertainty, trade wars and especially sluggish car sales. Services PMI also softer falling to 53.1 from 53.7 against expectations for a 53.6 outcome (Markit report)
• Canada October CPI revealed the Headline reading beat expectations coming at 2.4%yoy vs expectations of a 2.2% print. Core CPI was in line with expectations but there was a downward revision to the prior month. Core Trim at 2.1% as expected, prior month now 2.0% from 2.1%
• Canada September Retail Sales slightly higher than expected printing at 0.2%mom vs 0.1% f’cast, -0.1% prev, 0.0% rvsd
• US November Markit prelim services PMI 54.4 vs 55.0 expected, 55.7 prev.. Details revealed services sector employment index at 52.8 vs 53.4 prior – lowest since June 2017

Week ahead

Ahead of the G20 Trump-XI meeting next weekend, Australia’s GDP partials will be of interest for the AUD, both  RBA Governor Lowe and Assistant Governor Kent speak on Monday, with Kent’s speech on ‘Securitisation and the Housing Market’ likely to be of more market interest. A solid NZ Q3 retail sales report on Monday should be NZD supportive with the focus shifting to RBNZ Financial Stability Report and RBNZ speakers on Wednesday. That said, both antipodean currencies are likely to remain very sensitive to global themes, the G20 Trump-Xi meeting is now within sight and sound bites backing a temporary cease fire, should be supportive, but if the AUD and NZD are to test recent range highs, at a minimum we need to see an end to the current decline in oil prices and here the technical picture does not look encouraging.

• German IFO survery and ECB Draghi appearance before EU Parliament are the offshore highlights today.
• Week ahead: Packed with important events and data releases culminating with the G20 Trump-Xi meeting.
  • AU/NZ – AU CapEx, Work Done, Credit, Lowe and Kent speeches; NZ retail sales
  • Offshore: FOMC minutes, Powell speaks; CH PMI; Brexit negotiations; EZ CPI, Trump-Xi meeting and the other G20 Oil meetings (Russia, Saudi Arabia US)

See our What to Watch for more details

Market prices

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets