October 20, 2016

Markets Today: O Canada!

The revelation by Bank of Canada Governor Stephen Poloz following an as-expected unchanged monetary policy decision that the Bank ‘had actively discussed the possibility’ of further monetary policy easing at Wednesday’s meeting.

Resorting to national anthems this morning which is admittedly pretty lame, though a glance at the intra-day (night) chart of the Canadian dollar offers some justification.  In fact most of this volatility in the currency related not to the oil price – where WTI crude has punched up to its highest level since July 2015 (see below) – but the revelation by Bank of Canada Governor Stephen Poloz following an as-expected unchanged monetary policy decision that the Bank ‘had actively discussed the possibility’ of further monetary policy easing at Wednesday’s meeting. This was despite earlier describing the risks to the inflation outlook as ‘roughly balanced’. That headline  immediately reversed the earlier drop in USD/CAD from above 1.31 to within kissing distance of 1.30 and which had been the knee-jerk response to the BoC ‘no change’ decision.

Sandwiched within this highly volatile two hour period was the news that US crude oil inventories fell by 5.25mn barrels last week according to the EIA, sharply at odds with an expected build of about 2mn barrels. This news came a couple of hours after Saudi Arabia’s Minister of Energy and Industry Khalid Al-Falih said ‘many’ nations are willing to join OPEC in cutting production to secure a continued improvement in oil prices.  He said negotiations will continue until the scheduled 30 November OPEC meeting. The net result of all this is that WTI crude has added more than 2% to its recent rally (to $51.44) and Brent crude 1.7% up to $52.56 as we write.

US energy stocks are loving the oil price news, and together with a boost to financial stocks after Morgan Stanley became the latest US bank to comfortable beat its own earnings and revenue guidance, means that the S&P 500 is closing with gains of about 0.25%.  Post close, Amex has just reported and comfortably beat its earnings estimate ($1.24 vs. $0.96 expected). US bonds yields have also edged higher on oil though the yield rally has been pared to less than one basis point at 10 years in afternoon NY trade.

Closer to home, the other thing to note is of course that the AUD/USD rate now trades back clean above 77 cents, recording a high of 0.7729 soon after the London close.  Given the oil price news, you’d think that CAD and NOK would have easily outpaced AUD (and NZD) but not so in part given the BoC news. Also to note is the FT saying that a government appointed committee has recommended that Norway’s state oil fund should now invest 70% of its assets in equities, up from 60% currently.

The small pull- back in the AUD is early APAC trade appears to owe something to the front page report in The Australian newspaper by David Uren saying that the government fears the mid-year budget update could be the catalyst for Australian losing its AAA rating.

Coming Up

The third and final Trump/Clinton TV debate, in Las Vegas,    takes place from 12:00 AEDST this morning. With some bookies already paying out on a Clinton victory on 8 November, interest today may be more for its entertainment value than a genuine interest in Trump’s last chance to pull back from the electoral abyss.  As of yesterday, Nate Silver’s www.fivethirtyeight.com website was giving Clinton an 87.4% chance of victory (now about the same as you could get on the UK voting to stay in the EU on 23 June!)

Probably much more relevant for Australian markets today is the monthly (September) labour market lottery.  In preparing a “forecast” for the headline employment change (a term we use advisedly) we assume the underlying trend employment gain is likely to be the order of around 15K, but to that we would add the likelihood of a higher print owing to sample rotation effects. NAB’s forecast for employment is a rise of 30 K, with the possibility that an even higher print could be in the offing owing to monthly sample variability.

The unemployment rate in September is forecast to be steady at 5.6%, unchanged from August. Higher employment usually brings you a monthly lift in the participation rate that we expect will have risen from 64.7% to 64.9%, enough with much stronger employment should still keep the unemployment rate steady at 5.6%.

Offshore tonight, the main interest is likely to be in the ECB Governing Council meeting where following what will almost inevitably be a no-change policy decision, there’ll be keen interest in what President Draghi says – or doesn’t – about potential QE tapering when the current €80bn per month buying programme completes next March.  ‘Not a lot’ is our guess – i.e. he will firmly push on the suggestion that any decision has yet come close to having been made.

Also tonight we’ll get UK retail sales, and in the U.S. the Philly Fed survey, weekly jobless claims and Existing Home Sales.


On global stock markets, the S&P 500 was +0.22%. Bond markets saw US 10-years +0.18bp to 1.74%. In commodities, Brent crude oil +1.66% to $52.54, gold+0.6% to $1,268, iron ore -0.1% to $58.37. AUD is at 0.7717 and the range since yesterday 5pm Sydney time is 0.7663 to 0.7729.

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