August 30, 2017

Markets Today: Put down that weapon

The “risk off” sentiment that overshadowed markets after the launch of yet another missile from North Korea didn’t even last 24 hours.

Local stocks were in the red, mirroring Asia, risk currencies such as the Aussie and NZD were somewhat lower (the AUD/USD did not breach 0.79 though), with a bid tone added to bonds; yields lower as a result.  The Japanese Yen, the Swiss Franc and gold were bid, volatility pushed up again.  European stocks closed lower, as did European bond yields.  Earlier in the US session, the US 10 year treasury yield traded below 2.09%.  Running however against the grain, LME base metals closed higher, the LMEX index +1.62%, copper +1.88%, nickel +1.96% and ally +1.21%.  AU-related bulk commodities were mixed.

Risk-off sentiment persisted through the London session and into early NY trade, but then sentiment reversed.  Ostensibly, it was the release of a stronger than expected Consumer Confidence from the Conference Board that might have done the trick.

Consumer confidence in August (polled to August 16 so before Cyclone Harvey) rose from an already high 120.1 to 122.9, the second highest since 2000, that high in March this year.  The net jobs plentiful index rose from 14.5 to 18.1, again at “highs”, this one since 2001, boding well ahead of Friday’s payrolls report.  Also released overnight, the S&P/CoreLogic 20 cities house price index rose 0.11%/5.65% in June.

Speaking of Harvey, the rain continues to fall in Houston and checking weather reports this morning, another two inches of rain are expected in the next 24 hours.  There’s been over 40-50 inches of rain around the Houston area, the greatest amount in the Lower 48 states from a single storm and the largest flood in Houston-Galveston history, the US weather service reports.  Near term WTI oil futures continued to ease further (though longer-dated contracts are up), while near term US gasoline futures jumped another 5.4%.  Some US analysts are beginning to estimate that Harvey might dent US Q3 growth.

News overnight on President Trump is that after his visit to Texas he is going to Springfield, Missouri to deliver a major speech on tax reform Wednesday.  US political website Politico is reporting President Donald Trump will launch a major push for a sweeping tax overhaul, selling the idea he has a fresh vision for “unrigging” the American economy.  Politico is mentioning it will be long on rhetoric and short on detail, rates, deductions, loopholes in the tax system still to be worked through and clarified.  Apparently there will be scene-setting statements around personal and corporate taxes.

Across the Atlantic, as the third round of formal Brexit talks gets underway this week, the Brits came in for a severe dressing down.  EU President Juncker said that the UK discussion papers were “unsatisfactory”, they need to speed up and get serious, that the position papers were not good enough.  Chief EU Brexit negotiator Barnier said at a press conference with the UK’s Davis that he wanted the UK to come clean and say how much it is prepared to pay to leave the EU, still a major pre-condition from a European standpoint before any trade deal can be discussed, let alone settled.  EUR/GBP continues its path at its highs, up a net 0.27% since yesterday’s Tokyo close.

Coming up

There are two key local data points today with the release of the Q2 Construction Work Done and July Building Approvals.  These come after NZ Building Consents for July first up (8.45 AEDT), followed by Japanese retail sales (L: +2.1% y/y) and Department Store/Supermarket Sales (L: +0.2% y/y), both for July, out at 9.50 AEDT.

Our pick for Construction Work Done is a net rise of 1.0%, representing as it does the differing forces of the residential, commercial building, and engineering/ infrastructure activity, including construction work done by the private and public sectors.  As we noted on Monday in our Weekly, SEEK Job Ads in Construction continued rising through July, suggesting higher activity levels.  Weather effects from Cyclone Debbie likely curtailed activity in Q1 and there could be some payback/ catch-up in Q2, aside from the underlying trend.

Building approvals for July surprised on the high side last month from some likely temporary respite to the downtrend in apartment approvals.  We look for that trend to re-emerge, consistent with yesterday’s HIA New Home Sales report showing yet another double digit decline in Unit Sales.  It’s the more traditional detached home market that we also have under scrutiny where sales were flat in July, down in most States except Victoria, perhaps supported more by the first home buyer stamp duty concessions from 1 July.

As well as the monthly UK consumer/mortgage finance report for July, German inflation will be under scrutiny ahead of EC inflation tomorrow night.  The US is expected to see a marginal upward revision to Q2 GDP from 2.6% to 2.7%.  Trump’s tax reform speech should create lots of press coverage, but will the market take it to heart?


On global stock markets, the S&P 500 was +0.08%. Bond markets saw US 10-years -2.79bp to 2.13%. In commodities, Brent crude oil +0.17% to $51.98, gold+0.3% to $1,313, iron ore -1.0% to $76.36, steam coal -0.7% to $97.05, met. coal +0.5% to $197.00. AUD is at 0.7953 and the range since yesterday 5pm Sydney time is 0.7906 to 0.7983.

Good luck.

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