June 9, 2016

Markets Today: Rebellion

We are now seeing signs in other parts of the world of rebellion by private sector banks aimed at circumventing the deleterious effects of negative central bank policy rates and government bond yields.

As central banks in this part of world (first the RBA and now the RBNZ) resist the pressure for still lower rates in part on evidence that their respective housing markets are in such rude health that further easing risks usurping the success of macro-prudential to date to keep prices rises in check, we are now seeing signs in other parts of the world of rebellion by private sector banks aimed at circumventing the deleterious  effects of negative central bank policy rates and government bond yields.

Yesterday in Japan, BTMUFJ indicated it was minded to withdraw from being a Primary Dealer in JGBs. Though not yet confirmed, this would represent a protest against the inability to profit from taking JGBs on to their balance sheet at negative yields at the same time as having to pay the BoJ for the privilege of depositing excess reserves with them. In Germany meanwhile, Commerzbank has revealed that it is considering acquiring a stash of safe deposit boxes with the intention of holding a portion of its excess reserves in bank notes rather than negative yielding deposits with the Bundesbank. Stay long security firms.

Overnight markets haven’t brought a whole lot of volatility. US Treasuries have spent most of the night within 2 basis point ranges (2s between 0.77 and 0.79% and 10s between 1.6950 and 1.7150%). US equities continued to draw comfort from the view the Fed is probably on hold at least until September, but if we remember price action in the run-up to last week’s employment report, we could also argue that US risk markets were in any event travelling without much fear of a July tightening given the apparent strength of the US economy.

In currencies, the US dollar is softer for the fourth day running, off just under 0.5% and now some 2.75% below its pre-payrolls highs in broad index terms. This in turn has helped further support commodity prices – be it oil, metals or agriculture. Brent has added another $1.27 to $52.71 (highest since early November 2015) and WTI $1.21 to $51.27. Iron ore (up just 2 cents) hasn’t fared as well as traded metals (LMEX +1.4%) while gold is up a further $19 to $1263 – its best levels for three weeks.

Individually against the US dollar and front of the RBNZ, the Swiss France was faring best (+0.65%) and the British Pound the worse (-0.28%). Given a stellar UK industrial production report (+2.0% m/m against unchanged expected) this is further testament to the dominance of Brexit concerns driving sentiment and flows.  USD dollar slippage, meanwhile, has come despite fairly strong JOLTS (job opening report) up to 5.788mn from a downward revised 5.67mn in April. Some note was taken of a slightly lower ‘quit-rate’ (one of Janet Yellen’s favourite labour stats).

Yesterday the AUD received a small boost, to back above 0.7450, after China’s May trade data recorded a slightly smaller than expected surplus of $50bn, but led by a bigger than expected improvement in imports (the annual decline in imports in US$ terms reducing to -0.4% from -10.9%). The trade surplus, read in conjunction with latest FX reserves data, suggests ongoing capital outflows of perhaps $50bn a month and implies ongoing downward pressure on the CNY that is being partly resisted by the PBoC. For now though, with the post-US payrolls softening in the dollar taking upward pressure off USD/CNY, there is limited downside risk on AUD/USD from upward pressure on USD/Asia.  Indeed, a return to a 0.75 handle is now a serious risk, post RBNZ.

The RBNZ has as generally expected maintain its OCR at 2.25%, but with electrifying impact on the NZD which now trades back above 0.71 cents for the first time in almost exactly a year (11 June 2015). Auckland house prices trends rate an explicit mention in the statement as does the exchange rate (“higher than appropriate”) and though the RBNZ continues to indicate that further policy easing may be required, this does little to check the post-announcement  jump in all thinks kiwi.

Coming Up

Post RBNZ, there’s nothing much to look forward to today. China CPI/PPI are the only releases of note during the APAC session but shouldn’t be a market mover (market consensus is for annual CPI inflation to drop to 2.2% from 2.3%, and producer prices to lift to -3.2% from -3.4%).

Tonight, ECB president Draghi is due to speak at an economic forum in Brussels, while the main US data point of note is weekly initial unemployment claims. This takes on a little more importance in light of last week’s US payrolls shocker and given that the trend in jobless claims remains consistent with an ongoing decline in unemployment rate.


On global stock markets, the S&P 500 was +0.33%. Bond markets saw US 10-years -1.55bp to 1.70%. In commodities, Brent crude oil +2.51% to $52.73, gold+1.2% to $1,260, iron ore +0.0% to $52.56. AUD is at 0.7493 and the range since yesterday 5pm Sydney time is 0.7438 to 0.7493.

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