November 10, 2017

Markets Today: Rumour Mill

Equity markets hit a jittery patch overnight with selling seen across Europe and the US.

The USD is softer across the board with safe haven currencies the outperformers. Notably, however, core global yields did not enjoy a safe haven bid with 10y Bunds yields closing higher while UST yields are little changed.

Signs of market nervousness emerged yesterday late in our Asian session with a sharp drop in Japanese equities, seemingly driven by technicals and profit taking. The Nikkei at one stage was down just over 3.5% intraday, but then recovered to the end the day at -0.2%. Europe opened with a negative tone with the resources sector leading the slide and then speculation over the US Senate tax bill aiming to delay the corporate tax rate cut to 20% until 2019 provided an additional excuse to sell equities. Like Rudimental would sing, a tax delay is “on a rumour mill, the word is on the street”.

Now that we are about to press the send button, the Senate Republicans have released their “vision” for a tax plan. As expected, the outline includes a corporate tax rate cut to 20% with one year delay to 2019, it retains the seven income tax brackets at slightly different rates relative to the House proposal and it preserves existing mortgage-interest deduction for home purchases with up to $1 million of debt. The estate tax would also be preserved, but double the current $5.49 million exemption for individuals. Marker reaction to the proposal has been pretty muted given Republican Senator Cassidy had already alluded to the details earlier in the session.

As a reminder there are still many rivers to cross before US Tax Reform sees the light of day. Once Republican Senators agree the text of the bill, amendments will follow ahead of a vote aimed on the week starting November 20. Meanwhile the House should vote on its own bill next week and then once both Houses have voted the most likely outcome is that process of reconciliation will need to take place. So, given the apparent differences between the two bills, the implementation of tax reform before the end of the year looks pretty challenging and achieving it before Thanksgiving (November 23rd) seems close to impossible. The US tax saga still has a long way to go.

Moving on to currencies now, the USD was already struggling yesterday, but softness in equities overnight triggered a bid in safe haven currencies.  CHF and JPY are the top performers, up 0.62% and 0.51% respectively.  After briefly trading above ¥114 during the day yesterday, the drop in the Nikkei triggered a 50pips selloff in USD/JPY and then the softness in equities overnight dragged the pair down to ¥113.33, where it currently trades.

The CAD (+0.44%) benefited from a rise in oil prices amid reports of fresh arrests in Saudi Arabia’s crackdown on corruption, adding to geopolitical concerns in the region. The Euro is back trading above 1.16 ( +0.43%) following upward growth revisions by the European Commission. Output this year is now seen at 2.2% and 2.1% in 2018, versus expectations for a 1.7% increase this year and 1.8% next year. The upward revisions were also seen as the catalyst for the jump in EU sovereign yields with 10y Bunds closing at 0.373%, up 5bps on the day.

Closer to home, NZD has held up well, sustaining the modest rally we saw after yesterday’s RBNZ MPS announcement. NZD is currently trading at 0.6956, 30pips higher relative to levels seen before the RBNZ announcement. Meanwhile, AUD is essentially unchanged at 0.7682, after trading in a 44bps range overnight.

Lastly GBP is up 0.27% and now trades at 1.3150 after hitting an overnight low of 1.3088. The FT reports this morning that PM May is ready to increase Britain’s offer to the EU over the Brexit divorce bill, after signs that the hard Eurosceptics in her party will tolerate paying more money to break the deadlock in negotiations.

Coming Up

The RBA Statement on Monetary Policy (SoMP) is today’s highlight in what is an otherwise pretty light economic calendar. The five day window for China’s reporting of loans and financing numbers starts today, but this release rarely occurs on the first day of the window. The US will be observing Veterans Day and the University of Michigan releases its consumer sentiment report (US markets will be open, but we expect a quiet day).

As for the SoMP, on Tuesday’s Policy Statement the RBA noted that the  Bank’s updated forecasts for the economy remain for growth to pick up and average around 3% over the next few years (largely unchanged), while inflation and wages are expected to pick up gradually (as the economy strengthens). The unemployment outlook is improved and is expected to decline gradually from its current level of around 5.5%.

So although the Bank has a pretty positive outlook on the economy, inflation is below target and unemployment is above full employment. Hence for now the RBA looks set to retain its neutral policy for a few more months. That being said, NAB expects the RBA to begin a gradual lifting of interest rates in the second half of 2018 as the unemployment rate falls more convincingly. Our economists expect unemployment to be around 5.25% at the end of Q1 next year.

Incidentally with the RBA seen on hold at least until H2 2018, this means that there is a meaningful risk that US policy rates will rise above the RBA in H1 2018. This represents downside risk to our AUD/USD forecast for 0.75 by end 2017 and 0.73 next year ( see chart of the day below).


On global stock markets, the S&P 500 was -0.64%. Bond markets saw US 10-years -0.86bp to 2.33%. In commodities, Brent crude oil +0.66% to $63.91, gold+0.3% to $1,287, iron ore +0.1% to $62.32, steam coal -0.5% to $98.00, met. coal +0.0% to $186.75. AUD is at 0.7683 and the range since yesterday 5pm Sydney time is 0.765 to 0.7694

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