February 2, 2016

Markets Today: Stalled

Friday’s BoJ powered equity rally stalled overnight with disappointing data releases and fading hopes of output cuts in oil weighted down on sentiment.

Friday’s BoJ powered equity rally stalled overnight with disappointing data releases and fading hopes of output cuts in oil weighted down on sentiment.

Yesterday’s disappointing PMI reading from China set the tone at the start of the overnight session and although initially European equities managed to post small gains, the drop in oil prices and a new soft US ISM manufacturing print soured the initial positive mood.

January’s US ISM manufacturing rose trivially to 48.2 from 48.0. New orders rose to 51.5 from 48.8, suggesting the headline index could rise over the next couple of months, however the employment index was disappointing falling from 45.9 from 48.0. Meanwhile oil prices gave back some of the gains from last week after concerns that Iran will raise its export targets, despite comments from Saudi Arabia willingness to cooperate.

In the end, the Eurstoxx index finished the day down 0.79%, the DAX was -0.70% and the FTSE 100 outperformed at -0.39%, aided by a better than expected manufacturing PMI print. As we type, US equities look set to end the day marginally lower between -0.1 and -0.4%.WTI oil is trading at $31.6 (-6%) and Brent is at $34.13 (-5.2%).

Data also drove the move in currencies overnight. The USD is weaker against most G10 with GBP the outperformer boosted by a stronger than expected manufacturing PMI print (52.9 vs51.7). The NZD is also close to the top of leader board with our BNZ currency strategist noting that the move reflects portfolio flows, rather than fundamentals. The AUD has traded sideways and the AUDNZD has dropped below 1.09 suggesting some longs got squared up ahead of the RBA today.

In commodities, gold is up 1.1% to $1129, copper has managed to post some gains (+0.7%) despite the softness in Chinese’s equity markets and iron ore is up 3% currently trading at $43.

Looking at other data releases, European PMIs painted a mixed picture of fortunes in the Eurozone. Italy’s PMI fell to 53.2 from 55.6, well below consensus expectations of 54.8. France’s PMI was unchanged at 50 and Germany’ flash estimate of 52.3 narrowly beat expectations (52.3) leaving the Eurozone overall unchanged at 52.3

In the US, December personal income rose 0.3%, a bit above consensus (0.2%). Nominal consumption and the core PCE deflator were unchanged, but real spending – the direct GDP component – rose by 0.1%, in line with consensus’.
Just a couple of hours ago, Fed Vice Chair Fisher was speaking in New yoprk and he noted that it was too difficult to gauge the impact from recent turmoil in financial markets and uncertainty over China on the U.S. economy, which meant that policy makers undecided about what to do next.

Coming Up

In Australia this morning and ahead of the RBA cash rate announcement this afternoon, we get the weekly consumer confidence reading. In terms of the RBA while no change is unanimously expected, markets attention is likely to be focused on the tone of the Governor’s statement.

Early in December the market was pricing around 15bps of RBA rate cuts for the year ahead. In January, the sharp fall in the renminbi along equity markets instability and renewed downward pressures in oil prices have weighted down on RBA rate expectation with the market currently pricing 32bps of cuts for the year ahead. This has occurred despite the fact that domestic data releases over this period have continued to point to healthy improvements in the non-mining domestic economy.

Given this background our economists have noted that the key question will be whether the bank still sees prospects for a pick-up in growth. For now, the Board has time to continue reviewing domestic economic signals as global economic/financial developments evolve. As such, while we expect the board will retain a mild easing bias, today’s statement is unlikely support to current market rate cut expectations. As for the currency, notwithstanding our view that the AUD still needs to fall further to better reflect commodity price falls, we doubt the RBA will choose to materially change its view that the currency ‘is adjusting to the significant declines in key commodity prices’. Any acknowledgement of a more uncertain outlook due to international developments should temper any AUD-positive impact

In offshore markets it is a relatively quiet Tuesday. In Europe we get PPI for the Euro area (Dec) along with German unemployment (Jan). Later in the US we get the IBD/TIPP economic optimism print followed by vehicle. And in terms of US earnings, after today’s close we get Google and Exxon Mobil reports


On global stock markets, the S&P 500 was +0.20%. Bond markets saw US 10-years +3.98bp to 1.96%. On commodity markets, Brent crude oil -5.47% to $34.02, gold+1.1% to $1,129, iron ore +3.1% to $43.02. AUD is at 0.7104 and the range was 0.7043 to 0.7104.

Good luck,

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