November 21, 2016

Markets Today: The (bond) song remains the same

A key question this week, for the AUD at least, is whether local exporters will continue to stand aside expectant of still better levels to initiate longer dated hedges and/or whether local real money will now look to lift hedge ratios.

Last week, the relentless rise in US yields was continuing to drive the US dollar upward, is starting to put downward pressure on most commodity prices and is also now unsettling the post-Trump victory global equity rally.

The S&P lost 0.24% to 2,189.9 but this still leaves it 0.8% on the week and 4.6% higher since Trump’s victory. The Dow was -0.19% and just 0.1% up on the week with the NASDAQ -0.23% but +1.6% on the week. Despite the S&Ps dip, the VIX closed lower at 12.88 (-0.47) and is 1.29 lower on the week (but evidently not much help to the Aussie dollar as US rate considerations overwhelm).

US Treasury bond markets saw 2s +1.4bps to 1.062% (+14.5bps on the week) 5s +4.6bps to 1.783% (+22.5bps on the week). 10s +3.4bps to 2.338% and +18.7bps on the week.  Bunds were -0.7bps to 0.272% after ECB President Draghi in a speech on Friday failed to offer any hint of post-March QE tapering. 10yr gilts added 4.5bps to 1.455% (+9.1bps on the week).

In FX, the US dollar rally continues, DXY +0.43% to 101.32 and the broader BBDXY +0.47% – both new cycle highs. AUD/USD was Friday’s biggest G10 loser, -0.92% to 0.7338 followed by USD/JPY, +0.70% to Y110.89. EUR/USD was down 0.33% to 1.0591; GBP/USD -0.51% to 1.2354 and the NZD -0.2% to 0.7011.

In commodities, gold was down a further $8.70 to $1,208, the LMEX index -0.82% and iron ore off $0.80 to $72.79 (and $7.02 lower on the week). Steaming coal shipped out of Newcastle lost $1.15 to $105.10 (and the recent high of $114.75) but coking coal managed to add another 40.75 to $299.50 and so yet another cycle high. Oil also a touch firmer, Brent +30 cents to $46.77 and $2 up on the week while WTI added 110 cents to $45.55 for a gain of $2.14 on the week.

There was no data of note offshore on Friday save for slightly softer than expected Canadian CPI. Here, CoreLogic’s weekend housing market summary reports a preliminary nationwide auction clearance rate of 75.6% little changed from last week’s final 75.8%. 2,950 auctions were held, up from last weekend’s 2,897 last weekend. Sydney cleared a preliminary 81.2% versus 81.4% and Melbourne 79.4% up from 76.8%.

Friday’s Fed-speak was all on song with regards to the likelihood of a mid-December quarter-point Fed rate hike.

St. Louis Federal Reserve President James Bullard said the debate is now shifting toward the Fed’s rate path in 2017 and how Trump’s policies on taxes, infrastructure, spending and regulation will affect growth, productivity and ultimately Fed policy. “Markets are currently putting a high probability on a December move by the FOMC. I’m leaning towards supporting that”, Bullard said.

NY Fed President Bill Dudley said Friday the post-U.S. election market reaction is not concerning in terms of planned interest rate rises, because the bond sell-off and dollar rise appears motivated by expectations of new policies out of Washington.

Kansas City Fed President Esther George (of late a dissenter in favour of immediate Fed tightening) said the U.S. economy would benefit from the Federal Reserve raising rates sooner rather than later.

Coming Up

A key question this week, for the AUD at least, is whether local exporters will continue to stand aside expectant of still better levels to initiate longer dated hedges and/or whether local real money will now look to lift hedge ratios.  If the answers to both are ‘no’, still lower levels in AUD/USD look likely as the week unfolds.

With the Fed now seen to be a done deal for December and Thanksgiving upon us, oil may be more of a headline grabber than Trump this week ahead of OPEC’s formal meetings in Algiers next week. Deal or no deal has major implications for the 2017 inflation outlook.  OPEC ministers are meeting today.

We are also heading towards the December 4th Italian referendum and Austrian Presidential elections. Opinion polls will be important this week, as unreliable a guide as they may be to polling outcomes.

Australia has Construction Work Done on Wednesday and which is a partial indicator of Q3 GDP (due on December 7th.  RBA Assistant Governor (Economic) Chris Kent speaks on “Australia’s Economic Transition – State by State” on Tuesday evening.

There’s a smattering of second tier US releases and FOMC minutes on Wednesday.  Japan CPI is on Friday.


On global stock markets, the S&P 500 was -0.24%. Bond markets saw US 10-years +5.22bp to 2.35%. In commodities, Brent crude oil +0.80% to $46.86, gold-0.7% to $1,209, iron ore -1.0% to $72.79. AUD is at 0.7324 and the range since Friday 5pm Sydney time is 0.7321 to 0.7400.

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