Below trend growth to continue
In his 2007 best seller “The Black Swan” Nassim Taleb uses the life of a thanksgiving turkey as an analogy for explaining a black swan occurrence i.e. a tail event that is so remote that is completely unforeseen.
In his 2007 best seller “The Black Swan” Nassim Taleb uses the life of a thanksgiving turkey as an analogy for explaining a black swan occurrence i.e. a tail event that is so remote that is completely unforeseen. When a thanksgiving Turkey is born it is fed and taken care of by a seemingly nice human being. The daily occurrence convinces the turkey that the human has essentially been put on earth to look after all its needs. That expectation comes true every day until Wednesday before Thanksgiving, on that day the turkey experiences a ‘revision of belief’. As such the big take way form the analogy is that we shouldn’t be turkeys and expect good times will last forever and at the same time forecasting the future based on previous experience is a dangerous game (see chart below).
Well thankfully expectations of a quiet thanksgiving session became true once again. European equities have managed to eke out small gains, the USD is little changed and with the US market shut for Thanksgiving, European bond have traded in a narrow range.
Looking at currencies in more detail, the USD has lost a little bit of ground against all majors barring the yen. At the same time, however, the USD has continued to make some inroads against EM currencies with the Turkish Lira the big underperformer last night, down 1.45%. In an effort to protect the Lira, overnight Turkey’s central bank unexpectedly raised its benchmark rate to 8% from 7.50%. The Turkish Lira jumped on the news, but the move was quickly reversed with the market sending a clear message that more will need to be done by policy makers if they wish to contain the slide in the currency.
There is a growing concern on EM economies ability to withstand a stronger USD and a rise in US rates. Many of these EM countries have USD-denominated debt, so the stronger USD increases their country’s debt burden and this developing theme needs to be watched carefully for any contagion effect onto other markets.
The AUD is back trading above 74c after trading to a low of 0.7365 overnight. Support for the currency appears to have been driven by another solid night for commodities. Iron ore gained 1.4% to $76.9, steaming coal was up 2.6% and copper, a bellwether for the global economy, rose 2.2%. Meanwhile oil prices are little changed and gold is down 0.5% at $1183.6
In other news Bloomberg reported that the ECB is considering postponing its decision on the future of its bond buying programme until early next year. Rising bond yields have eased scarcity concerns and there is no longer a sense of urgency to begin “QE tapering”. Market sensitivity to tapering is very high with the US experience a good example of the challenge the ECB faces as and when it decides to end its QE programme.
Last night the ECB also published its six-monthly Financial Stability report and it was a sobering read. The report noted that there is an increasing risk of an abrupt global market correction intensified by an increase in political uncertainty. The report also concludes that more market volatility was likely and “vulnerabilities remain significant for euro-area banks”.
As for data releases, Germany’s IFO survey printed in line with expectations and it suggests Germany’s economy should accelerate in Q4.
Today we have a clear calendar in Australia and this morning New Zealand releases its trade figures for October. The trade deficit is expected to have declined to NZ$ -971m from NZ$ -1,436m aided by an uptick in exports (NZ$ 3.76bn from NZ$ 3.47) and a pullback in imports (NZ$4.66bnfrom NZ$4.9bn).
The highlight during our session should come from Japan with CPI figures due out at 10:30am Sydney time. The market is looking for a pick-up in the year on year Core number (ex-fresh food and energy) from 0.0% to 0.1%. The decline in oil prices over a year ago are essentially dropping out of the equation and the Tokyo CPI (ex- fresh food and energy) for October, which was released a month ago and tends to be a leading indicator, also supports the view for a small uptick. That said, in our view the Yen is the biggest inflation driver in Japan, USD/JPY has depreciated over 10% in the past two months however the CPI relationship works with a lag and as such we will still need to wait a few more months before we see a meaningful rise in inflation in Japan (see chart of the day below).
Moving on to Europe, there are no major data releases in the continent, but UK data prints could be of some interest. October home loan approval figures should show that the housing market remains subdued rather than subsiding and the second Q3 GDP estimate should provide a first look into the GDP components with the consensus view that private consumption was the main growth engine in Q3 while fixed capital formation was a drag.
Lastly tonight the US releases advanced October figures for its goods trade balance and the soybean number will be closely watched given the upsurge seen in the previous month. Markit Preliminary November readings for Services and Composite PMI are also due for release.
On global stock markets, the S&P 500 was +0.00%. Bond markets saw US 10-years +0.00bp to 2.35%. In commodities, Brent crude oil +0.10% to $49, gold-0.5% to $1,184, iron ore +1.4% to $76.93. AUD is at 0.7406 and the range since yesterday 5pm Sydney time is 0.7367 to 0.7416.
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