February 16, 2016

Markets Today: The rebound continues

Global equities extended their Friday rally helped along by a strong lead from Asia.

Global equities extended their Friday rally helped along by a strong lead from Asia. Draghi complemented the positive mood by yet again hinting at the possibility of further stimulus ahead and the stability in oil prices was also a positive contributing factor.

Yesterday’s lower CNY fix (196 pips) helped USD/CNY trade sub 6.5 for the first time this year and was a source of stability for the region. China’s soft trade figures and Japan’s bleak Q4 GDP report did little to affect the positive mood. The Nikkei gained over 7%, boosted by news of SoftBank $4.4bn share buyback plan.

The rally in European equities was led by banks and auto sectors with the Euro Stoxx 600 ending the day up 3%. Markets in the US were closed, but stock futures suggest the potential for a 1.3% opening gain for the S&P 500%.

The USD is stronger against safe haven currencies and softer against commodity ones. The AUD is the top performer up 0.45% followed closely by the NZD +0.44% and the CAD at +0.14. Yen was the biggest loser at -1.17% with CHF down -1.05%.

Comments from ECB Draghi dragged European core and peripheral sovereign bond yields lower. 10y Portuguese and Greek bond yields fell around 20bps while 10y Bunds dropped 2.4bps to 0.236%.

Draghi noted that the ECB deliberation will focus on two areas: Firstly, the pass-through from low imported inflation (from things like oil and commodity prices) to wages and inflation expectations, and secondly the transmission mechanism from the financial system, particularly banks. He said if either of these entail downside risk to price instability, “we will not hesitate to act”.

Ahead of the 10 March policy meeting, there is a general consensus that the ECB will lower its deposit rate and while other additional measures aimed at boosting banks are also expected, what these might entail is still not very clear. As our European strategist noted, it does sound like the ECB will be at its most creative in trying to shore up share prices – which in turn could allow it to be more aggressive in lowering the deposit rate.

As for commodities, WTI and Brent oil grinded higher overnight, both up by 1%, gold was down 2.4% and iron ore had a solid day closing at $46.3, up 6%.

Coming Up

In Australia this morning we get the weekly reading on consumer confidence followed by RBA minutes from their February meeting.

While the minutes will be scanned for the potential of any new hints on what the RBA is thinking, we know from Friday’s RBA Governor Stevens parliamentary testimony that the Bank is currently watching international markets and economic events very closely.  They are still fairly chilled about the current state and momentum in the domestic economy and the hurdle for any near-term rate cut remains high.

In Europe, we get the February edition of the ZEW surveys for Germany. This is an opinion survey from finance professionals and it tends to be more sensitive to equity market moves rather than recent economic data releases.  As such, a pullback is expected in both the current situation and expectations series. Across the English channel, the UK releases its CPI and PPI reading for January. The market is expecting a small decline in core inflation (1.3%yoy  vs 1.4%yoy prev), however because every  January the office of national statistics updates the weightings its assigns to different goods and services in the basket, there is a wider than usual dispersion on  the expected outcome.

The US is back from its long weekend holiday with the Empire Manufacturing survey (Feb) and NAHB Housing Market Index the two data highlights for Tuesday. The Empire survey should provide the first February look into the manufacturing sector in the US. While the survey is expected to pull back from -19.37 to -10.50, aided by recent softness in the USD, the index is still expected to remain well entrenched in contractionary territory.

Philly Fed President Harker (non-voter) is scheduled to deliver a speech on the 2016 economic outlook and Minneapolis President Kashkari, will speak at the  Brookings Institution, but his speech is likely to be focused on legislative and regulatory  issues.


On global stock markets, the S&P 500 was +2.00%. Bond markets saw US 10-years +0.00bp to 1.75%. On commodity markets, Brent crude oil +1.86% to $33.98, gold-2.4% to $1,209, iron ore +6.0% to $46.26. AUD is at 0.7141 and the range was 0.7099 to 0.7172.

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