December 1, 2016

Markets Today: Vienna

Oil prices shot up when OPEC announced that a deal had been reached in Vienna, giving special dispensation to Iran, but overall cuts across the group.

OPEC has by all accounts struck a production deal to limit its overall output to 32.5 million barrels (a drop of 1.2million barrels) and Russia will reportedly join in with a 600,000 barrel a day cut. Iran and Saudi Arabia are said to have agreed that Iran’s output can rise to 3.8mn barrels (an increase of 90,000 barrels) and Iraq has apparently agreed to curb production. All up, a supply agreement along these lined if honoured would reduce global oil supply by just under 2%.  Full details are still awaited at time of writing (the meeting is still in progress). But for oil producing nations at least, the hope must be that the Ultravoxx’s line that “This means nothing to me, oh Vienna” doesn’t prove prophetic. Oil is currently up over $4 or more than 9%.

Global market impact of the OPEC news has been electric (there’s a Gary Numan song in there as well if you want it) and is most evident in US bond yields and global energy stocks. The S&P energy sector sub-index is up just over 5% but the majority of others sector are down led by a 2.7% fall for utilities (higher heating and air conditioning bills on the way) and consumer discretionaries (higher petrol price coming to a gas station near you). This leaves the overall S&P500 pretty flat into the close.

US 10 year Treasury yields are up about 8bps from where Sydney left on yesterday at 2.363% having been briefly back above 2.40%. Most of the move is attributed to higher inflation expectations/break-evens.  Fed funds pricing for 2017 has lifted only very slightly, with 64bp of fund rate increases prices between now and the end of next year. This is still below the Fed’s most recent median ‘dot plot’. That may well have to change and is a key factor beyond our expectation for further US dollar strength next year if not before. The BBDXY dollar index is some 0.4% on Tuesday’s close.

US data has been helpful to the cause of higher yields and a higher US dollar alongside oil. In particular the 216k rise reported by ADP for private employment in November removes much of the risk of a dramatically weaker than expected print for official payrolls tomorrow night. We also had a big jump in the Chicago PMI (57.2 from 50.6) but this will have ben inflated by Boeing orders.  The Fed’s preferred core PCE deflator measure of inflation meanwhile stuck at 1.7% as expected.

Oil aside, commodity prices are mostly weaker including another $14 drop in the gold price and $5.22 in iron ore, now back to $72 from above $80 earlier in the week. This has left the AUD as the second weakest G10 FX performer overnight, -1.27% to back below 0.74 (0.7390). The currency was already on the back foot yesterday after the weak building approvals data spared us a push back above 0.75.

USD/JPY is the biggest mover overnight, fully consistent with the move in US-Japan yields spreads, making a new post-Trump election high of ¥114.54.  CAD and NOK are, unsurprisingly, the only two currencies have gained against a generally stronger dollar

Coming Up

Key events during our time zone are first the Q3 Australian capex data and shortly thereafter the China Official PMI data covering both manufacturing and services (and shortly after that, the Caixin manufacturing version).

On capex, NAB’s Australian GDP model has been calling for GDP to have grown by a modest 0.1% in the September quarter, a forecast that embodies a 0.5% decline in underlying private business investment.  Q3 Construction points to downside risk for both of these estimates.  A 12.9% decline in non-residential building construction in all likelihood will be followed by today’s survey revealing weak business “Buildings and Structures” spending, pointing to an aggregate decline of 2% for Q3 Capex.

As well as actual spending, the outlook for business investment for the current 2016-17 financial year will also be under focus.  This is the 4th estimate, this one polled in October-November when there were signs emerging that the edge was being taken off domestic business conditions but mining confidence was re-emerging. While the large step-up in coal prices would have been a relief for local coal businesses, we still expect capital spending expectations among resource companies to remain largely under wraps.

For the China PMI data, the official manufacturing version (12:00AEDT) is seen dipping to 51.0 from 51.2, and likewise for the Caixin version. (12:45). Services were last at 54.0 (no survey for this).

Tonight the main data attraction is the US manufacturing ISM expected at 52.3 up from 51.9). We also get the UK manufacturing PMI (seen rising to 54.4 from 54.3), the final Eurozone PMIs (where the ‘flash’ composite estimate was 54.1 up from 53.3)


On global stock markets, the S&P 500 was -0.03%. Bond markets saw US 10-years +7.55bp to 2.37%. In commodities, Brent crude oil +10.02% to $52.06, gold-1.2% to $1,174, iron ore -6.8% to $72.08. AUD is at 0.7393 and the range since yesterday 5pm Sydney time is 0.7376 to 0.7487.

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