Markets Today: Waiting on the world to change

Markets were quiet overnight given the Columbus Day Holiday in the US. Equities were flat (S&P500 0.2%), the US dollar was marginally lower (DXY 0.2%), while the US bond market was closed (note futures were open but with little movement).

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Markets were quiet overnight given the Columbus Day Holiday in the US. Equities were flat (S&P500 ‑0.2%), the US dollar was marginally lower (DXY ‑0.2%), while the US bond market was closed (note futures were open but with little movement). Markets it seems are playing a waiting game ahead of risk events later in the week – inspiration for today’s title Waiting On The World to Change by John Mayer. Focus instead shifted to Europe where a diplomatic spat between Turkey and the US has seen a sharp fall in the Turkish Lira (-3.0%). To date there has been little in the way of contagion to other emerging markets.

The biggest move overnight was in the Turkish Lira. The Lira at one point dropped more than 6% against the US dollar in Asia, but managed to pare back losses to be down 3%. The sharp fall occurred after the US suspended visa services to Turkey following the arrest of a Turkish citizen who was employed at the US consulate; note subsequent reports cited a Turkish official in expecting a reversal on the visa ban. While the initial catalyst is clear, the sharp fall really reflects a re-rating of Turkey’s risk — the relationship between Turkey and the US has been deteriorating over the past year with Erdogan consolidating power following an unsuccessful coup in 2016 and ongoing US support for Kurdish forces in the fight against ISIS.

The other major move in FX was the UK Pound. GBP/USD rose 0.6%, mostly in reaction to an upward revision to unit labour costs for Q2. The statistics office reported unit labour costs were actually 2.4% in Q2, up from the 1.6% initially reported. This is significantly higher than 1¼% the Bank of England had forecast in August and suggests non-tradable inflation could pick up more than expected. That plays into the view of the Bank of England needing to hike soon and Bloomberg WIRP has a November rate hike priced at a 77% chance with another hike fully priced by September 2018.  Also related to the UK, Brexit chatter continues with no real update to note – the fifth round of negotiations is underway in Brussels.

As for the big dollar, DXY fell slightly (-0.2%) with the Euro higher (+0.2% to 1.1748). The Aussie was marginally lower (-0.1% to 0.7756).

There was little reaction in the Euro to better than expected German Industrial Production – this rose 2.6% m/m in August and was well above the 0.9% consensus expectation. While market reaction was muted, it is another sign that “hard data” is reflecting the very positive “soft data” that we have seen recently coming out of Europe and reinforces our view of the ECB announcing a tapering of their asset purchase program in October.

Yields were contained with no trading in the US Bond Market. European yields were mostly lower with tensions easing slightly around prospects for Catalonian independence following a pro-unity rally and warnings by companies that they would move offices out of Catalonia in the event of independence. Spanish yields fell 3.2bps to 1.68% and are down some 13bps from their peak. Bund yields were also lower – perhaps driven by some reaction to North Korean fears over a possible ICBM test – down 1.5bps to 0.44% alongside UK Gilts (‑0.6 bps to 1.36%).

In commodities, oil prices steadied with WTI up 0.5% to $49.54 following comments by OPEC that the oil market is balancing out but further steps may be needed to sustain the recovery.

Coming Up

Domestic focus will be on the NAB Business Survey (11.30am AEDT) with no hints as usual from your scribe. The market will be interested in the ongoing divergence between Business Confidence and Consumer Confidence and how this eventually closes over time. Last month’s survey didn’t really help resolve the issue with Business Conditions lifting to their highest levels since early 2008 to +15, whereas Business Confidence fell 7 points to +5, while the separate W-MI Consumer Report rose 2 points.

Also out is the usually second‑tier ANZ-Roy Morgan Weekly Consumer Confidence (9.30am AEDT) while the RBA’s Debelle speaks on the Foreign Exchange Global Code of Conduct (2.20pm AEDT).

International focus is likely to be on the IMF’s latest forecasts for the economy, released as part of the World Economic Outlook – a forecast upgrade is likely. As part of the meetings there will be a number of central bankers talking on panels in the coming days with the Bank of Canada’s Wilkins first up (5.00 am AEDT).

Outside of this it is quiet. Across the ditch, NZ has Card Spending, Japan has the Current Account and Eco Watchers Survey. The UK has Industrial Production and the Trade Balance. Fed talk also continues with Kashkari (voter, dove) and Kaplan (voter) speaking.

Overnight

On global stock markets, the S&P 500 was -0.18%. Bond markets saw US 10-years +1.09bp to 2.36%. In commodities, Brent crude oil +0.05% to $55.65, gold+0.8% to $1,282, iron ore +0.7% to $62.67, steam coal -0.7% to $96.65, met. coal -0.6% to $179.00. AUD is at 0.7756 and the range since yesterday 5pm Sydney time is 0.7748 to 0.7782.

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