Equity markets harboured something of a defensive tone, but the oil market kicked higher again on the little to no fundamental news, signs of a classic short squeeze.  There were reports of an OPEC bulletin indicating some preparedness to talk to other producers to achieve fair prices, but this bulletin hasn’t been the key mouthpiece for OPEC before.  In any case, OPEC output has continued to increase a little.  In recent weeks however, we have seen tentative signs from weekly US production that shale output might be peaking.  (See chart in enclosed pdf.)

In any case, oil prices jumped by over $3/bbl for both WTI and Brent, WTI up to $48.32 and Brent to $53.06, the third day of this squeeze higher in prices.  This spilled over into strength in the CAD (+0.79%), NOK (+0.51%) and the RUB (+4.25%).  The NZD (-1.15%) and the AUD have been pushed lower (-0.85%) against the USD that has been little changed overall.  US Treasury yields rose in tandem with oil prices with the market shading higher the pricing of a Sept FOMC hike to 24%.

No especially large data points overnight with the EC preliminary CPI a tenth higher than expected for headline and core and an unchanged Chicago PMI.

Coming up today/tonight

Two major focus points for the markets today: the official China PMIs at 11.00 – with particular focus on manufacturing – and then the RBA Board decision/statement at 2.30.  In between comes some more quarterly pre-GDP partials, net exports and government spending together with July building approvals.  There is also August CoreLogic RP Data house prices (expect 0.3-0.4%) being released at 10am (together with QVNZ NZ house prices at 10am) and the AU AiG PMI Manufacturing report first up at 9.30.

China’s official Manufacturing PMI for August (11.00 AEST) will be under the big spotlight this morning.  There’s always been some suspicion this series has been far too smooth and not picking up the economy’s manufacturing variations.  The market is looking for a slight pull-back to 49.7 from 50 within a range of 49.2-50.  With all estimates bar one below 50, the surprise for markets would be a higher than expected outcome.  Should it be a low one estimate, since 2010, the minimum of this index has been 49 (Nov ’11) and since the start of last year, the lowest has been 49.8.  You’d need a low 49s number (sub 49.5) to signal weakness.  Recall that the preliminary Caixin private sector PMI printed at a low 47.1; its final estimate is being released at 11.45.

As far as Aussie data at 11.30 is concerned, we look for net exports to have detracted 0.3% points from GDP growth in Q2 (as does the market); we also expect that real government spending rose 0.4% in Q2.

Then the focus turns to the RBA announcement at 2.30 and the statement.  Clearly market volatility will get plenty of discussion and we expect China to continue to be discussed. The RBA clearly has China under close scrutiny, but for Australia, we have not seen steady iron ore prices this past month and the AUD has been cushioning the blow, something the RBA even recognised in last month’s statement.  As for the domestic economy, high frequency data suggests there’s been some further evidence of growth from the likes of retail sales, housing activity, the labour market and business activity.  More reasons overall to hold rates steady again.  Today’s statement should not require only some marginal refinement.

After the Final Euro-zone PMIs tonight, the major focus will be the US ISM Manufacturing report for August, the first of the US major indicator doubles for this week.  There were several more regional PMIs overnight, a virtually unchanged Chicago PMI, but a weaker Dallas Fed manufacturing survey (oil downturn effects?).  The market is looking for the overall index to be virtually unchanged at 52.8 from 52.7.

Overnight

Oil jumped again: Eurostoxx 600 -0.1%, Dax -0.4%, CAC -0.5%, FTSE +0.9%.  Dow -115 points to 16,528, -0.7%, S&P 500 -0.7%, Nasdaq -0.8%, VIX 28.43 +9.1%.  Mumbai -0.8%, Nikkei 225 -1.1% and ASX 200 -1.1%; ASX SPI futures this morning -0.4%.  US bond yields: 2s at 0.74% (2), 10s at 2.22% (+4).  WTI oil at $48.14 (+6.5%), Brent at $52.97 (+5.8%), Malaysian Tapis (yesterday) $49.46 (+2.8%).  Gold at $1133.90/oz (-0.0%). Base metals: LME copper -0.1%, nickel +0.0%, aluminium +2.8%. Iron ore $56.2/t +0.3% Chinese steel rebar futures +0.1%. Soft commodities spot futures: wheat -0.3%, sugar -2.6%, cotton +0.0%, coffee 0.2%.  Euro Dec 14 CO2 emissions at €8.08/t (-0.5%). The AUD/USD’s range overnight 0.7082-0.7150; indicative range today 0.7075-0.7150; the AUD/USD is 0.7110 now. India’s GDP (Q2) 7.0% (L: 7.5%; E: 7.4%)

EC CPI (Aug) 1.0% y/y (L: 1.0%; E: 0.9%); core CPI 1.0% (L: 1.0%; E: 0.9%); Chicago PMI (Aug) 54.4 (L: 54.7; E: 54.8).

For full analysis, download report:

• Markets Today: 1 September 2015 (PDF, 328KB)

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