February 24, 2016

Markets Today: You’ve lost that loving feeling

Risk markets have turned turtle overnight despite some reassuring words on monetary policy.

After the S&P 500 had, as of Tuesday, recovered all of the  losses suffered during the first half of February – a rally of some 7.5% – risk markets have turned turtle overnight despite some reassuring words on monetary policy from both the Fed and Bank of England.  Heading into the close of the NYSE, all the major indices are down over 1%, US Treasury yields are slightly lower across the curve, and in currencies the ‘safe-haven’ Yen and Swiss Franc top the G10 leader board.  Sterling again sits firmly at the bottom as ‘Brexit’ concerns continue to dominate sentiment.  Not too far behind sit the commodity currency triumvirate that is AUD, NZD and CAD, all of which have suffered on the sight of a 5% drop in oil prices as earlier (false?) optimism about OPEC production freezes has all but evaporated.

One other notable feature of the currency landscape is that the Euro is no longer proving to be a beneficiary of safe haven flows/unwinding of EUR-funded ‘carry trades’, with the prospect of UK ‘Brexit’ seen to be an almost equally bad news story for the EU (risk of wider fragmentation were the UK to vote to leave). A relatively poor German IFO survey also didn’t help the Euro’s cause, with the business climate reading down to 105.7 from 107.3 (106.8 expected) and Expectations dropping to 98.8 from 102.3 (101.6 expected).

The first opinion polls since the referendum was called for 23 June and after London Mayor Boris Johnson declared for the ‘leave’ side, are keenly awaited and should arrive by the weekend.  Sterling will either snap back quite sharply, or suffer another lurch lower, depending on what they reveal.

Behind the renewed oil price drop are comments from  Saudi Arabia’s Oil Minister Ali Al-Naimi – in Houston attending the big energy industry conference – that the country wouldn’t cut oil production as other countries would be unlikely to assist in restraining output, albeit he mentioned the proposed “freeze” at current production levels is the “beginning of the process”.  Earlier, Iran’s Oil Minister said that it was “ridiculous” for Saudi Arabia to propose a production freeze when that country had already increased output.  With the exception of tin and iron ore (the latter holding recent strong gains to be little changed at $51.60 for the China import benchmark) industrial metals prices are all weaker by at least 1%.

Significant Fed speak overnight came from recently installed Dallas Fed president Robert Kaplan, who told the Financial Times that “In order to reach our inflation objective we may need to be more patient than we previously might have thought,” he said. “If that means we take an extended period of time where we stop and don’t move, that may also be necessary”.  Fed Vice-Chair Stanley Fisher is due to speak in Houston in just over 5 hours’ time (see ‘Coming Up). Kaplan’s comments were preceded by data showing the Conference Board’s consumer confidence index dropping to 92.2 from 97.8, below the 97.2 consensus though the survey date was right at the (11 Feb) stock market nadir.

Bank of England Governor Mark Carney, together with new MPC recruit Jan Vlieghe, testified to a Treasury select committee yesterday and implied the Bank had plenty of ammunition left in its arsenal should the UK economic outlook worsen.  “We could cut interest rates towards zero. We could engage in additional asset purchases, including a variety of assets,” Mr Carney said, while also saying that negative interest rates were not under consideration.

Vlieghe, meanwhile, said that “I have to say that I have relatively little tolerance for further downside surprises and should downside surprises continue then I think we will get relatively quickly to a point where I would find it appropriate to respond to it.”

Coming Up

The ABS wage price index for the December quarter is due.  NAB expects a repeat of 0.6% growth, resulting in annual growth of 2.3% and still subdued enough to point to muted upward pressure on business costs and prices. To the extent that the wage price index shows signs of stability, that would also be consistent with labour market trends through last year which reflected some overall net improvement.

Also due is Construction Work Done.  NAB expects a decline of 1.4% for the quarter, somewhat better than last quarter’s decline of 3.6%. (The market consensus is -2% and we would not quibble with that estimate either).

Neither of the releases is as significant as Thursday’s Capex report.  Nor will they be as potentially market sensitive as a speech from Fed Vice-Chair Stanley Fisher at the energy industry conference underway in Houston.  This is slated for 12:30AEDT and an audience Q&A is scheduled.  New Home Sales and the Markit services/composite PMIs are the main US economic release tonight.


On global stock markets, the S&P 500 is currently -1.10%. Bond markets saw US 10-years -0.86bp to 1.74%. On commodity markets, Brent crude oil -4.15% to $33.25, gold+1.1% to $1,222, iron ore +0.2% to $51.60. AUD is at 0.7216 and the range has been 0.7200 to 0.7259.

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For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets