Markets Today: Summertime

Summer has begun in Australia today, it’s Friday and we have had a risk positive night.

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Better yet and as Kool and the Gang would sing, in a few hours it will be “Time to sit back and unwind” (fwiw DJ Jazzy Jeff & the Fresh Prince is my preferred version of this song). US Tech shares rebounded after yesterday’s worst selloff in a year and news that Senator McCain will support the Senate tax bill provided an additional boost to US equities. The latter was also the catalyst for 10y UST yields to break above 2.40% after the PCE deflators came in line with expectations. In spite of underwhelming EU inflation data, month end flows and improved prospects of an Irish border agreement have helped the Euro and GBP outperform. Lastly oil prices are steady after OPEC agreed to extend the production cut agreement through the end of 2018.

Main European equity indices closed Thursday in negative territory with month end flows seemingly a factor at play. US Equities opened in positive territory and continued to march higher over the course of the session with news that Senator McCain would support the Senate Tax bill providing an additional boost to the move in the past few hours. The DJ past the 24000 mark for the first time ever and all three main equity indices (DJ, S&P500 and NASDAQ) look set to end the day firmly in positive territory.

US Treasury yields have also been the big movers with the curve bear steeping for a second day in a row. Core global yields found some support early in the overnight session with Bunds leading the way on the back of underwhelming EU inflation data. After misses from Italy and Spain, the EU headline inflation number came in at 1.5%, just under the 1.6% expected by the market. Meanwhile the core inflation also disappointed unchanged at 0.9% vs 1% exp. US data prints (core PCE as expected at +1.4% YoY, personal income stronger at +0.4% MoM, Chicago PMI stronger at 63.9 vs 63.0) had a small upward impact on yields, but the big catalyst came from news that senator McCain would support the Senate tax bill. UST yields jumped along the curve and the 10y note traded to an overnight high of 2.4311% before settling around 2.41%.

In currencies the USD is little changed. It initially traded lower, but then the jump in UST yields helped reversed the initial move. GBP and EUR are the G10 outperformers, the pound is up 0.87%, the pair traded to an overnight high of 1.3548 after news reports suggesting Dublin and London were close to reaching an agreement on the Irish border issue. News then followed suggesting an agreement was not as close as expected with cable now trading at 1.3521.

The disappointing EU inflation data saw the euro trade to an overnight low of 1.1809, but then month end flows appears to have been a factor for the rebound in the common currency. Another supporting factor came from unusual activity in the EU money market with the EONIA fix jumping higher towards the end of session closing at  -0.241 from 0.301% in the previous session.

After yesterday’s better than expected CAPEX report and China official PMIs, the AUD continued to march higher in the early part of the overnight session reaching a high of 0.7594 around 3 am this morning. But then the big rise in UST yields which lifted the USD was too much for the Aussie. The currency fell 0.5% in two hours and has now has settled at 0.7563. In the end and relative to yesterday’s opening level, AUD is sharply unchanged.

The kiwi is about 0.65% weaker than it was this time yesterday, with the fall confined to the aftermath of the recorded slump in business confidence.  Overnight the currency has been tightly range-bound and sits this morning at 0.6835. Our BNZ strategist note that it is normal for confidence to shift down to an enduring lower plane under a Labour government, but PMIs are a better read on activity (released earlier this month) and they showed business-as-usual.

OPEC members agreed in principle to keep output cuts through the end of 2018. , providing assurance for an oil industry still struggling through a fragile recovery. The world’s biggest oil-producing countries believe that a global oversupply of oil is still weighing down oil prices noting that oil in storage–a proxy for the global glut–remains well above historical averages. As a compromise to Russia’s concern for some flexibility Saudi Energy Minister Khalid al-Falih told reporters that he preferred an agreement that lasted all the way through 2018 but said any deal would be reviewed in June, when the cartel meets again.

Coming Up

Today is basically all about manufacturing activity indicators across the globe. This morning New Zealand gets its Q3 terms of trade data and Australia gets manufacturing activity indices along with Core Logic House prices. Is a busy day in Japan with labour market data, PMI and inflation figures all due for release. The Caixin manufacturing PMI is out in China and then the EU and UK get their PMI manufacturing readings (finals for Europe and new ones for the UK).The ISM manufacturing is release in the US and Fed Kaplan, Bullard and Harker are on speech duties.

Japan jobless rate is expected to stay unchanged at 2.8% in October. Similarly no change is expected in the jobs to application ratio despite of an increase in anecdotal evidence that the labour market has continued to tighten. Meanwhile headline inflation is tipped to decline in October (0.2%yoy vs 0.7% prev.) driven by fresh food base effects, but encouragingly for the BoJ, core CPI – which excludes fresh food – probably picked up to 0.9% yoy from 0.7% in September. A weaker yen and higher oil prices the likely culprits.

The market is looking for China’s Caixin manufacturing PMI in November to print almost unchanged relative to the previous month (50.9 vs 51 prev.). Yesterday the official PMI printed above expectations (51.8 vs 51.4), but the two PMIs don’t always move in the same direction.

As for the UK Manufacturing PMI, the market is looking for a slight improvement in November to 56.5 from 56.3. Meanwhile the US ISM is seen printing at 58.3, slightly below the October reading of 58.7. That being said, softness in regional surveys suggest the risks are tilted towards an ISM printing below the 58 mark. ISM Prices paid and employment sub-indices are also going to be of interest to the market.

Overnight

On global stock markets, the S&P 500 was +0.69%. Bond markets saw US 10-years +2.86bp to 2.42%. In commodities, Brent crude oil +0.13% to $62.61, gold-0.7% to $1,273, iron ore +0.3% to $68.13, steam coal +0.0% to $96.80, met. coal +0.4% to $191.98. AUD is at 0.7564 and the range since yesterday 5pm Sydney time is 0.7557 to 0.7595.

Good luck.

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