Market Moves Overdone?

Tuesday November 15: Five things the market is talking about

The speed and ferociousness of some of the price moves across the various asset classes since Donald Trump was elected U.S President have been stunning.

The intensity of the sovereign bond rout has cost investors more than a +$1.5trillion dollars – U.S 10-year notes have backed up +41bps in three-sessions marking the steepest climb in more than seven-years. Industrial metals like iron ore have rallied +27% on potential infrastructure promises, while the dollar has been the “go to” currency across the board, printing 13-year highs on rate differentials.

Overnight, the global bond rout took a breather, emerging market equities traded broadly mixed, while the ‘big’ dollar struggled for further momentum.

The dollars overall upward trajectory may not be disrupted, but the speed of its dominance to higher ground should probably be adjusted. Just as a bull equity run will eventually be caught out by higher rates.

Despite the breather, investors should expect market risks to remain elevated, coupled with a further increase in volatility as dealers/investors continue to second-guess what policies might eventually come out from the U.S in the new Trump regime.

1. Asian shares take a time out from sell off

Overnight, the emerging-markets selloff took a breather as shares traded broadly mixed and regional currencies gained some strength outright.

The Hang Seng Index reversed yesterday’s steep losses and ended up +0.5%. In Japan, the Nikkei Stock Average closed flat even as the yen gained +0.3% (¥108.20). The outlier was commodities or commodity sensitive economies – Aussies ASX 200 ended -0.4% lower, reacting to an overnight decline in commodity prices.

In Europe, equity indices are trading mixed. Banking stocks are weighing on the Eurostoxx 600 while the bounce in both Brent and WTI to the FTSE 100.

S&P futures have advanced +0.2%.

Indices: Stoxx50 -0.2% at 3,039, FTSE +0.8% at 6,806, DAX -0.1% at 10,688, CAC-40 +0.2% at 4,519, IBEX-35 +0.2% at 8,678, FTSE MIB -0.3% at 16,636, SMI flat at 7,895, S&P 500 Futures +0.2%

2. Oil gets a lift on OPEC optimism, commodities prices mixed

Oil prices have rallied in the overnight session, moving away from its multi-month lows, supported by expectations of falling U.S shale output and renewed optimism that OPEC will deliver production cuts at its meeting on Nov 30.

U.S. shale oil production is expected to fall in December to its lowest level in nearly two-years at +4.5m bpd.

January Brent futures is trading up +71c, or +1.6%, at $45.14 per barrel, while WTI has climbed +90c, or +2.1%, to +$44.22 a barrel ahead of the U.S open.

To date, the market has been trading rather pessimistic on an OPEC deal being achieved in a couple of weeks. A glimmer of hope by periphery producers to get a deal done is putting the squeeze on some of the markets ‘short’ positions.

Commodities are seeing some sharp price swings ahead of the open stateside as the effects of ‘Trumponomics’ gets recalibrated.

Iron ore is trading down -9%, extending yesterday’s session’s loss from its two-year high. The +27% rally on Trump’s election win certainly has a considerable amount of “speculative premium” built and its no surprise to see the market take some of that back. Zinc is off -1%, reversing earlier gains and retreating from its highest level in almost seven-years, while copper has dropped -2.8%, pulling back from its own one-year high.

Gold is up + 0.4% ($1, 228), rebounding from its five-month low Monday – the yellow metal has lost -4.4% this week on the back of a stronger dollar.

3. Global yield rally stalls

As the market prepares for Fed Chair Yellen’s testimony this Thursday (due to testify about the U.S economic outlook before the Joint Economic Committee), the market continues to digest rhetoric from other Fed members.

Fed’s Lacker (hawk, non-voter) yesterday indicated that more fiscal stimulus would bolster the case for raising rates, while Fed’s Kaplan (moderate, non-voter) said that they “need to find opportunities to raise rates; the time for monetary policy in the U.S is coming to an end.”

With those comments in mind, Fed fund futures are pricing in a +90% chance of a Fed hike in December and a further +25% chance for an additional two hikes in H1, 2017.

The back up of sovereign yields has abated somewhat overnight, as dealers question the justification of the recent sharp run-up. U.S 10-year yield have fallen -6bps to +2.20%, while German bunds have fallen -1bps to +0.31%.

The outlier is Japan’s JGB’s whose yield has backed up to zero%, having been negative for two-months, on the back of a weak 5-year auction yesterday.

4. Sterling slides recommences

U.K PPI data this more showed that the cost of raw materials/fuels bought by domestic companies jumped at the highest monthly rate on record last month – fuelled by the sterling’s (£1.2400) post-Brexit collapse. Oct PPI Input (beat) m/m: +4.6% vs. +2.0%e; y/y: +12.2% vs. +9.3%e.

However, accelerating producer costs do not appear to have hurt the British consumer last month as they have not yet fed into a sustained pickup in prices – CPI slowed to +0.9% on the year, from +1.0% in September (Core-CPI y/y +1.2% vs. 1.4%e).

What’s the BoE to do?

BoE’s Governor Carney remains in a tough spot. The bank is forecasting that the pounds slide will push inflation above their +2% annual target during H1, 2017, while believing that last June’s Brexit vote will weigh on growth as uncertainty hinders spending, investment and hiring.

5. Yuan slides to lowest level in eight-years

Trump has been very open and critical of China’s currency policy, branding the country a “currency manipulator.”

The PBoC set its daily reference rate for their currency at ¥6.8495 overnight, up +0.3% from the day before, and marking the highest “fix” since Dec. 8, 2008.

Dealers indicate that the PBoC appears content to let the yuan keep sliding for now, temporarily abandoning its heavy-handed market intervention approach due to the lack of panic in the market.

The yuan is under pressure along with other emerging-market currencies since Trump was elected. Chinese authorities have been shifting toward managing the yuan with reference to a basket of currencies of its major trading partners.

Despite its recent fall outright, its value against the currency basket has in fact risen in the same period.

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