Monday November 21: Five things the markets are talking about
Markets have been very positive on the new U.S President elect and have been quick to embrace the “reflation” trade over the past fortnight.
Is it too much perhaps? If so, this would suggest that some of the aggressive market moves that we have witnessed across the various asset classes may prove a tad overly optimistic on what can be delivered by the Trump administration.
Perhaps a cooling period is justified, since many of Trumps policy proposals certainly lack detail, and it’s not very clear what support Trump will actually get from Congress.
While market pricing for a rate hike in December is almost +100%, dealers are pricing only one more rate hike in 2017. Is that not too few for an economy close to full employment and about to receive Trump’s large fiscal stimulus next year? A speech by FOMC vice-chair on Tuesday and the FOMC minutes on Wednesday should give further guidance on rates.
Elsewhere, despite the week starting slowly things picks up pace with Nov. flash EC consumer confidence and U.K CBI industrial trends, followed by the flash manufacturing PMI’s for Japan, France, Germany, the Eurozone and the U.S. Second estimates of U.K and German GDP will also be reported. Germany’s important Ifo survey is released on Thursday.
1. Asian shares on the defense again
Trump’s unexpected election victory has led to a major recalibrating of asset pricing.
Asian shares start the week on the defense again, pressured by the strength of the “mighty’ dollar and rising U.S. Treasury yields.
Regional bourses were steady to slightly lower overnight, with Hong Kong’s Hang Seng trading flat, Aussie stocks were down -0.2% and South Korea’s Kospi falling -0.3%.
Again the outlier is Japan’s yen-sensitive Nikkei bucking the trend, rising +0.8% to print an 11-month high, thanks to the weaker yen (¥111.03) helping exporters.
In Europe, indexes consolidate as politics takes centre stage (see below). Market participants will be eyeing up comments by ECB’s Draghi (EST 11:00am) especially after last week stating that the ECB will continue to implement fresh stimulus measures using all instruments available. Financials are leading losses across the board, while commodity stocks are trading notably higher in the FTSE 100.
S&P futures are set to open a +0.1% higher.
Indices: Stoxx50 -0.3% at 3,015, FTSE -0.1% at 6,768, DAX -0.3% at 10,631, CAC-40 -0.3% at 4,491, IBEX-35 -0.3% at 8,596, FTSE MIB -0.7% at 16,149, SMI -0.6% at 7,860, S&P 500 Futures +0.1%
2. Oil price rally on OPEC expectations, commodities higher
Crude oil prices continue to rebound after last week’s two-month low print as OPEC members renew their diplomatic efforts before next weeks Nov 30 meeting in Vienna to finalize the output deal “informally” agreed to in September.
Member states are seeking to trim output for the first time in eight-years – this plan has been complicated by Iran’s commitment to boost production and Iraq’s request for an exemption to help fund its war with Islamic militants.
Over the weekend various comments from members is supporting oil. Iraq’s al-Luaibi said he plans to offer new proposals next week for output cut, Iran’s oil min expressed confidence that members will reach a consensus, and Russia’s Putin stated it would not be hard for Russia to freeze oil output.
Ahead of the U.S open, Brent crude futures are trading +1.4% higher at +$47.50, while West Texas Intermediate (WTI) has added +1.3% to trade +$46.28 a barrel after climbing +0.6% on Friday.
In commodities, Nickel has rallied from its two-week low, up +3% after slumping -3.6% on Friday, as industrial metals renew their advance amid optimism over demand in China and the U.S. Copper is up +2.9%.
Even gold has found some early traction ahead of the open stateside, trading up +0.4% at +$1,214 mostly on the back of a softer dollar.
3. Bonds Trump tantrum takes a breather
Trump’s reflation trade has managed to push interest rates higher, aided by U.S data and Fed commentary that’s priced in a rate hike at next month’s FOMC meeting (Dec 14).
Overnight, the U.S treasury curve is taking a well-earned breather with U.S 10-year yields slipping -2bps to +2.34% following last week’s +21bps surge or -8% price loss.
Elsewhere, with German bond yields little changed at +0.278%, the spread over Tsy/Bund yields have widened to levels not seen in 30-years. For Japan, the aggressive back up in yields is causing some concerns. The BoJ’s Governor Kuroda has pledged to continue to use new “fixed rate operations” to keep Japanese yields lower.
The only winner thus far has been the U.S saver – U.S 30-year Treasury bonds have rallied +50bps since the U.S election.
4. Dollar takes a breather
The dollar index has moved off its 14-year highs in quiet trading overnight.
To date, the ‘big’ dollar has benefitted from expectations that the Trump administration would adopt expansionary fiscal policies, which would lead to higher interest rises.
The EUR/USD is trading up +0.4% (€1.0623) outright, while USD/JPY tested above the psychological ¥111.00 handle for the first time in six-months. Sterling is little changed, trading atop £1.2340 area with focus on the Autumn Statement Wednesday from Chancellor Hammond in his first major fiscal statement after the Brexit vote. China’s PBoC set the yuan currency at weakest level in eight-years, its 12th straight day of a weaker fix (¥6.8985 vs. ¥6.8796).
5. A busy weekend in European politics
German Chancellor Merkel announced that she plans to run for a fourth term as Chancellor and wants to serve the full four-year term if her health allows it.
In France, President center-right primary results show that former PM Francois Fillon wins top spot with +44% of the vote, Alain Juppe +28% and Nikolas Sarkozy (conceded defeat) with +22%. The runoff is set for Nov. 27. Fillon’s popularity should ease some fears over a victory for far-right Marine Le Pen.
In Italy, PM Renzi expects his government to collapse if he loses the Dec 4 referendum, as other parties would not be able to reach agreement for another administration. Investors should expect heightened market volatility in the last two weeks of campaign.
In the U.K, a number of senior Conservatives have said that PM May risks losing Brexit “speed and scope” with the High Court appeal and that she should accept that triggering Britain’s exit from the EU requires parliamentary approval.
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