Wednesday October 26: Five things the markets are talking about
Despite the tight trading ranges scattered across the various asset classes, investors remain vulnerable to some unwelcome pockets of volatility ahead of an upcoming busy fortnight. Again, most of the market price moves have been instigated right at the top, from central bankers.
Yesterday it happened to be sterling; it fell to its lowest level (-1.5% £1.2105 intraday) since the infamous “flash crash” on October 7. Why? BoE Governor Carney cautioned that investors would demand a higher premium to buy U.K assets, if his or his bank’s independence was questioned. Expect the Governors tenure and independence will be the focus of much attention for sterling traders for the remainder of this year.
The pounds partial recovery this morning (£1.2207) can be attributed to Carney’s comments on exchange rates and how they need to be taken into account for policy consideration and on the suggestion that no further rate cuts were likely.
Also hitting the wires yesterday was ECB President Mario Draghi, who launched a strong verbal defense of the his own banks easy-money policies, stressing that his central bank is committed to keeping interest rates low until its hit its inflation target. However, his words were a tad hollow and only managed to temporarily move the needle on the single unit, which happened to print an eight-month low intraday print (€1.0851).
Next week investors have to contend with a plethora of central banks (RBA, BoJ, FOMC and BoE) and a number of employment reports (non-farm payroll) before 2016’s main event, the U.S Presidential Election.
1. Global stocks fall on disappointing earnings
Euro and Asian bourses have been in retreat mode along with U.S. equity index futures as energy prices slump and Apple’s results after the bell yesterday disappointed.
Following on from the U.S’s disappointing session on Tuesday, South Korea’s KOSPI dropped -1.25%, the Aussie ASX 200 ended the day down -1.5%, China’s Shanghai Composite index pulled back -0.5%, while Hong Kong’s Hang Seng lost -0.8%. The outlier was Japan’s Nikkei reversing its earlier losses to close up +0.15%.
With investors remaining nervous given the U.S. election, next week’s Fed meeting and China’s property market, the above average seasonal earnings reports are finding it difficult to keep global indices in the black.
The Stoxx Europe 600 index has pulled back -0.7% in early Euro trading, led by a -1% drop in the U.K.’s FTSE 100 index and a -0.7% decline in Germany’s DAX.
U.S futures are set to open on the soft side, down -0.4%
Indices: Stoxx50 -0.4% at 3,072, FTSE -1.0% at 6,949, DAX -0.7% at 10,683, CAC-40 -0.7% at 4,511, IBEX-35 flat at 9,137, FTSE MIB -0.1% at 10,207, SMI -0.5% at 7,888, S&P 500 Futures -0.4%
2. Weak energy prices remains the order of the day
Crude is again on the defense, heading to the open stateside following yesterday’s American Petroleum Institute (API) inventory numbers showing a surprise rise of +4.8m barrels against a market expected rise of +1.7m.
The “black stuff” had already being under pressure this week from OPEC’s jawboning over supply constraints at the weekend. Iraq’s oil minister said his country (OPEC’s second-largest producer) wanted to be exempt from output curbs, as they needed more money to fight ISIS. The Russians say output cuts are not an option for them, while Nigeria production numbers keep rising.
Hence, crude oil prices have fallen in excess on +1% in overnight trading. WTI has broken the +$50 a barrel (+$49.40) and is attacking support at +$49.00, Brent is approaching the psychological +$50 a barrel itself, trading down -51c at +$50.40.
Today’s EIA Crude Inventory figures will be closely watched at 10:30am EDT (exp. +0.7m vs. -5.2m). Any build up in inventories will see the black stuff prices being pushed lower again.
Gold (+$1,274.33) continues to trade atop of its three-week high amid speculation demand will strengthen in the run-up to this weekend’s Diwali festival in India, the world’s largest bullion-consuming country after China.
3. Global yields remain confined ahead of decisions
Global fixed income volatility remains tepid ahead of next week’s key Central Bank meetings (RBA, FOMC, BoE and BoJ).
Nevertheless, stronger than expected Aussie inflation data overnight seems to have deflated some market expectations for an interest rate cut by the RBA anytime soon and reason why Aussie two-year debt product yield increased by +2bps to a one-week high of +1.69% overnight. The probability that the RBA will cut interest rates by mid-2017 has dropped to +29% from yesterday’s +37% print.
The yield on U.S 10’s remains contained, declining -1bps ahead of the open to +1.74%, again trimming this month’s back up in yield to only +15bps.
Currently owning U.S debt continues to saddle investors with losses for a third consecutive month – reason? Market is speculating that domestic inflation will quicken along with a proactive Fed.
4. “Big Dollar” dips after recent rise
The USD is trying to consolidate its recent gains, but it seems tenuous at best. Despite fixed income currently pricing in over a +78.3% probability of a Fed hike in 2016, dealers are using the overnight session for mainly profit-taking on recent moves.
The market has seen a sharp leg higher for the dollar of late, so it’s not a surprise to witness a small pullback. With a Dec. hike almost priced in, the markets focus is beginning to switch to next years rate outlook, which is impeding any immediate further dollar gains.
Dollar index is down -0.25%. The EUR is up +0.3% at €1.0922, while sterling again trades north of £1.22 after BoE’s Carney suggested that the pounds fall and consequent inflation rises may lessen chances of further easing. His comments have provided some investors an excuse to cover recent GBP shorts. The AUD (A$0.7682 +0.8%) is firmer after Aussie Q3 inflation reading left the RBA with an option of shifting towards a more “neutral” bias at nest weeks monetary policy meeting.
5. Euro consumer confidence
Consumer confidence data from Germany this morning exhibited slightly weaker sentiment than expected. At 9.7 it’s the lowest reading in four-months and below the psychological 10 handle that the market had been expecting.
Analysts noted that despite the somewhat more downbeat outlook for personal finances, consumers assessed that economic prospects had improved, with the relevant indicator rising to the highest level in 12-months.
In Europe’s second largest economy, France, consumer sentiment this month revealed the strongest confidence level in seven-years. The headline index rose to 98. Note: It’s still below the key 100-watermark, the long-term average level since inception (1987).