Trump Effect Wont be Beat by NFP

Friday December 2: Five things the markets are talking about

It’s non-farm payroll (NFP) day and the event risk is not for a stronger number, that’s been covered ad nauseam, but for such a disappointing headline print that will unravel some of the baked in Fed rate hike set for Dec 14. The signs of that happening have been non-existent.

So heading into the U.S jobs release (08:30am EST – +180k and +4.9% expected) the Trump “reflation” market rally seems to be running out of steam as fresh concerns over the outlook for the U.S. and stability in Europe are weighing on the ‘mighty’ buck and equities.

An anticipated pullback in wage growth after two consecutive months of solid increases could put a wrinkle in an otherwise upbeat November employment report – average hourly earnings are forecast to increase by +0.2% after rallying +0.4% in October.

The bond market is unlikely to move strongly after the release, given current bond valuations and political risks in Europe – U.S Treasury’s are already pricing in a lot of good news for the economy and the market will not be willing to sell product before this weekends Italian referendum and Austria’s Presidential election on Sunday.

A headline print close to expectations will have investors shifting their focus immediately back to Europe to further price in the “what if” scenario, something that capital markets has not been terribly good at this year.

1. Equities under pressure from the fading Trump effect

Asian shares were broadly lower overnight, mirroring yesterday’s losses stateside, pressured by the “Trump trade” being overdone.

Until now, the market has been betting that a Republican-led government would slash taxes and regulation, which would jump-start growth and inflation. It’s only natural to take a bit of the froth off the situation since so much had been priced in over the past three-weeks.

The Nikkei Stock Average closed down -0.5%, with a firmer yen pulling the index back from its year highs. The S&P/ASX 200 ended off -1.0%, Hong Kong’s Hang Seng Index was off -1.2% and Korea’s Kospi finished -0.7% lower. The Shanghai Composite Index closed down -0.9%, while the Shenzhen Composite Index fell -1.7%.

In Europe, equity indices are trading sharply lower due to uncertainties over Sunday’s Italian referendum. In particular, financial stocks are under pressure across all regions, while energy, commodity and mining stocks has the FTSE 100 in the red.

U.S futures are set to open down -0.3%

Indices: Stoxx50 -1.1% at 2,994, FTSE -0.9% at 6,692, DAX -1.0% at 10,432, CAC-40 -1.4% at 4,499, IBEX-35 -0.8% at 8,604, FTSE MIB -0.7% at 16,987, SMI -0.8% at 7.717, S&P 500 Futures -0.3%

2. Crude off its highs, commodities mixed

Its no surprise to see oil prices ease away from their 16-month high they reached after OPEC agreed to cut output for the first time in eight years. Russia also agreed to reduce production for the first time in 15-years.

Traders consider the agreement may only draw more supplies from storage tanks and more crude shipments from the U.S and not have a material impact on global glut concerns.

Brent crude futures are off -0.26% to +$53.80 a barrel, while U.S light crude (WTI) has slipped -0.6% to +$50.75 a barrel. Crude is heading for a +10% rally this week.

In other commodities, spot gold has gained +0.3% to +$1,175.27 an ounce, halting its three-day drop to trim this week’s retreat to -0.7%, the fourth straight decline.

Industrial metals are seeing further Trump infrastructure profit taking. Ahead of the U.S open, copper futures have fallen for a second consecutive session, slipping -0.5% – note: Nov was the best month in six-years for industrial metals.

3. Bond prices continue to consolidate

With the Fed expected to start raising interest rates in a couple of weeks (Dec 14), and fed fund future pricing in more than one hike a year, has market inflationary expectations climbing.

If you include the fact that some Tier 1 central banks are considering buying fewer sovereign securities going forward, sovereign yields can only do one thing and that’s back up and steepen even further.

Overnight, Aussie 10-year debt backed up +8bps to +2.86% and is heading for their highest closing level this year, while yields on Kiwi notes rallied by +6bps +3.28%.

U.S 10-years are down -1bps at +2.43% after increasing by +7bps yesterday to their highest close in 18-months. Currently, the market expects U.S 10’s to trade towards their 14-month highs north of +3.04%.

Euro policy makers next meet on Dec 8 with the market expecting President Draghi to extend their QE program beyond March 2017.

4. Dollar gives back some of its premium

The ‘mighty’ dollar is on course for its first weekly decline in four-weeks against its G-10 peers amid muted trading ahead of today’s payroll report.

The EUR/USD is steady and trading in the mid-€1.06 area with focus on the key risk events over the weekend (Sunday’s Austrian Presidential election and the Italian Referendum). Tech analysts indicate that the key support for the single unit remains the €1.0462 (the post financial crisis low made back in 2008) in the event the “No” vote wins in Italy and disrupt markets. With ECB still poised to extend its QE bond-buying program beyond March 2017, has dealers believing that any potential EUR rally could be faded on the approach of key resistance levels (€1.0800).

USD/JPY (¥113.85) is still unable to break above the psychological ¥115 handle where Japanese exporters are rumored to be sitting on offers. Comments by U.K. Brexit minister Davis yesterday that the U.K. government would consider paying the EU after it leaves the bloc in return for single-market access has been supporting the pound (£1.2620).

5. Chances for an Italian “no” vote increase

Uncertainty over the outcome and market impact of this weekend’s referendum in Italy is causing choppy trading in the country’s banking stocks and government bonds.

Currently, markets are pricing in at least a +70% probability of a “no” outcome. Italian and other periphery bond markets are expected to take another hit on that headline, as will Italian banks, and to a lesser degree the EUR.

Investors can expect German and other safe-haven markets to continue to benefit, at least until there is some clarity.

A “yes” outcome would send Italian bond yields sharply lower, further support the EUR and weaken the safe-haven bond market.

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