Wednesday March 29: Five things the markets are talking about
U.K PM Theresa May has written a letter that will be delivered by hand to E.U Council President Donald Tusk at around 07:30 EST – only when notification is received in Brussels will Article 50 finally be triggered.
Yesterday, U.K Brexit Minister David Davis stated that he was not targeting a “no-deal” Brexit, but insisted that the government has a “huge contingency plan” for the U.K leaving the E.U without a deal, and that the country would abide by its obligations when settling outstanding liabilities with the E.U.
The triggering of Article 50 is expected to spark long-term volatility for the pound. Current sentiment remains firmly ‘bearish’ towards sterling moving forward, and the potential resurgence of hard-Brexit fears could ensure price weakness would become a recurring theme.
It will likely take a couple of months for negotiations to start in earnest, with the E.U’s 27 other members needing to agree formally how they will approach the talks. Further delaying matters, both sides will need to see the outcome of German elections in September.
Note: GBP has slid more than -1% (£1.2420) within the past 24-hours ahead of today’s move by PM May.
Now that Scottish lawmakers voted 69-59 in favour of an “independence referendum” yesterday, sets Edinburgh on a collision course with the U.K government. Messy or what?
Let the gamesmanships “formally” begin!
1. Global stocks get a U.S confidence boost
Stocks in Europe and Asia climbed for a second day amid rising optimism over the strength of the U.S economy and are on course for their fifth consecutive month of gains.
Down-under overnight, Australia’s ASX 200 Index and New Zealand’s NZX 50 both added at least +0.9%. Singapore’s Straits Times Index gained +0.8% and Jakarta’s benchmark jumped +0.7%, while Hong Kong’s Hang Seng was little changed.
In Japan, the Nikkei (+0.1%) share average produced small gains in choppy trade, but any advances were limited as ex-dividend share price adjustments pressured the market and offset positive U.S sentiment. The broader Topix shed -0.2% – more than three-quarters of its member companies traded ex-dividend.
In Europe, equity indices are trading higher as official Brexit negotiations are scheduled to begin. Banking stocks are leading the gains in the Eurostoxx, while energy, commodity and mining stocks are trading notably higher in the FTSE 100.
U.S stocks are set to open in the black (+0.1%).
Indices: Stoxx50 +0.3% at 3,475, FTSE flat at 7,343, DAX +0.5% at 12,210, CAC-40 +0.3% at 5,061, IBEX-35 flat at 10,384, FTSE MIB flat at 20,327, SMI +0.2% at 8,615, S&P 500 Futures +0.1%
2. Oil rises on Libyan supply disruptions, gold lower
Crude oil prices have extended their gains from yesterday’s close, lifted by supply disruptions in Libya and on market expectations that an OPEC-led output reduction will be extended into H2.
Brent crude futures have rallied +29c, or +0.6% to +$51.62 per barrel from Tuesday’s close. West Texas Intermediate (WTI) crude futures are up +34c, or +0.7%, at +$48.71 a barrel.
Note: Armed protesters, reducing output by -252k bpd, have blocked oil production from the western Libyan fields of Sharara and Wafa.
Despite OPEC and non-OPEC members agreeing to cut production by almost -1.8m bpd during H1 in order to rein in a global fuel supply overhang and prop up prices, U.S shale oil drillers continue to ramp up their output and exports.
And reason why the market continues to expect another build on weekly crude inventories when EIA release their figures at 10:30 am EST this morning (+1.2m e).
Ahead of the U.S open, gold has slid -0.1% ($1,250.19), paring its Q1 gain to +9%. Some investors believe the ‘yellow’ metal may be in the early stages of a new “bull” run, and is poised to rally to levels last seen four-years ago as rising inflation and negative real interest rates combine to boost demand.
3. Global yield curves have the confidence to back up
U.S Treasury yields backed up yesterday after consumer confidence (125.6 vs. 113 e) hit its highest level in 17-years and while the Richmond Fed manufacturing data posted a big beat (22 vs. 17).
Yields on U.S 10-year notes are little changed at +2.41%, after yesterday’s advance of +4 bps.
In the U.K, the “official” triggering of Article 50 could still generate further market jitters in fixed income if there is any evidence of disagreements about ‘how to negotiate’ before negotiations even begin.
Note: U.K 10-year gilt yields (+1.19%) dropped right after the U.K. gave notice of triggering Article 50, even though PM May was expected to do so by the end of Q1.
While on mainland Europe, a strengthening eurozone economy and higher inflation expectations are the main cause for rising yields. German 10-year bunds have backed up +2bps to +0.38%.
Note: On the day after the Brexit vote (June 24, 2016), German 10’s saw the yield drop to a low of -0.17%.
4. Dollar pulls away from multi month lows
The ‘mighty’ dollar is a tad firmer overnight; pulling away from its four and half month lows as impressive U.S economic strength has kept the door ajar for continued ‘gradual’ rate hikes by the Fed. A number of Fed officials (Powell, Kaplan and George) this week have reiterated their views for steady pace in ‘normalization.’ For now, rate differentials remain the dollars biggest supporter, especially as other central banks (BoC and SNB) have hinted that it was too premature to consider tightening at this time.
GBP/USD (£1.2420) remains under pressure as the Brexit process is set in motion. The pair was off -0.5% in early trading. The trick now is to figure out if the market has already priced a ‘hard Brexit’?
Ahead of the U.S open, EUR/USD is trading atop of its O/N lows at €1.0791, USD/JPY is at ¥111.00.
Elsewhere, Thailand’s CB kept their overnight benchmark (+1.5%) rates steady. Officials noted that the THB currency strength ($34.38) was not good for the economy. Investors should expect THB to face higher short-term volatility.
5. German import prices rise
On a light day on the economic front, data this morning showed that German import prices increased at the fastest pace in nearly six-years last month.
Import prices climbed by +7.4% year-on-year in the month, the highest rise since April 2011, when prices surged +7.6%.
At the same time, export prices climbed +2.5%, faster than January’s +1.8% increase.
On Monday, German Ifo Business Climate in March, rose to 112.3 points and marked its highest level since July 2011 and supports high optimism in the business sector, despite rumblings of protectionism from the U.S and the uncertainty in Europe over the imminent Brexit negotiations.
Note: The German economy has enjoyed a robust Q1. Later this week, Germany releases key consumer and employment numbers, including CPI, retail sales and unemployment claims.