Wednesday October 25: Five things the markets are talking about
Later this morning, the Bank of Canada (BoC) will release its rate statement and quarterly monetary policy report (10 a.m. EDT). No rate change is expected after two consecutive increases (+1%), especially after last Friday’s sluggish inflation headlines and disappointing August retail sales print. There is also less certainty about the timing of the next rate increase in Canada due to the negative turn in talks to reshape NAFTA.
Tomorrows European Central Bank (ECB) meeting is expected to see the bank outline its plans for QE in 2018. The responsibility is on President Mario Draghi and fellow members to deliver a monetary policy recalibration that recognizes the improvement in economic conditions. With real growth having acquired reasonable momentum, the same cannot be said of inflation, thus any shift in the ECB’s policy stance is likely to be quite measured.
With forward guidance ruling out any rate hike any time soon, the market focus is going to be on the extent to which QE asset purchases will be tapered and the deadline, if any, for the completion of the program.
1. Stocks mixed results
Euro stocks have stalled as the earnings season continues to unfold, while benchmarks in Asia were mostly higher, but Japan’s Nikkei finally snapped its record run of gains.
The Nikkei share average dropped for the first time in 17-days in choppy trade overnight as investors took profits on the record run of consecutive daily gains, although higher U.S yields supported financial stocks. The Nikkei 225 declined -0.5%, while the broader Topix fell -0.3%.
Down-under, Australia’s S&P/ASX 200 Index rose +0.1% while South Korea’s KOSPI was up +0.2%.
In Hong Kong, equities rallied, supported by strong gains by listings in the city of mainland-based companies, and as China’s ruling Communist Party revealed its new leadership line-up. The Hang Seng Index climbed +0.4%, while the China Enterprises Index rallied +0.8%.
In China, blue chips stocks extended gains overnight to 26-month highs, supported by robust profits from tech firms and the Communist Party’s new leadership line-up. The blue-chip CSI300 index rose +0.5%, while the Shanghai Composite Index gained +0.3%.
In Europe, regional indices trade mixed, with focus on the ECB rate decision tomorrow. A stranger German IFO reading this morning did little to move the market, while a slightly stronger U.K. GDP print is supporting the pound (£1.3193) and consequently putting pressure on the FTSE100.
U.S. stocks are set to open in the red (-0.2%).
Indices: Stoxx600 -flat at 389.4, FTSE -0.4% at 7498, DAX flat at 13010, CAC 40 +0.2% at 5405, IBEX 35 +0.4% at 10241, FTSE MIB flat at 22629, SMI -0.1% at 9183, S&P 500 Futures -0.2%
2. Oil hovers near four-week high on Saudi pledge, gold lower
Oil prices are largely steady; hovering near a four-week high after top exporter Saudi Arabia said it was determined to end a supply glut.
Brent crude is up +8c at +$58.41 a barrel, after settling yesterday up +1.7%. U.S. West Texas Intermediate (WTI) is trading down -9c at +$52.38.
Earlier today, the Saudi Arabia’s Energy Minister Khalid al-Falih said the focus remains on reducing oil stocks in industrialized countries to their five-year average and raised the prospect of prolonged output restraint once OPEC’s supply-cutting pact ends.
Note: OPEC plus Russia and nine other producers have cut oil output by -1.8m bpd since January. The pact runs to March 2018, but they are considering extending it.
API data yesterday showed that U.S. crude stocks rose by +519k barrels last week. The market was expecting a decline of -2.6m barrels. The U.S. Energy Information Administration (EIA) will release official government inventory at 10:30 a.m. EDT.
Ahead of the U.S. open, gold prices have edged lower, pressured by a firmer U.S. dollar amid speculation over who will be the next Federal Reserve chief. Spot gold is down -0.2% at +$1,273.70 an ounce.
3. U.S. Sovereign yields back up
U.S. bonds yield continue to edge higher as investors anticipate tighter monetary policies. The yield on the U.S. 10-year note has backed up above +2.41% and any signs from the ECB tomorrow that they will be reducing QE should support higher Euro debt yields.
The market is also pricing in a good chance that U.S. President Donald Trump could nominate a replacement for Janet Yellen, who would quicken the pace of interest-rate increases. Yellen has indicated that tightening is going to continue and she’s the most ‘dovish’ of the candidates to lead the Fed over the next four years.
Also weighing on U.S. Treasury prices are upcoming debt auctions that will add to the supply of outstanding bonds. The Treasury Department is scheduled to sell +$34B of five-year notes today and +$28B of seven-year notes Thursday.
Elsewhere, Germany’s 10-year Bund yield has dipped -1 bps to +0.47%, while the U.K.’s 10-year Gilt yield declined -1 bps to +1.349%.
4. Dollar hangs tough
The EUR (€1.1771) is little changed ahead of the U.S. open with the market focus on tomorrow’s ECB policy meeting. The single unit has shown little reaction to this morning’s stronger German October IFO Business Climate survey hitting a fresh reunification high. The ECB is expected to outline plans to scale back its bond purchases under its QE program with tapering expectations shifting towards a “lower for longer” approach.
Sterling (£1.3193) has found support after U.K. Q3 Advance GDP data registered a slight beat (see below) and keeps market expectations that the Bank of England (BoE) could hike rates early next month. The futures market is pricing in an 80% chance of a hike in November.
USD/JPY (¥114.19) is back trading atop of its three-month high. The USD is firmer after John Taylor supposedly won an informal ‘straw poll’ among GOP senators for Fed Chair appointment at lunch with Trump on Tuesday.
Softer CPI data out of Australia is weighing upon the AUD/USD (A$0.7704) as inflation remains below the lower end of the RBA’s +2-3% inflation target.
5. U.K economy accelerates
Data this morning showed that the U.K. economy accelerated in Q3, according to a preliminary estimate, strengthening expectations that the BoE may raise interest rates as soon as next month.
The ONS said U.K. GDP expanded +0.4% in Q3 compared with the previous three months, an annualized rate of +1.6%.
The performance marked a small improvement from Q2 when the U.K. posted the slowest growth among all 28 countries of the European Union, alongside Portugal, at +0.3%.
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