Market Seeks Rate Clarity, Dollar Drifts

Monday February 6: Five things the markets are talking about

Last weeks market data capped a week that saw monetary policy makers in Japan, the U.K. and the U.S stand pat, at least until they can truly assess the impact of Trumponomics on global growth.

The odds for a Fed March rate hike have dropped after Friday’s U.S jobs report showed weak wage growth even as hiring picked up – investors continue to expect a “gradual” approach to tightening.

For this week, on the economic data front, pales in comparison to last week. In Australasia, there are three central bank announcements – Reserve Bank of Australia (RBA) this evening (10:30 EST), Reserve Bank of New Zealand (RBNZ) and Reserve Bank of India (RBI). In Europe, there is merchandise trade and industrial production.

Stateside, Tuesday’s JOLTS openings and U.S trade report take center stage, while Friday’s consumer sentiment is expected to remain steady at post-election highs.

Note: A number of Fed speakers are expected to offer commentary on last weeks FOMC meeting.

North of the border, Canada will post its own merchandise trade balance, housing starts and its all-important jobs report on Friday (08:30 EST).

1. Global equities rally on Trump deregulation orders

Japan’s Nikkei rallied overnight as financial stocks climbed following measures ordered by President Trump to reduce regulation in the financial sector, although a slightly stronger yen kept gains limited. The Nikkei rose +0.3%.

Even Hong Kong stocks happened to snap their four-day losing streak on mainland demand. The benchmark Hang Seng index added +1.0%. Financial, telecommunication, and consumer goods sectors were among their best performers.

In China, equity gains have been hampered by last week’s People’s Bank of China (PBoC) tightening. The Shanghai Composite Index gained +0.5%.

In Europe, equity indices are trading mixed, but generally higher. Major banking stocks are trading mixed in the Eurostoxx, while commodity and mining stocks are leading the gains in the FTSE 100.

U.S equities are set to open in the ‘black’ (+0.1%).

Indices: Stoxx50 flat at 3,278, FTSE +0.2% at 7,205, DAX flat at 11,656, CAC-40 +0.3% at 4,838, IBEX-35 +0.1% at 9,470, FTSE MIB -0.3% at 19,053, SMI +0.2% at 8,370, S&P 500 Futures +0.1%

2. Oil finds firmer footing from dollar exploits

Oil prices are on the rise as investors shift money into crude futures as the dollar weakens, and over concerns that new U.S. sanctions against Iran could be extended to affect crude supplies.

However, intraday prices should be capped by growing U.S. production as well as worries that import demand in China could slow.

Brent crude futures are trading at +$56.96 per barrel, up +15c from their Friday’s close, while U.S. West Texas Intermediate (WTI) futures are up +18c at +$54.01 a barrel.

Note: Data last week showed that investors have raised their net long U.S. crude futures and options positions in the week to Jan. 31 to a record +412,380 lots.

Ahead of the U.S open, gold has surpassed the strong resistance zone of $1,219-21. The metal on Friday erased losses as the “big” dollar came under pressure from a payrolls report that flagged up weak wage growth in January, weakening the case for near-term interest rate hikes.

3. Sovereign yields remain rangebound

Investors are still nervous about the BoJ’s policy stance to keep a lid on the recent rise in domestic yields. Trading yen recently has been relatively volatile due to some of the wild yield moves on 10-year JGB’s. However, since the BoJ’s signal last week that it plans to buy more than +$6B worth of Japanese debt product with 5- to 10-year maturities, the market’s concerns have receded. But, another gain in benchmark yields is expected to rattle investors. Currently, 10-year yield is trading flat overnight at +0.095%.

Note: Trump and Japanese PM Abe are to meet later this week (February 10). The U.S. president has accused Japan’s carmakers of engaging in “unfair trade” practices and suggested he favours a weaker dollar.

Elsewhere, The yield on the benchmark 10-year U.S. Treasury note is trading atop of +2.44%. The yield on the 10-year U.K. gilt has dropped to +1.374% from +1.460% before the BoE decision last week, while the yield on the 10-year German bund has declined to +0.420%.

4. “Big” dollar is confined to tight ranges

The USD remains range bound outright against the majors as the market continues to digest Friday’s U.S jobs report. The non-farm payroll (NFP) headline figure showed a greater-than-expected rise in job growth (+227k. However, the unemployment rate edged up (+4.8%), while the m/m wage growth (+0.12%) was disappointing.

In Japan, Abenomics received another boost to its credibility after Japan’s overall 2016 real average monthly wages rose by +0.7% for its first rise in five- years and biggest increase since 2010. Currently, ¥112 remains key support for the USD/JPY pair (¥112.61).

The EUR/USD continues to hover around the mid-€1.07 area as the market awaits ECB’s Draghi’s testimony at the European Parliament for clues on the outlook for the central bank’s stimulus program.

Nevertheless, the ‘single’ unit remains vulnerable to selling due to eurozone’s political concerns – dwindling support for the French candidate Fillon in polls could weigh on EUR.

Elsewhere, INR has strengthened to a three-month high outright (INR67.19) as investors are again willing to take risks in EM.

Note: Foreign investors have invested about +$347m in India’s debt market so far this month, almost already erasing January’s -$512m net outflow.

5. Germany’s order data improves, Aussie retail disappoints

Euro data this morning shows that Germany’s December manufacturing orders posted their strongest monthly gain in over two-years (+5.2% vs. +0.8% e), led by big-ticket orders for capital goods.

Against the background of Brexit and Trump, the data suggests that the German industry could shift into a higher gear for H1 2017.

The increase was led by domestic demand and a sharp increase in orders from the rest of the eurozone.

Down under and ahead of this evening’s RBA decision, where expectations are largely for a rate hold, Aussie retail sales was disappointing, registering the first decline in over a year (-0.1% – first m/m decline since Aug 2015 vs. +0.3% e).

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