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ANZ Morning Focus

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Contributor:
Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- A subdued session in Europe, with markets moving into holiday mode.

- However, US markets were busy, with stocks sliding on technical factors, oil price falls and ongoing global growth concerns.

OUTLOOK

UPCOMING TODAY: Westpac consumer confidence for 4Q (10:00am) and November net migration and visitor arrivals data (10.45am) are the focus today.

CURRENCY: Markets are likely to be illiquid this week. This will mean some unlikely moves, with little to explain them, as flows are cleared. NZD is likely to find support from migration data today.

RATES: After a quiet London session, local rates should open unchanged.

REVIEW

CURRENCY: USD consolidated its way into the weekend, giving back some of its post-FOMC gains. JPY strengthened after the BoJ tweaked its programme, extending duration of its bond buying and tweaking the ETF programme.

GLOBAL MARKETS OVERVIEW: It was generally a subdued trading session on the last Friday before Christmas with little fundamental macro events to drive markets after the BoJ’s surprise tweak to its QE programme. That said, US equity markets had one of their busiest trading days of the year as the expiry of some futures and options contracts resulted in a sharp increase in trading volume. This, together with lower oil prices and ongoing global growth concerns, saw major US bourses finish down around 2%. Falls in European equities were more modest. Sovereign bond markets rallied and outside of oil, commodity prices generally strengthened.

ANZ’S ASSESSMENT

SO NOW WHAT? It feels like we had been talking about the timing and possible implications of the first Fed rate hike for pretty much the entire year. So now that the hike is finally behind us, and to date markets seem to have taken it pretty well (although recent US equity wobbles are worth keeping an eye on), we are no doubt entering a bit of a post-decision lull period (perhaps just like many local workers are feeling after their recent staff Christmas parties). But with so much focus on that one decision, it is of course natural to now pause and ask; so now what? The next couple of weeks will surely give people plenty of time to catch up on their reading and prepare themselves for the year ahead. But things will no doubt pick back up quickly again in the New Year as some key questions surrounding the outlook remain unanswered. Will it be FOMC members or the market that is correct in terms of the pace of future US interest rate hikes? How will asset valuations fare as the global cost of capital continues to get re-priced? Will Chinese officials be forced to deliver more stimulus to help shore up the economy and generate some inflation? Will the commodity price rout continue, or will supply eventually respond? There are many other questions too. Domestically (and beyond any possible spill-overs from global volatility and uncertainty), the biggest question is now no longer about the growth backdrop - that is clearly picking up (weather risks aside) - but whether or not domestic inflation pressures follow suit. Typically we would say yes. But recent history suggests some caution, and certainly there is an argument that structural forces are playing a role. Ultimately it is inflation - together with the stubbornly elevated NZD and possible credit market developments - that will decide whether or not the RBNZ returns to the rate cutting table next year.

OVERNIGHT SPECIFICS AND KEY EVENTS

- As part of the WTO’s "Nairobi Package" agreement signed over the weekend, developed nations have pledged to abolish export subsidies for farm exports, with the WTO Director General hailing it as the "most significant outcome on agriculture" in the organisations 20-year history. Under the decision, developed members have committed to remove export subsidies immediately, except for a handful of agriculture products, and developing countries will do so by 2018.

- Federal Reserve Governor Powell is watching for further labour market improvement to guide the path of future policy moves stating "We do look at a wide range of thing. For me, at the top of the list will be continued progress in the labour market, and with it, continued progress on inflation." He added "I want to see continued strong job growth. We’ve had three years of very strong job growth - I want to see that continue."

- US economic data was on the weak side of expectations. The preliminary estimate of the Markit services PMI fell to 53.7 (exp: 55.9) in December from 56.1 in November. Together with the manufacturing equivalent, the composite PMI fell to 53.5, from 55.9, which is the softest in 12 months. Additionally, the Kansas City Fed Manufacturing Index fell to -9 from -1 in December (exp: +1).

- Equity markets had a soft finish to the week. Markets in Europe gave back Thursday’s gains, with French and German bourses falling over 1% and the UK FTSE down 0.8%. Trading was generally subdued though. However, it was a busy session of trading in the US, with volumes sharply higher on the back of the expiry of some futures and options contracts (an event known as quarterly witching). Together with weaker oil prices and global growth concerns, US bourses finished down around 2%.

- Bond markets rallied. Weaker equity markets and further falls in oil prices were influential. 10-year yields fell around 5bps in France, Germany and Spain. US markets underperformed, however, (despite a sharply weaker equity market performance), with the yield on the 10-year Treasury note down 2bps to 2.20%.

- Crude oil prices again sunk to seven year lows after the EIA reported another rise in stockpiles. There were also news reports that the number of active US oil rigs rose by 17 over the past week to 541, continuing concerns of an ongoing supply glut. WTI and Brent crude prices fell a further 0.6% and 0.5% to USD34.70/bbl and USD36.90/bbl.

- However, other commodity prices generally strengthened, with the broad CRB futures index closing up 0.9%. Sixteen of the 19 constituent commodities rose (crude oil was an exception), with gains led by industrial and precious metals. Gold prices rose 1.4%.

NZD/USD: Consolidation…

The USD gave back some of its FOMC gains on Friday as the weaker run of data continued. This time it was the service sector with the Markit services PMI dropping to 53.7 from 56.1. The run of data weakness continues to reinforce the gradual message. NZ migration data should remain strong today, which eases pressure on the constrained labour market.

Expected range: 0.6670 - 0.6750

NZD/AUD: Above the median…

New Zealand and Australian data should take a back seat to liquidity over the coming weeks. Illiquid spikes are opportunities for importers to sell. The CAD continues to warn of further AUD and NZD depreciation.

Expected range: 0.9360 - 0.9460

NZD/EUR: Spanish election...

The results of the Spanish elections should come out this morning, with a close result predicted. Italian wages picked up a tenth in November, while the EU current account surplus shrunk, but remains impressive.

Expected range: 0.6160 - 0.6240

NZD/JPY: Twist and shout...

The BoJ surprised markets and enacted a mild easing on Friday. It extended the duration of bonds it would buy from 10 years to 12 years and tweaked the ETF buying programme. JPY initially weakened, but reversed course to end the week stronger.

Expected range: 80.80- 82.50

NZD/GBP: June referendum?

In a speech to EU leaders, UK PM David Cameron indicated the ‘Brexit’ referendum would be held in 2016, most likely June. This will see GBP underperform.

Expected range: 0.4480 - 0.4540

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