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NZ Morning Focus

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Fuseworks Media
Fuseworks Media


- Hard commodity prices remained under pressure, especially oil/energy.

- European equity markets had a better session, but falls in commodity prices weighed on US companies with energy earnings exposure again.


UPCOMING TODAY: QVNZ house prices for December, Australian job vacancies for November and Chinese trade data for December.

CURRENCY: With commodities printing fresh lows, China intervening in the market, and any bounce in US equities lacking conviction risks remain to the downside for the NZD and AUD.

RATES: Local yields are expected to open a touch lower, with pressure for the curve to flatten following US moves.


CURRENCY: The USD outperformed overnight with the GBP dropping to the lowest level since 2010. Both the NZD and AUD fell, but not as much as the pound. EUR grinded lower and the CAD dropped with oil prices.

GLOBAL MARKETS OVERVIEW: The downbeat feel to the start of the year continued despite a reprieve for European equity markets as key bourses (FTSE 100, DAX, CAC 40) gained around1-1.6%. Confidence appears fragile, though. Commodity price weakness is still a big focal point, with the CRB hitting a new 14 year low overnight, down 1.3% (-8% year-to-date). Oil prices fell a further 3-4% on expectations of higher US stockpiles. Industrial metal prices also remained under pressure, with gold prices also down. Bucking the falling trend were increases in grain prices. The weakness in commodities saw European and US equity markets trim earlier gains as the session progressed. US bond yields fell, with 10 yields back 6bps to 2.11%.


EL NINO YET TO RAVAGE: as far back as early 2015 there’s been a lot of attention on farms and elsewhere devoted to the possible impacts of El Nino and pre-planning for these. This attention only increased as the forecasts for intense El Nino conditions during the summer/autumn period strengthened. However, while there are localised effects the economy wide impact so far has been a bit of a fizzer. There have been localised dry conditions across the country most notably in North Canterbury/Marlborough for an extended period and parts of Otago/Manawatu at present, but they have been far from widespread, such as in 2013. Indeed the likes of Hawkes Bay, Gisborne and the Bay of Plenty, which had been expecting dry conditions due to the typically weather pattern associated with El Nino are generally having very good seasons due to regular rainfall events. The 2015/16 El Nino is still considered to be one of the top three strongest events. However the latest ocean surface temperatures have started to cool, indicating that the peak may have been reached at the end of 2015. NIWA say El Nino conditions are expected to remain in the strong category over the next three months with its effects likely to persist into the autumn. So farmers are certainly not off the hook yet. A dry autumn can lead to a tough winter for livestock farmers. For now though the widespread rainfall in the early New Year, that put an end to many camping holidays, and prospects for more rain over the next couple of weeks has improved the near-term pasture outlook warding off drought conditions in many places. This reduces the downside risks for milk supply over the second half of 2015/16, will lower peak seasonal throughput for lamb and beef processing numbers, boosts feed reserves (winter crops and silage), as well as ensures many of the main horticultural crops have enough water to make it through to harvest time. This suggests the risks posed by El Nino to the New Zealand wide economy have subsided for now. As always a watching brief needs to be kept, but this is always the case with weather and agriculture.


- US: The December NFIB small business optimism index rose to 95.2 vs 94.9 suggesting that businesses were not discouraged by the FOMC’s decision to start normalising interest rates last month. The JOLTS job openings for November rose to 5.43m vs 5.35m in October suggesting demand for labour remains strong and consistent with the strength in non-farm payrolls during Q4.

- UK: A sharp decline in industrial production in November, falling by 0.7% m/m to see the annual rate of growth ease to just 0.9%. The main drag was the energy sector, with low prices not helping and the warmer weather seeing energy demand reduced, feeding into lower production. Oil and gas production fell by 1.8% m/m, while utilities production eased 2.1% m/m and mining dropped 1.6% m/m. Manufacturing remained weak (as it does globally), with activity falling by 0.4% m/m to be 1.2% lower compared to year ago levels. Combined with muted inflation and heightened financial market volatility, these data will act to keep the BoE on the sidelines at this week's meeting, and for months to come.

- Chinese equity bourses were more stable yesterday (Shanghai composite +0.2%, Shenzen +0.4%) and this led to a positive start to the European session. However, as commodity prices came under pressure so did equity prices. Key European bourses (FTSE 100, DAX, CAC 40) still managed to gain around1-1.6% over the session. The later opening US market saw commodity price weakness weigh more heavily on companies with energy earnings exposure, with major bourses down a touch at the time of writing. Consumer, health care and technology stocks all outperformed, whereas industrials, utilities and energy underperformed highlighting the changing fortunes bought about be low commodity prices.

- Core European Government bond yields finished largely unchanged after trimming earlier gains as commodity price weakness emerged. This also flowed into the US with 10 year Treasury yields declining 6bps to 2.11%; US 10 year yields have fallen 16bps since the start of the year. UK 10 year yields declined 3bps (to 1.75%), influenced by the weaker UK industrial production data.

- Commodity prices were under pressure again with the CRB index slipping 1.3% to be down 8% for the year-to-date. Crude oil prices were under pressure(Brent -3.2%, WTI -4%) driven by expectations of higher US stockpiles. Industrial metal prices also remained under pressure, falling 2.1%, with further falls in copper prices. Gold prices fell 0.8%, with silver prices down 0.6%. Grain prices rose 2-3%, supported by USDA estimates of the area of winter wheat planted being below expectations.


Global considerations continue to dominate trading with the rout in commodities, volatility in equities, and dislocation in the CNH market of key focus. Domestic property price data later today are unlikely to have a material impact on the NZD. Risks remain to the downside until global markets find some stability.

Expected range: 0.6490 - 0.6580


Both currencies fell against the USD overnight, however the NZD underperformed. Few local data releases suggest the cross will continue to be range bound. Medium term risk continues to be for a lower NZD/AUD cross.

Expected range: 0.9310 - 0.9380


Europe will release December inflation data which will begin to show the impacts of another leg lower in oil prices through the end of last year. Eurozone production data will also be released. With global markets still jittery, risks remain to the downside for this cross on safe haven flows.

Expected range: 0.5990 - 0.6060


The JPY’s 2016 assent has slowed this week, however the yen remains well supported. Risks remain to a lower NZD/JPY cross.

Expected range: 76.50- 77.35


UK industrial production surprised to the downside by a large margin, driving the GBP lower. With the pressure on the pound, expect NZD/GBP cross to grind higher.

Expected range: 0.4500 - 0.4555

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