U.S. equities declined with bonds as the U.S. dollar strengthened, following comments from the Federal Reserve's Jeffrey Lacker that he would have voted in favour of raising interest rates in September. Lacker, who will vote on policy in 2018, cited “pre-emptive increases in the federal funds rate are likely to play a critical role in maintaining the stability of inflation”. The U.S. dollar index strengthened +0.45% as bond yields on two & ten-year debt increased +2.7 & +6.6 basis points respectively.
Equities were broadly lower, both the S&P 500 & Nasdaq 100 finished trading -0.15% & -0.50% lower. All ten sectors of the S&P500 were in negative territory for the session, with declines led by utilities (-2.18%), basic materials (-1.83%) and telecommunications (-1.49%).
The GBP/USD dropped to the lowest level since 1985 on Tuesday on continued concerns of a “hard” Brexit, preferring to curb immigration over preference to accessing the single market. The Pound shown on the first chart below along with the FTSE100 index, finished -0.91% lower on Tuesday taking its two day decline to -1.95%. U.K. government debt yields also rose and investors demanded a higher return to hold the debt, the two-year yield rising +3.2 basis points to (+0.126%) as did the ten-year yield up +5.4 basis points to (+0.785%). Data from the U.K overnight also showed that the Markit Construction PMI survey (MoM Sep) exceeded expectations of 49 with an actual reading of 52.3.
The declines in the currency are having the desired effect so far in helping shield the U.K. economy by making their exports more competitive, and the FTSE100 which has a large overseas earnings exposure jumped +1.30% overnight to close at a new all-time high. The FTSE250 which tends to be more domestically focused also moved to a new all-time high up +0.87%. At the same time we have witnessed better than expected data since the Brexit referendum and the Bank of England has stressed it is willing to look through higher inflation in the near-term and add further stimulus to protect the economy. This has the effect of creating a goldilocks situation for U.K. equities, particular for U.K. based investors or international investors who are able to hedge their currency exposure.
In mainland Europe the Euro pared back initial declines of up to -0.65% to finish relatively unchanged shown on the second chart below. Traders bought the Euro against the U.S. dollar following a report by Bloomberg citing unnamed ECB officials that the central bank may look to taper it’s quantitative easing purchases. The report states purchases could be reduced by around €10billion per month following the scheduled end of the program in March 2017. European equities shrugged this off to close higher led by gains in the Euro Stoxx 600 & DAX up +0.84% & +1.03% respectively while the yields on the German Bunds were unchanged.
The ECB will meet another four times prior to the scheduled end of their purchase program so there is still time to make a decision. Realistically any decision is going to be driven by the inflation outlook, currently at +0.8% year-on-year in August for the core measure at +0.4% for the headline measure. Overall the outlook for European data has stabilised somewhat recently which is an encouraging sign, however the argument for extending the program further into 2017 remains stronger than beginning to wind back stimulus.
Commodity prices were broadly lower given the strength of the U.S. dollar overnight, Crude Oil & Brent crude oil closed -0.37% & -0.12% weaker ahead of U.S. crude oil inventories tonight which are expected to show an increase in supplies. Copper prices fell -1.14% as did the Thomson Reuters CRB index down -0.91% while natural gas gained +1.74% following a decline in output to the lowest levels in two-years. Precious metals spot gold & silver were hit hardest by the strengthening dollar and outlook for U.S. interest rates, down -3.21% & -4.75% respectively.
Locally the S&P/ASX 200 reversed initial losses of up to -0.55% to finish trading higher for the day, up +0.10% as the RBA left interest rates on hold at 1.50% as widely anticipated. Meanwhile the market looks set to open weaker this morning with ASX SPI200 futures down 31 points in overnight trading as is the Australian dollar, down -0.77%.
Data releases:
- Nikkei Services & Composite PMI (MoM Sep) 11:30am AEST
- Australian Retail Sales (MoM Aug) 11:30am AEST
- U.K. Services & Composite PMI (MoM Sep) 7:30pm AEST
- Euro-zone Retail Sales (YoY Aug) 8:00pm AEST
- U.S. ADP Employment (MoM Sep) 11:15pm AEST
- U.S. Trade Balance (MoM Aug) 11:30pm AEST
- U.S. ISM Non-manufacturing Composite (MoM Sep) 1:00am AEST
- U.S. Factory Orders (MoM Aug) 1:00am AEST
- U.S. Durable Goods Orders – Final (MoM Aug) 1:00am AEST
- U.S. Crude Oil Inventories (Sep 30) 1:30am AEST