Originally published by Rivkin
Data releases in Europe surprised to the upside on Wednesday with better services and composite PMI from both mainland Europe and the U.K. The final reading of the Markit Euro-zone services PMI (MoM Sep) surpassed estimates to remain unchanged at 52.1 with an actual reading of 52.2 while the composite reading was in line with forecasts of 52.6. Similar surveys for the U.K. also added to the recent stream of better than expected data, with services PMI (MoM Sep) up to 52.6 against estimates of 52.2 while the composite measure registered 53.9 with expectations for a reading of 52.3. Euro-zone retail sales (YoY Aug) were also released, coming in lower than forecast at 0.6% down from 1.8% previously and 1.5% expected.
The Euro was flat against the U.S. dollar as it continues to hover around the 1.1200 level while German Bund yields rose on concerns surrounding reports that the ECB is considering tapering its current QE program. The yields on two-year debt rose +1.8 basis points to (-0.67%) while ten-year debt yields jumped +8.6 basis points to (-0.05%). European equity markets were broadly lower, with both the Euro Stoxx 600 & DAX30 down -0.55% & -0.32% respectively.
While recent data out of Europe has stabilised which is an encouraging sign, it logically does not make sense for the ECB to wind back on stimulus yet, not with unemployment still above 10% and inflation below the 2% target. If the ECB is concerned about the financial imbalances, the effects on the financial industry or running out of eligible bonds to purchase they have a number of different policies they can switch to, for example adopting a yield curve target rather than a specific purchase target similar to Japan.
Looking ahead we have an upcoming Italian referendum, Brexit negotiations beginning in March 2017, as well as French & German elections in 2017 all of which have the potential to cause significant volatility across financial markets thereby tightening financial conditions in the EU.
In the U.K. the GBP/USD halted a five day decline against the U.S. dollar rising +0.16% having been heavily oversold the past few days. U.K two-year gilts yields were unchanged around +0.124% while the yield on ten-year gilts increased +3.5 basis points to (+0.820%). Both the FTSE100 & FTSE 250 declined -0.58% & -0.77% having moved to new all-time highs during the previous session.
Across in the U.S. equity markets gained, bonds declined and the USD was flat following better than anticipated data adding further strength to the likelihood of a rate hike in December, which is now priced over a 60% probability implied by futures. A report by the ADP research institute suggests that payrolls increased by 154,000 during September down from 177,000 previously ahead of Friday’s government non-farm payroll data. Currently it is estimated that to keep the unemployment rate stable only 100,000 new jobs per month are needed to keep up with the population growth.
The U.S. trade balance (MoM Aug) increased slightly from -$39.5b in July to -$40.7b, the ISM non-manufacturing composite survey (MoM Sep) exceeded expectations of 53.0 with an actual reading of 57.1. Factory orders (MoM Aug) were also higher than forecast at +0.2% against -0.2% estimated and a final reading of durable goods orders (MoM Aug) gained +0.1% with expectations for zero growth.
Both the S&P 500 & Nasdaq 100 gained +0.43% & +0.38% respectively with gains led by energy (+1.43%) & financials (+0.89%) while defensive sectors telecommunications & utilities both declined -0.63% & -0.24% respectively. Defensive sectors tend to be more yield driven and fall out of favour as the economy improves and becomes less appealing as rates rise. U.S. government debt yields also increased, two-year debt up +1.6 basis points to +0.8376% as was ten-year debt up +2.4 basis points to (+1.7074%). A measure of the U.S. dollar against a basket of peers was little changed, down just -0.03%.
In the commodity space oil prices continued recent gains following an unexpected decline in U.S. crude oil inventories. Data from government agencies showed that inventories for September 30th declined by -2.976m barrels with the market anticipating an increase of 1.5m barrels. Both Crude Oil & Brent crude gained +2.18% & +1.79% respectively, the highest levels in three months however still significantly well below the $110 levels from 2014 shown on the first chart below. Natural gas prices increased +2.36% on further expectations of a decline in U.S. output, copper prices also gained +0.19% and the broader Thomson Reuters CRB index finished +0.72% higher. Precious metals spot gold & Silver closed -0.08% & -0.29% lower.
Locally the S&P/ASX 200 closed -0.57% lower on Wednesday at 5,452.93 while we can expect a stronger open to the market this morning with ASX SPI200 futures up 25 points in overnight trading. The Australian dollar swung between gains and losses before finishing relatively unchanged, up just +0.11% as Australian retail sales (MoM Aug) increased +0.4% surpassing forecasts of a +0.2% gain.
Data releases:
- Australian Trade Balance (MoM Aug) 11:30am AEDT
- German Factory Orders (YoY Aug) 5:00pm AEDT
- German Construction PMI (MoM Sep) 6:30pm AEDT
- German & EU Retail PMI (MoM Sep) 7:10pm AEDT
- U.S. Continuing & Initial Jobless Claims (Sep 24 & Oct 1) 10:30pm AEDT
This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd.