Good morning and happy Friday.
To the scoreboard:
Dow: 20,657 -5 (-0.02%)
S&P 500: 2,346 -2 (-0.11%)
ASX SPI200 Futures – June (20 minute delay): 5,712 +5 (+0.87%)
AUD/USD: 0.7628 -0.0061 (-0.79%)
Iron ore benchmark 62% fines: $US86.36 +$US1.38 (+1.6%)
1. A quiet day on markets ahead: After pushing higher on strong home sales data, US stocks gave up gains in late trading after House Republicans postponed the planned vote on the healthcare bill. A final vote on that bill could take place as early as Friday. US 10-year treasuries continue to fluctuate around the 2.4% mark. US Federal Reserve Chair Janet Yellen made no mention of monetary policy in her speech in overnight while Minnesota Fed Chair Neel Kashkari highlighted the need for the central bank to present a plan to the market for how it will go about reducing its balance sheet. The Fed is focused on 2% inflation for the US economy as the key driver for extra tightening of policy. The market expects a further two rate increases this year, with the probability of a third rate hike at 35%.
2. Oil trades flat ahead of OPEC meeting: West Texas Intermediate (WTI) was trading at around $48 per barrel ahead of a meeting between OPEC members in Kuwait to discuss the supply cuts agreed to in November 2016. The meeting comes as Saudi Arabia announced that it would be sticking to its commitment to reduce supply, stating that oil exports to the US in March would be 300,000 barrels lower than February. Saudi officials said this would help decrease US crude stockpiles which have hit record levels. After a week of heavy selling, iron ore spot prices finally steadied as benchmark 62% fines added 1.6% to $86.36 a tonne.
3. Currency wrap: The pound reached a one-month high against the greenback after strong retail sales data, climbing to over $US1.25. Analysts are mixed on the pounds prospects as the Brexit process gets underway, with Deutsche Bank predicting a drop in the currency as low as $US1.06. Weakness remains in the US dollar as it lost ground against japanese yen for the eighth straight day. The AUD was down 0.7% against the G10 basket of currencies, hitting a low of 0.7622 against the US dollar.
4. Grexit still on the cards: Britain may not be the only country to leave the EU, as focus has returned to the plight of Greece and whether its status as an EU nation is tenable. After showing some promise, Greece’s economy retracted by 1.2% in the December quarter. Greek banks have lost 4 billion euros in deposits since the start of 2017 as the country’s citizens fear a return of capital controls which would limit their access to savings. No agreement has been reached on a 7 billion euro loan repayment to the IMF due in June, and Greece’s debt obligations are growing faster than GDP. The situation means that Greece is subject to Eurozone restrictions but doesn’t receive any benefits from the monetary union. Watch this space.
5. Eurozone faces policy challenge: Like other central banks the European Central Bank (ECB) has embarked on huge stimulus measures in the wake of the GFC, buying bonds and cutting interest rates. While the US slowly reduced its bond buying program before raising interest rates, the ECB has kept both policies intact as growth in the Eurozone has been slower to pick up. With more positive data out of Europe, the ECB may look to unwind but the order in which it does so could be problematic, according to Mohamed El-Erian. Following the path of the US central bank would mean stopping asset purchases, but that would be in breach of the forward guidance offered by the bank which has pledged to keep buying bonds until the end of 2017. Political uncertainty in Europe will add to the ECB’s challenge of unwinding its stimulus program without sending shock waves through markets.
6. Financial markets unfazed by terrorist attacks: In light of yesterday’s events in London, data compiled over the last 15 years shows that markets typically brush off terror attacks, sometimes briefly dipping lower before getting back on track soon after. The random nature of terrorist attacks affects people’s morale, but generally has no effect on consumer spending or the underlying economy. Where a terrorist attack occurs around the same time as a key economic development, such as central bank stimulus, the economic indicator far outweighs the effect on markets from random acts of violence.