Good morning and happy Friday. Here’s what traders will be talking about before markets open.
To the scoreboard:
Dow: 20,728 +68 (+0.33%)
S&P 500: 2,368 +7 (+0.31%)
ASX SPI200 Futures – June (20 minute delay): 5,889 +9
AUD/USD: 0.7654 +0.0012 -0.15%
Iron ore benchmark 62% fines: $US81.60 -$US0.60 (-0.72%)
1. Markets stay buoyant: ASX 200 futures are up a further 9 points as US shares posted another day of gains led by bank stocks. After slowing in March, US stocks managed to post a 5% gain for the first quarter as final Q4 2016 GDP figures were released and revealed stable growth of 2.1% (just above the forecast of 2.0%). European shares also rose, but the Euro remains under pressure after claims that the market overreacted to the European Central Bank’s policy outlook. Disappointing inflation data in Germany overnight (1.6% in March, down from 2.2% in February) saw it lose 0.77% against the US dollar to fall below $US1.07. Cleveland Federal Reserve President Loretta Mester was the latest Fed official to advocate multiple hikes to the benchmark interest rate this year. The yield on US 10-year treasuries rose back above 2.4% as the market weighs up the likelihood of an increase to the current forecast of two rate increases. Following the rise in yields, the US dollar index rose 0.5% to move back over 100.
2. China is on a losing streak: The Shanghai Composite Index lost 1% yesterday, posting its fourth straight day of losses as concern grows around the flow of liquidity and a bubbly property market. Reuters reported that Chinese authorities kept the liquidity tap off for a 5th straight day, instead withdrawing another 40 billion yuan. Analysts cited increased risk that a property downturn would leave banks exposed after a record lending spree, as policy makers moved to put more restrictions on property developers. Volatility in newly listed stocks has also weighed on the Chinese market, with some stocks crashing by 10% (the maximum daily limit in China) after getting bid up by speculators.
3. Aussie dollar trades in a narrow range: The AUD managed to stay within a range of US76.50 and US76.80 cents overnight, with performance fluctuating against the major currencies as iron ore dropped slightly. Like other G10 currencies the Aussie gained against the Euro but fell slightly against a strongly performing pound in the immediate aftermath of Brexit. The EUR/GBP trade saw a significant break, as the GBP gained 1.1% in overnight trade and the Euro is now trading below its 200-day moving average of GBP0.8585 pence. Markets will be paying close attention on Friday to the European Union’s first official response to Brexit. Traders will also be keeping an eye on volatility in the USD dollar and South African rand, with the rand dropping significantly amid political turmoil and news that South African Prime Minister Jacob Zuma sacked his Finance Minister late on Thursday.
4. Emerging Markets attract global capital: An interesting trend is underway in emerging markets (EM) as trade momentum continues to build. EM economies sold a record amount of government bonds in the March quarter, with issuance increasing at a yearly rate of 48%. Corporate debt issuance also surged by 135% from same time last year. Some of the increase is driven by a sense of urgency to lock in debt before the US continues raising rates later this year, but sentiment has also been driven by improving trade conditions and lower inflation in EM economies. Global trade grew at the fastest pace since 2010 in the three months ended January as EM economies posted a 4.2% lift in export volumes.
5. Oil hits a three-week high: Benchmark crude rose another 1% and West Texas Intermediate gained 1.7% to climb back over $US50 a barrel after further commitments from OPEC members to reduce supply cuts beyond the initial May time frame. Kuwait’s oil minister confirmed that the country would commit to an extension while Russia (a non-OPEC country) advised that it had reduced production by 200,000 barrels a day in March. The International Energy Agency (IEA) said that it did not expect a significant increase in the price of oil despite the likelihood of a supply cut extension. Significant inventory build up remains and US production will be maintained, with the controversial North Dakota pipeline (500,000 barrel per day capacity) expected to be operational next month.
6. US companies on the charge in Europe: First quarter M&A activity in Europe posted a yearly increase of 16% to $US215.3 billion, as cheap valuations with some positive economic indicators fueled the takeover appetite. Activity was driven by US companies who spent $US114.3 billion in the quarter, the highest level ever recorded. US companies took advantage of a relatively strong dollar in comparison the Euro and Pound, as well as access to cheap debt to finance deals in a low interest rate environment. Overseas activity in America went in the opposite direction due to the strong protectionist stance of the Trump administration. M&A deals in the US were also slowed by less Asian investment, as Chinese officials crack down on capital leaving the country.