Good morning! Here’s what you need to know to start your week.
To the scoreboard:
Dow: 20,915 -20 (-0.10%)
S&P 500: 2,378 -3 (-0.13%)
SPI 200 Futures – March (20 minute delay): 5,802 +3 (+0.05%)
AUDUSD: 0.7705 +0.0028 (+0.36%)
Iron ore benchmark 62% fines: $US92.36 -$US0.27 (-0.29%)
1. G20 fallout: The meeting of G20 leaders over the weekend is unlikely to have much of an effect on early trading in markets. Importantly, there was strong agreement that international cooperation on foreign exchange markets is imperative to avoid excessive volatility and exchange rate exploitation. G20 delegates were less conciliatory on the subject of trade, as US Treasury Secretary Stephen Mnuchin repeated the protectionist stance of the Trump administration. Mnuchin said he agreed with free trade in principle, but that some trade agreements may need to be renegotiated. Disagreements on trade are unlikely to move markets in the short term, with analysts pointing to meetings later this year between Donald Trump and Chinese Premier Li as being more likely to shape the global trade outlook.
2. Pound shows renewed vigour: After falling to around US$1.21 earlier in the week, the GBP closed the week at US$1.2396 following more hawkish sentiments from the Bank of England in conjunction with a dovish US Federal Reserve. Analysts still expect the GBP to face headwinds due to uncertainty around the two-year process for Brexit once Article 50 is triggered. Deutsche Bank has offered a share-trading strategy based on UK companies that would benefit from a weaker pound. The AUD broke through US77 cents on Friday, which has proved to be its recent ceiling. Speculators have taken a more bullish stance, with AUD longs at their highest level since April 2016 and the currency is expected to perform well this week.
3. US treasuries – bulls or bears?: Analysts are split in their forecasts for the yield on US 10-year government bonds. Predictions for the yield on US 10-years as at the end of the June quarter ranged from 2.23% to 3% (after briefly reaching 2.6% last week, the yield closed down at 2.501%). The consensus forecast was at 2.65%. Views differ as to whether US treasuries will act as more of a safe haven asset due to political uncertainty (pushing yields down) or whether yields will rise further from a June 2016 low of 1.32%, assuming that the US Federal Reserve continues to raise rates and the Trump administration can effectively enact its fiscal stimulus measures.
4. Oil outlook is murky: Oil traded in a narrow band at the end of last week, as both benchmark crude ($US51.73) and US crude ($US48.75) indexes barely changed on Friday with low volumes. Traders are reassessing their positions as the outlook for global supply becomes more unclear. With the recent boom in US shale oil supply, a rise in the oil price is reliant on the effect of the OPEC cuts working their way through the supply chain. Saudi Arabia has reduced its supply further to pick up the slack while other OPEC members have continued to pump oil. There’s some doubt as to how much patience Saudi Arabia has to continue supply cuts in light of US shale drilling and the failure of other OPEC members to adhere to the supply cut agreement.
5. Data this week: It’s a relatively light week of key data in Australia, but the ABS releases house price data on Tuesday which is sure to attract some attention. The US reports its current account deficit for Q4 2016 on Tuesday, which is expected to increase from US$128 billion from US$113 billion. The US house price index is on Wednesday and Federal Reserve chair Janet Yellen gives a keynote address on Thursday.
6. US$3 trillion shift is underway: A report by Morgan Stanley and Oliver Wyman predicts that capital flows into Exchange Traded Funds (ETFs) could reach as high as $US3 trillion over the next three to five years. The shift is putting strain on the mutual fund industry, with managers cutting fees to reduce capital outflows as mutual funds struggle to compete with the cheaper and transparent ETF model. In a unique twist, mutual funds are now deploying capital into ETFs to benefit from simple index exposure as part of their portfolio. Credit Suisse estimates that ETFs will increase their market share from 15% to 40-60% over the next 10 years.