The big story talked about on the floors this morning is the bullish move in oil, which, in part were driven by a 2.8% gain in gasoline prices.
Some are turning their attention on Iran, but the main focus is on Hurricane Florence and the impact on the US east coast, and we have seen a state of emergency being called in D.C, Maryland and Virginia. This is having an effect on gasoline prices, with the natural read through into higher US crude prices, which themselves have gained over 3% and closed nine cents away from breaking through $70 – could this occur in Asia today?
Brent crude had a less pronounced gain of 2.7%, and this needs monitoring as the price is sitting at the top of its multi-month range and looks destined to break into the $80 area. We can also throw in a massive 8.4m barrel draw in the weekly API inventory report, which provides a feel that the consensus for tomorrows official DoE inventory report, which calls for a 1.58M draw, is too pessimistic.
The moves in crude have helped sentiment towards the S&P 500 energy sector, which closed up 1% and only bettered by telcos. So, equity investors didn’t get too carried away, while credit traders possibly took more heart, with high yield credit spreads coming in five basis points relative to risk-free rates. The broader S&P 500 once again found support off the former August highs of 2865, with the buyers stepping in and pushing the index higher to close +0.4% at 2887. With price closing above Mondays high, the result was a bullish outside day reversal on the daily chart, which, should we see further bullish flows today (and a higher high) argues for new highs in the S&P 500. The bulls, it seems, have wrestled back control.
Despite this move in the S&P 500 cash market, SPI futures are a touch lower from 16:10aest, which suggest a softer start for the local index. That said, I wouldn’t be surprised if ‘turnaround Tuesday’ morphs into ‘follow through Wednesday’ and the buyers feed off the positive S&P 500 tape, supporting the open, with energy names firing up. All eyes fall on China though, and as we get closer to 2600 on the Shanghai Composite and 3200 on the CSI 300, there could be greater concerns around the wealth effect and the feedback loop weaker asset prices could have on economics.
US data has been partially in play, with a solid read in the JOLTS report, with job openings gaining 117,000 to 6.93m and another new record. NFIB small business confidence also hit a new record, where the ‘plans to hire’ survey also moved to a new all-time high and throws further fuel to the fire that the US labour market is in rude health and the Phillips Curve is not broken after all. We shall see tomorrow night (22:30aest), with US core and headline CPI due out with economists expecting another strong read of 2.4% and 2.8% respectively. One suspects a headline CPI print north of 3% will send tremors through markets and its no surprise to see that rates traders are managing exposures accordingly, with the yield differential seen between the Eurodollar December 2018 and December 2020 contract pushing out by a further four basis points (bp) overnight to 42.5bp.
Fixed income markets have also seen decent selling across the curve, spurred on by the moves in crude and the mentioned data. An article in the Wall Street Journal detailing that Chinese companies are going on a ‘charm offensive’ to encourage investment from US multinationals has resonated too, pushing a view that China could be submissive in a bid to change the tide around the trade tensions. We can see German 10-Year bunds have broken out of the recent highs, closing at 43bp. While in US 5-Year treasuries have lead the charge, closing at 2.86% and eyeing a break of the 1 August highs of 2.88% and perhaps could have even pushed above here if it weren’t for a fairly solid $35bUS 30-Year Treasury sale.
Certainly, fixed income should be watched here, especially if we adjust yields for inflation expectations, as ‘real’ yields matter to investors and we can see both 5- and 10-year ‘real Treasury yields threatening to break out of their multi-year highs and this could have significant implications for markets. This is especially true for the appeal of the USD and could add more misery to emerging markets or gold.
The moves in crude and fixed income have had mixed impacts on G10 FX markets, with USD/JPY the cleanest way to play higher bond yields. Here, we see USD/JPY trading into ¥111.60 and the top of the recent range. The trend is still sideways here, so it's compelling to want to fade moves in this pair into ¥111.80, and its hard to be too exposed to the USD on the risk we get a poor CPI print tomorrow, with the market seemingly positioned for a slightly hotter-than-consensus print.
USD/CAD shorts have worked fairly well, with price smashing back through 1.31 and currently testing the 50% retracement of the August to September rally at 1.3058. While the CAD gets the tailwind from strong oil prices, as does NOK (Brent), we are hearing Trump detail that talks with Canada are going ‘very well’. Reuters is reporting that Canada is offering the concession of limited access to their dairy market.
EUR/USD lacks any real direction at this juncture, tracking a range of $1.1644 to $1.1566, as is the case for AUD/USD, which has followed EUR/USD fairly closely and itself held a range of $0.7129 to $0.7085. Todays Westpac consumer confidence print at 10:30aest shouldn’t move the pair too greatly, and traders will need to manage exposures ahead of tomorrow’s Aussie jobs report and US CPI.