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Markets remain on edge about a 'hard' Brexit
Sunday, 9 Oct 2016 11:56:27 | Stephen Letts
The futures market points to a flat-to-marginally higher opening locally. (AP Photo: Seth Wenig)
After a few days filled with worries about deteriorating global growth, the UK's exit from Europe being "hard", the possibility of a European "taper tantrum" and a solid but hardly spectacular US jobs report, global markets largely went down giving a weak lead to week ahead.
US stocks fell 0.7 per cent over the week, Europe was marginally down and Australia chiselled out a 0.6 per cent gain.
The futures market points to a flat-to-marginally higher opening locally despite Wall Street losing more ground on Friday.
Markets on Friday's close:
- ASX SPI 200 futures +0.1pc at 5,458
- AUD: 75.83 US cents, 67.67 euro cents, 60.96 British pence, 78.02 Japanese yen, $NZ1.058
- US: Dow Jones -0.2pc at 18,240 S&P500 -0.3pc at 2,154 NASDAQ -0.2pc at 4,865
- Europe: FTSE +0.6pc at 7,044 DAX -0.7pc at 10,491 Eurostoxx50 -0.7pc at 3,001
- Commodities: Brent oil -1.1pc at $US51.93/barrel, Gold +0.2pc at $US1,256/ounce, Iron ore -0.2pc at $US54.40/tonne
Friday's "flash crash" in the UK pound showed while traders may not be that twitchy, their automated strategies and algorithms certainly are and there are plenty of unseen dangers primed to generate a tidal wave of sell orders in the global financial bazaar.
While the UK has re-emerged as one of the new big risks — and the pound's 4 per cent capitulation last week made it the biggest loser on global currency tables — its equities market is booming, hitting a record high during the week and rising again after the flash crash.
That might seem counterintuitive but the surge has been driven by the "mega-caps" in the FTSE 100 index that make the bulk of their money outside Britain and get a hefty earnings boost from the pounding of the pound.
Betting of a Fed rate rise in December shortens
A rise in US non-farm payrolls of 156,000 in September was a bit below expectations but solid enough to firm the prospects of the Federal Reserve raising rates another notch in December.
Forget about a November move — just a week before the presidential vote would be politically a bit too "courageous".
An increase in the participation rate in September was just enough to edge unemployment up from 4.9 per cent to a rounded-off 5 per cent, while wage growth was slightly stronger than expected although still weak.
The shortening odds of a December hike helped push the Australian dollar down a tad, finishing the week below $US0.76.
US profits still weak
However a bigger drive of sentiment next week will the latest round of quarterly earnings reports in the US kicking off with Alcoa on Monday.
The equation is delicate.
The S&P 500 is looking expensive with stocks above their long term trading multiple of 15-times earnings, having been bid up despite enduring a year long profit recession.
Analysts have forecast that third-quarter earnings will be down more per cent on last year, but up on the previous quarter thanks to stronger oil prices and the US dollar stabilising.
That will probably be seen as OK if there are enough positive surprises in the mix.
If the surprises are nasty and earnings don't even match the low earnings hurdle that has been set, the automated selling — this time in equities — might just fire up again.
RBA Financial Stability Review
It may not be a market mover, but Reserve Bank's half-yearly Financial Stability Review (Friday) gives a detailed insight into the risks lurking in the economy.
Regulator enforced tightening of home loan standards has taken some heat out of the investor sector, but prices — particularly in Melbourne and Sydney — continue to rise rapidly.
Bank of America Merrill Lynch's Alexandra Veroude said the biggest worries for the RBA could be the on-going super cycle in apartment construction and the risk it poses for investors.
"With building approvals remaining around peak levels, the RBA is likely to conclude that risks have grown in the space and emphasise the importance of prudent lending to this market,'" she said.
"The downturn of the mining investment boom has weighed on economic activity in Perth, resulting in a correction of property prices.
"We expect the FSR to highlight the growing risks in this market, especially as the construction pipeline remains elevated."
August home loan data will be released on Tuesday and is expected to show activity cooling a bit with both values and volumes down.
However investor loans have rebounded lately and heat is expected to return to the broader market as the spring auction season gathers pace.
The other key piece of domestic economic data to be released is the NAB's keenly observed business conditions and confidence surveys (Tuesday) which should remain broadly steady and above long-term averages.
China trade expected to slip again
Chinese trade data (Thursday) is still expected to be sluggish.
Imports are forecast to grow around 1 per cent, largely supported by Port Hedland shipping out a record 33.5 million tonnes of iron ore to China last month.
That would back the view the domestic economy maybe turning around.
However the Caixin composite PMI — measuring activity in the manufacturing and services sectors — released over the weekend slipped again despite higher prices being recorded and more jobs created in services.
Importantly Chinese business expectations fell which not a great sign looking forward.
Exports are likely to fall again as global trade remains stuck in the doldrums.
More from the Fed and oil likely to be volatile
The US will be dominated by the release of minutes from the last Federal Open Markets Committee meeting (Wednesday) where rates were left on hold and a speech from Fed Chair Janet Yellen (Friday).
The message that any increase in rates will be gradual will be central to both updates.
Oil may be in for a volatile week with a monthly update from the IEA out (Tuesday) and informal talks being held between OPEC players in Istanbul this week to resolve how the proposed production cut will be delivered.
The IEA's last missive had a gloomy "the glut will last for longer" sentiment, which temporarily hit the oil price, while private OPEC talks are notoriously leaky and also lead to a fair degree of short-term volatility.
| Australia | ||
| Monday 10/10/16 | Overseas arrivals BHP investor briefing | Aug: Tourism increasingly important export earner Focussing on oil and gas |
| Tuesday 11/10/16 | Housing finance Business conditions Consumer confidence Telstra AGM Fed Reserve speech | Aug: Investor lending the focus Sep: NAB series measuring business confidence and conditions, likely to remain above trend Weekly series from ANZ The Fed's Charles Evans speaks in Sydney |
| Wednesday 12/10/16 | Credit and debit card transactions Consumer confidence CSL AGM | Sep: May bounce back after falling in August, fuelled by high petrol prices and iPhone release Oct: Westpac's monthly series still above average |
| Thursday 13/10/16 | Iluka production S32 | Q3 production report Q3 production report |
| Friday 14/10/16 | Lending finance Financial stability review | Aug: Survey of home, business and personal loans Half year report from the RBA looking at financial risks, particularly in housing |
| Overseas | ||
| Monday 10/10/16 | EU: Eurogroup meeting | Reviews financial adjustment in Greece |
| Tuesday 11/10/16 | US: Business optimism IEA oil report | Sep: Surveys mainly small business Monthly survey has turned glum again |
| Wednesday 12/10/16 | US: FOMC minutes US: Job openings CH: New loans EU: Industrial production | Minutes from the Fed's September meeting Aug: Forward look at jobs market Sep: May ease back a bit Aug: Likely to drop again |
| Thursday 13/10/16 | CH: Trade US: Trade prices US: Federal budget update | Oct: Key import and export data Sep: Both import and export prices falling Sep: Measure of government spending |
| Friday 14/10/16 | US: Fed chair speech US: Retail sales US: Producer prices CH: Inflation
EU: Trade balance
| Fed chair Janet Yellen speaks in Boston Sep: Should bounce back after August fall Sep: Still very weak, around 1pc growth YoY Sep: Weakness likely to continue, around 1.5pc YoY Aug: Surplus of around 22bn euros maintained |
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