Originally published by Rivkin Securities
An historic moment on Wednesday as EU Council President Donald Tusk was handed a letter from UK Prime Minister Theresa May officially giving notice for the UK’s intention to withdraw from the union. This now triggers two years of talks set to conclude around March 30th 2019 at which point the UK will leave the EU. During this time the UK will seek to hold parallel talks negotiating the divorce settlement including the outstanding bill from prior commitments while also seeking to negotiate a comprehensive trade deal. The EU wants a basic deal for the divorce settlement in place by November 2017 with 2018 spent on a trade agreement while Scotland is seeking to hold a second independence vote around August 2018 depending on the terms of a deal the UK can achieve.
In reaction both the euro and the pound traded -0.43% and -0.10% lower shown on the first chart below respectively in line with a decline in both the UK and German two year yields of -3.5 and -4 basis points respectively. Spot gold was little changed, up just +0.03% and the yen rose +0.12% suggesting safe haven demand was relatively subdued. European equities were higher, the Euro STOXX 600 gained +0.33%, as did the FTSE 100 +0.41% and DAX +0.44%.
The US Dollar Index gained +0.23% following despite a -2 basis point drop in both the 2-year and 10-year yield. Overnight three Fed officials also spoke with Boston Fed President Eric Rosengren suggesting the Fed should raise rates four times during 2017. Rosengren who was previously an advocate of lower rates 18 months ago says the Fed should raise rates a little more quickly so they don’t over-heat the economy. San Francisco Fed President John Williams stated that three increases in 2017 were in line with his own forecasts, however the risks were to the upside and could not rule out more than three rate increases. Neither of the Presidents are voting members of the FOMC during 2017 however take part in the deliberations at each meeting.
Chicago Fed President Charles Evans who has been a busy speaker recently and a voting member in 2017 said that four hikes would require a further improvement in the fundamentals and the US could afford inflation modestly above target.
US equity markets closed the session higher with both the S&P 500 and Nasdaq 100 gaining +0.11% and +0.43% respectively. Gains on the S&P500 were led by the energy sector which rose +1.21% thanks to a spike in oil prices while financials were the underperformer, down -0.37% as yields declined. Both WTI and Brent crude oil jumped +2.17% and +1.89% respectively shown on the second chart below as US crude oil inventories for March 24th rose less than anticipated, increasing 867,000 barrels against estimates for a 2 million barrel increase.
Locally the S&P/ASX 200 index finished +52.28 points or +0.90% higher on Wednesday to close above the key resistance zone between 5,800 and 5,827. This is a bullish sign that signals the decent probability of a move up towards 6,000 by year end and this morning we look set to start trading slightly stronger with ASX SPI200 futures up +5 points in overnight trading.
Data releases:
· Eurozone Consumer Confidence (MoM Mar) 8:00pm AEDT
· German CPI (MoM & YoY Mar) 11:00pm AEDT
· US GDP (QoQ Q4) 11:30pm AEDT
· Fed’s Mester Speaks 12:45am AEDT
· Fed’s Kaplan Speaks 2:00am AEDT
· Fed’s Dudley Speaks 7:30am AEDT
Chart 1 – EUR/USD (Blue) and GBP/USD (Purple)
Chart 2 – Brent (Blue) and WTI (Purple) Crude Oil
Source: Rivkin, RivkinTrader