Global asset prices extended gains from Wednesday following both the BOJ tweaking its policy framework and a more dovish outlook for 2017 from the FOMC. Thursday was fairly data light and for the moment it is central bank outlooks that are guiding risk sentiment ahead of an upcoming meeting between oil producing nations next week, third quarter earnings in October and an upcoming U.S. presidential election in November.
U.S. equity markets rallied with both the S&P 500 & Nasdaq 100 finishing +0.65% & +0.77% higher with all ten sectors of the S&P500 positive for the session led by gains in Telecommunications & Consumer Non-cyclicals up +1.09% & +0.96% respectively. The first chart below shows both the S&P500 index which is modestly below all-time highs while the Nasdaq100 has moved to new all-time highs. The U.S. dollar fell against a basket of its peers down -0.30% while yields on U.S. government debts fell with both the two & ten year yields falling -1.6 basis points & -5 basis points to +0.7744% & +1.6183% respectively.
U.S. continuing claims for unemployment for September 10th fell more than anticipated to 2.133m against expectations of 2.14m and continuing claims for September 17th also declined to 252,000 with forecasts for a modest gains to 261,000 continuing to support evidence of a healthy labour market. Elsewhere a measure of house prices (MoM Jul) gained +0.5% surpassing estimates of +0.3% while existing home sales (MoM Aug) declined more than forecast, down -0.9% against estimates of a +1.1% gain. Finally a gauge of U.S. leading indicators declined -0.2% missing forecasts to remain unchanged after advancing +0.5% in July.
In Europe key equity benchmarks also rallied, led by gains in both the Euro Stoxx 600 & DAX up +1.58% & +2.28% respectively while the Euro pared the majority of initial gains to close modestly higher, up +0.16%. There was no key data out for Europe aside from a consumer confidence survey (MoM Sep) which was in line with expectations for a reading of -8.2, modestly higher than the previous reading of -8.5. The yields on benchmark European sovereign debt, German Bunds, also declined with both two-year and ten-year yields falling -0.8 & -10 basis points respectively to yield -0.668% & -0.092% respectively.
Mario Draghi also spoke at an annual meeting of the European Systemic Risk Board where he touched on the issue of overbanking in Europe and low bank profitability noting that the ECB analysis suggests that revaluations in fixed income portfolios of banks outweighs the negative effects of squeezing interest margins as a result of overbanking and declining longer-term interest rates. He also touched on risks beyond banking including liquidity mismatches, especially among some bond funds, as well as the interconnected nature between banks and shadow banks including money market funds. Finally he also touched on a macro prudential focus such as using margins and haircuts in a counter cyclical manner to help contain any excessive build ups in leverage.
In the U.K. both the FTSE100 & FTSE250 gained +1.12% & +0.30% respectively along with the Pound which finished +0.31% higher. A statement from the Bank of England’s Financial Policy Committee on Thursday highlighted they believe there remains the ongoing threat of a “sharp adjustment” in commercial real estate and of overseas investors deciding to divert funds away from the U.K. in the wake of the decision to leave the EU, such outflows of funds for the U.K. would act to tighten funding conditions.
The second chart below shows the British Pound along with the FTSE100 which has significantly benefited from a weaker GBP/USD following the Brexit given the large exposure of constituents to overseas earnings. However we can see the Pound is basically stuck in a trading range at the moment as the FTSE100 moves higher, this effectiveness of this inverse relationship seems to be dissipating as recent improving data out of the U.K. along with a dovish Bank of England has helped to create a goldilocks environment for equities.
In Asian Japanese equity markets did not trade on Thursday due to a public holiday, this follows from gains in both the Nikkei & Topix on Wednesday of +1.91% & +2.71% respectively. It’s difficult to gauge whether we will see a continuation of these gains today in sympathy with other global markets given futures trading for the Nikkei225 finished down 240 points on Wednesday and the Yen has strengthened +0.88% against the U.S dollar since Wednesday morning which tends to weigh on equities.
Commodity prices were higher again on Thursday helped by a weaker dollar, both WTI & Brent crude gained +2.16% & +1.20% respectively ahead of next month’s meeting in Algeria between OPEC & non-OPEC producers. Copper prices gained +1.77%, natural gas fell -2.09% as U.S. natural gas storages declined modestly less than expected and the Thomson Reuters CRB index gained +0.79%. Precious metals spot gold & silver reversed initial gains to close fairly flat, up just +0.02% & +0.20% respectively.
Locally the Australian pared most of its gains on Thursday to finish +0.15% higher as the ASX200 gained +0.65% to close at 5,374.46. We can expect a stronger open for the market this morning with ASX SPI200 futures up 27 points in overnight trading.
Data releases:
- Nikkei Manufacturing PMI (MoM September) 10:30am AEST
- Japan All Industry Activity Index (MoM Jul) 2:30pm AEST
- French GDP (YoY Q2) 4:45pm AEST
- German Manufacturing, Services and Composite PMI (MoM Sep) 5:30pm AEST
- Euro-zone Manufacturing, Services and Composite PMI (MoM Sep) 6:00pm AEST
- Canadian Retail Sales (MoM Jul) 10:30pm AEST
- Canadian Consumer Price Index (MoM & YoY Aug) 10:30pm AEST
- U.S. Manufacturing PMI (MoM Sep) 11:45pm AEST
- Federal Reserve’s Harker, Mester and Lockhart speak at Philly Fed Conference 2:00am AEST
- U.S. Baker Huges Rig Count (Sep 23) 3:00am AEST
This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd.
