U.S. equity markets reversed initial losses to close relatively unchanged on Monday in what was a fairly narrow trading range. Markets have rallied strongly since late June and it looks as though these gains are becoming exhausted with measures of momentum beginning to fade and some near-term weakness remains a decent probability as investors take a breather. The S&P500 shown on the first chart below whipsawed throughout the trading session before closing -0.06% weaker, the Nasdaq100 managed to gain +0.05% while the U.S. dollar index reversed initial gains of up to +0.47% before closing flat, up just +0.01%.
These comments have increased the speculation that the Fed will look to raise rates later this year, with the market looking to a speech by Fed chair Janet Yellen on Friday at the Kansas City Fed’s annual Jackson Hole symposium for guidance. While a bounce in the U.S. dollar currently makes sense given it has been highly oversold in the past fortnight I remain sceptical about the likelihood of a hike before the end of 2016. Non-farm payrolls have added fairly significant numbers over the past two months and we have seen some firming of wages however inflation remains below the Fed’s 2% target and unlike prior to hike in December 2015 we have not seen an increase over the past few months.
Economic growth remains tepid, as seen in the most recent GDP print for the second quarter of 2016 which suggests the U.S. economy is growing at a 1.2% annualised rate. Both business investment and productivity remain low, in fact we have seen a decrease in productivity over the past few months, down -0.6% in quarter one and -0.5% in quarter 2. I think most importantly perhaps were the minutes released last week of the Fed’s July policy meeting which showed a clear lack of unity amongst participants in whether or not to raise rates sooner rather than later. Most members “saw relatively low risk that a further gradual strengthening of the labor market would generate an unwanted increase in inflationary pressures” and had “ample time to react if inflation rose more quickly than they currently anticipated”. For reference the market implied probability of a rate hike implied by Fed Fund futures by the end of 2016 is currently around 50%.
Japanese equities gained on Monday with the Nikkei up +0.32% and Topix up +0.62% with the Yen weakening -0.29% following comments from Bank of Japan governor Haruhiko Kuroda who stated the BOJ won’t hesitate to act in adding further stimulus following the results of a review into the effectiveness of its monetary policy at its September 20-21st meeting.
Oil prices declined on Monday after Iraq stated it would increase production by around 150,000 barrels per day while at the same time rebel militants in Nigeria declared an end of attacks on oil pipelines in order to conduct talks with the government. Both WTI & Brent crude oil shown on the second chart below declined -3.03% & -3.52% after rallying more than 20% from the beginning of August on speculation around an output freeze at next month’s informal meeting on OPEC & non-OPEC members in Algeria. Natural gas futures gained +3.68% following forecast warmer temperatures into early September would increase the demand by power stations helping to reduce a supply glut. Copper prices fell -1.22%, iron ore futures gained +0.13% as did the Thomson Reuters CRB commodity index, up +0.13%. Meanwhile precious metals spot gold & silver fell -0.2% & -2.20% respectively.
European equity markets were generally lower, led by losses in the DAX30 & FTSE100 down -0.47% & -0.44% respectively while the Euro Stoxx 600 was flat, up just +0.09%. Meanwhile the Euro declined -0.27% while the Pound finished +0.52% stronger. We have key European data out tonight for manufacturing, services and composite PMI and this should help give the market a little more direction.
Domestically the ASX200 finished -0.21% weaker on Monday and the market is set to open flat this morning with ASX SPI200 futures up 3 points in overnight trading.
Data releases:
- German Manufacturing, Services & Composite PMI (MoM Aug) 5:30pm AEST
- Euro-zone Manufacturing, Services & Composite PMI (MoM Aug) 6:00pm AEST
- U.S. Markit Manufacturing PMI (MoM Aug) 11:45pm AEST
- Euro-zone Consumer Confidence (MoM Aug) 12:00am AEST
