Originally published by Rivkin
Thursday was an interesting day for markets as investors tuned in to the third and final U.S. presidential debate as well as the decision on monetary policy by the ECB. While Trump certainly wins the award for “most improved” it seemed he did little to convince voters to help him narrow the Clinton lead, which according to the New York Times is 45.8% to 39.5% in a national average. That places Clinton with a 92% implied probability of winning the election versus Trump’s 8%.
Overall the reaction in financial markets was fairly muted, equity markets were modestly lower both the S&P 500 & Nasdaq 100 down -0.14% & -0.08% respectively. Declines in the S&P500 were led by telecommunications which were -1.85% lower as Verizon Communications Inc (NYSE:VZ) third quarter earnings disappointed and AT&T (NYSE:T) declined following reports by Bloomberg that the company had been in discussions with Time Warner Inc (NYSE:TWX). over a potential merger.
Verizon’s earnings update showed its core business of wireless operations struggled with increased competition as revenue fell -6.7% to US$30.94 billion from US$33.16 previously and missing estimates of US$31.14. The stock finished trading -2.46% lower after adding only 442,000 retail subscribers in the third quarter with market forecasts calling for 766,00.
The U.S. dollar index continued recent strength gaining +0.39% as a survey of economic expectations increased to 45 from 41.5, despite a slight drop in the current assessment as the Bloomberg weekly consumer comfort index declining to 41.3 from 42.1 . The yield on two-year treasuries also increased +2 basis points to +0.8231% while the yield on ten-year debt was unchanged at +1.7539%.
Further data from the U.S. showed initial jobless claims for October 15th missed estimates of 250,000 with an actual of 260,000 while continuing claims for October 8th was also modestly higher than anticipated, up to 2.057 million with estimates for 2.053 million. The housing market continues to show signs of strength with existing home sales (MoM Sep) up 5.47 million or +3.2% from -1.5% previously and forecasts of +0.4%.
In Europe the ECB kept its current monetary policy unchanged as widely anticipated by the markets with investors more interested in what Mario Draghi would say in the press conference following the decision. Similar to the September 8thmeeting Draghi stated that the council did “not discuss” an extension of the current stimulus program that will expire in March 2017. Instead he pointed to the December 8th meeting as possible opportunity to announce any changes to the program as the council would “benefit from the new staff macroeconomic projections extending through to 2019 and from the wok of the Eurosystem committees on the options to ensure the smooth implementation of our purchase program”.
Draghi reiterated the stance that the ECB would “continue to act, if warranted, by using all the instruments available within our mandate” in order to achieve the inflation target close to 2% over the medium term. Once again he also called on government and other policy makers to do more for the recovery highlighting the need for structural reforms and appropriate fiscal policies. Structural reforms should focus on reducing unemployment and boosting potential output across all Euro countries including adequate public infrastructure, enhancing current investment initiatives, progressing on the capital markets union and reforms around non-performing loans.
The Euro had a volatile session shown on the first chart below, initially gaining up to +0.60% before reversing to close -0.41% lower. Equity markets were modestly higher, the DAX gaining +0.52% and the Euro Stoxx 600 closing +0.19% higher. The yield on ten-year German bund yields declined -1.7 basis points to +0.007% while the yield on two-year debt was unchanged at -0.666%. Euro-zone data showed that German producer prices (YoY Sep) which flow through into consumer prices, decreased more than the anticipated -1.2% to -1.4% and the Euro-zone current account (MoM Aug) increased to €29.7 billion from €27.7 billion.
In the U.K. retail sales missed expectations remaining unchanged month-on-month in September with forecasts for a +0.2% gain while year-on-year sales expanded +4.1% with estimates for +4.4% and a previous reading of +6.2%. The GBP/USD was -0.26% lower against the U.S. dollar and equity markets were mixed with the FTSE100 +0.07% higher while the FTSE250 declined -0.53%.
The stronger dollar weighed on commodity prices, the Thomson Reuters CRB index declined -1.04% with the most significant contributions coming from a -2.27% & -2.53% decline in both Crude Oil & Brent crude oil. Both copper and natural gas prices were also weaker, down -0.29% & -0.8% as were precious metals spot gold & Silver down -0.28% & -0.91%.
After strengthening over the past week the AUD/USD shown on the second chart below reversed initial gains to finish -1.24% weaker following an unexpected decline in employment. Seasonally adjusted, employment decreased by 9,800 between August and September with forecasts for a 15,000 increase. We also continued to see momentum shifting towards part-time work which increased 43,200 while full-time decreased 53,000. The participation rate decreased to 64.5% from 64.7% which resulted in a slightly lower headline unemployment rate of 5.6%.
Month-to-month figures can be quite volatile so we don’t read into them too much. While the headline unemployment rate continues to trend in the right direction, significant slack remains in the labour market. Estimates of underemployment or those working part-time but seeking full-time work continue to trend higher along with weakening wage growth. While the RBA has stated it is in no rush to lower rates further as it assesses the impact of 50 basis points of reductions earlier this year, it does provide the scope to lower rates if the situation deteriorates further.
The S&P/ASX 200 index was modestly higher, up +0.12% and we can expect a flat start to trading with ASX SPI200 futures down just -1 point in overnight trading.
Data releases:
- U.K. Public Finances (MoM Sep) 7:30pm AEDT
- Canadian CPI (YoY & MoM Sep) 11:30pm AEDT
- Canadian Retail Sales (MoM Aug) 11:30pm AEDT
- Euro-zone Consumer Confidence (MoM Oct) 1:00am AEDT
- U.S. Baker Hughes Rig Count (Oct 21) 4:00am AEDT
This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd. 