Tuesday 20 February 2018

Daily Market Update: Asian markets begin the week in positive mood

Tokyo's business district, Japan, 2016. REUTERS/Toru Hanai
Tokyo's business district, Japan, 2016. REUTERS/Toru Hanai

Simon Barry

Building on the positive tone which emerged late last week following Draghi’s dovish policy update on Thursday, overnight moves in the Asian session have included further gains for stock and oil prices.

Wall Street had closed out what was an exceptionally volatile week with two up‐sessions on the trot following a 2% rally in the S&P on Friday, mirroring similarly‐sized gains across many European bourses. And the risk‐on mood has carried over into early‐week trading in the Far East, with the Nikkei and Shanghai Composite indices both ending Monday’s session in the green to the tune of 0.8‐0.9%. Wholesale energy prices have also pulled off last week’s lows, with Brent Crude trading as high as $32.80pb overnight having flirted with $27 last Wednesday.

However, a word of caution is warranted in that oil prices look to be struggling to maintain this upside momentum, with Brent prices in the process of slipping back as I write, trading at just over $31 as the European session gets underway. Similarly, the opening price action in European stocks is underwhelming so we should probably expect more volatility in coming sessions rather than a straight‐line continuation of the improvement in risk appetite that began to take hold at the tail end of last week.

Speaking of underwhelming, Friday’s economic news from both the euro zone and UK was on the weak side of market expectations. The composite PMI from the zone slipped to its lowest level in eleven months in January. It’s still above its long‐run average and is at levels consistent with reasonable economic growth (by euro area standards at least) of around 0.4% q/q so nothing to get overly concerned about at this stage. But it is a sluggish start to a year and points to a softening rather than maintenance or improvement in growth momentum and thus keeps the prospect of more ECB stimulus in March very much a live topic of debate for investors. In the UK, December retail sales figures were disappointing in showing a drop of 0.9% in ex‐fuel sales volumes last month. That still leaves annual growth not far from its long run average at just over 2%, but again the easing of momentum (y/y growth was 4.5% in Q3) warrants attention. Net net, this has left Eur/Stg little changed since early on Friday with the pair opening just below the 76p mark in early trading today. Eur/USD and GBP/USD are similarly not much changed, changing hands at $1.0825 and $1.4260.

Looking to the week ahead, The Conference Board consumer confidence figures are published in the US tomorrow. A labour market experiencing an ongoing, healthy recovery is one of the key supports for the US outlook despite the recent financial market upheaval. However, much of the short‐term macroeconomic benefit relies on the improvement in jobs market trends translating to increased consumption, which in turn generally requires healthy consumer confidence, amongst other things. Expectations are for the print to remain at 96.5 in January, generally in line with recent trends. Also of interest tomorrow will be the Markit services PMI which should give a lead in to next week’s ISM equivalent. Expectations are for the index to decline slightly from 54.3 to 53.9.

On Wednesday evening the FOMC make a policy announcement and although no change to interest rates is expected, there will be considerable interest in the extent to which their outlook for interest rates may have evolved in response to recent financial market turmoil. With US market interest rates having fallen considerably since the year open, the Fed’s median forecast for 4 interest rate hikes in 2016 is viewed with heightened scepticism by financial markets (current market pricing barely has one hike factored in for 2016). There will be some interest in capital goods shipments (nondefense & ex. air) on Thursday, which are expected to rebound 0.5% m/m in December following a 0.6% fall in November. The first estimate of fourth quarter GDP will be published on Friday and is expected to show a slowdown from 2.0% to 0.8% a.r. q/q, however, much of the expected slowdown in the headline figure is likely from a reduction in the contribution to growth from inventories.

Last Friday’s Eurozone composite PMI signalled a slowdown in the business activity growth, so markets will turn to the IFO in Germany for additional clarification today. Expectations are for the current assessment component to edge lower from 112.8 to 112.6 and for the expectations element to decrease from 104.7 to 104.1. This would leave the business climate (the composite measure) slipping from 108.7 to 108.4, albeit remaining fairly in line with recent prints. Sharp falls in oil prices at the start of 2016 ensure that January CPI inflation will see some attention as analysts gauge how the aforementioned price declines eat into the expected acceleration in headline inflation (largely base‐effect induced due to large drops at the tail end of 2014). Expectations are for headline inflation to accelerate from 0.2% to 0.4% y/y while core inflation is expected to remain at 0.9% y/y.

Finally, the first cut of Q4 GDP in the UK is released on Thursday and expectations are for a slight uptick from 0.4% to 0.5% q/q to result in an annual rate of inflation of 1.9% y/y following 2.1% in Q3

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