Bank of Melbourne

Morning Report

Main Themes: US President Donald Trump tweeted that a “big” trade deal with China was “very close”, sending US stocks and bond yields higher. Meanwhile, voting has closed in the Brexit-dominated UK general election. The pound has fallen slightly, however markets are still predicting a conservative majority.
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Main Themes: US President Donald Trump tweeted that a “big” trade deal with China was “very close”, sending US stocks and bond yields higher. Meanwhile, voting has closed in the Brexit-dominated UK general election. The pound has fallen slightly, however markets are still predicting a conservative majority.

Share Markets: Equity markets rose on optimism that the US and China have reached an agreement on a phase-one trade deal. The deal is expected to delay or remove the fresh tariffs that were due to come into effect on Sunday. The S&P500 rose 0.8% to a fresh record high and the Dow Jones added 0.8%. The positive sentiment on trade spread to most global indices. The MSCI all-country index rose to an all-time high.

Saudi’s energy giant, Aramco, rose further in its second ever day of trading. When the company listed it was the world’s largest ever IPO. The stock briefly hit a market valuation of US$2 trillion overnight, valuing it at more than Berkshire Hathaway, Facebook and Amazon combined.

Interest Rates: Bond yields surged on fresh optimism on trade. The US 10-year treasury yield is up 11 basis points to 1.90%. The Australian yield curve flattened. The 10-year bond yield fell 2 basis points to 1.14% and the 3-year yield saw a 1 basis point fall to 0.70%.

Foreign Exchange: The US dollar index rose 0.2% overnight, but was down against the safe-haven yen and virtually unchanged against the euro. Trade optimism drove the movements in the US dollar overnight. The pound fell 0.5% as nervousness crept in around the prospects of Brexit amid the UK general election. It had been rallying in the days leading up to the election on expectations of a conservative majority. The GBP/USD is currently 1.3182.

The Australian dollar rose as investors took a more risk-on attitude. The AUD/USD rose 0.5% to 0.6909.

Commodities: Oil prices spiked 1.5% overnight. A report from the International Energy Agency which said that OPEC+ output cuts will not prevent a global oil surplus next year was not enough to dampen the positive sentiment around the US-China trade negotiations. WTI oil futures are currently US$59.2 per barrel.

Australia: Consumer inflation expectations were unchanged at an annual rate of 4.0% in December, and point to inflation being steady.

Japan: Machine orders slumped 6.0% in October, dropping for four consecutive months. The impact of the typhoon along with the sales tax hike from October 1 are both pointing to a sharp weakening in in economic activity in the final quarter of the year. 

Europe: New ECB president Christine Lagarde presided over a relatively quiet first policy meeting. There were no changes to key policy rates or further guidance on the bank’s new bond-buying program. At her press conference, she declined to classify herself as either a policy hawk or a dove, instead describing herself as an owl, because owls are wise.

United Kingdom: Polls have closed in the UK general election, with a conservative majority expected. Exit polls will be released at 9am today, and the results of the election will be released gradually throughout the day.

United States: The US and China were reported to have reached an agreement over the terms of the ‘phase-one’ trade deal first announced in October. Media reports say that advisors from both countries have agreed to the deal, with signoff required by President Trump the last remaining hurdle. Trump is meeting with his advisors at the time of writing.

The deal is expected to include a 50% cut on the tariff rates of US$360 billion in Chinese imports in exchange for a commitment from China to buy large quantities of agricultural products and enhance the protection of intellectual property rights. The proposed deal comes as the spectre of additional tariffs to be implemented on Sunday looms.

Thank you for your readership this year. This will be our last morning report until Monday 20th January 2020.

We wish you and your families a very happy and safe festive season.

 

Today's key data and events:

NZ BusinessNZ Manufacturing PMI Nov prev 52.6 (8.30am)

JN Tankan Large Manufacturers Index Q4 exp 3 prev 5 (10.50am)

JN Industrial Production Oct final prev -4.2% (3.30pm)

US Import Price Index Nov exp 0.2% prev -0.5% (12.30am)

US Retail Sales Nov exp 0.5% prev 0.3% (12.30am)

US Business Inventories Oct exp 0.2% prev 0.0% (2.00am)

 

Times are AEST. All data forecasts are m/m or q/q and seasonally adjusted unless otherwise specified. Forecasts for Australian data are our forecasts and for other countries they are consensus forecasts.

 

Nelson Aston, Economist Ph: 02-8254-1316