US equities markets are little changed while bond yields have nudged higher, the latter supported by a further rise in oil prices; USD has weakened across the board, although the NZD has underperformed and is up only modestly

By Nick Smyth

Markets are in a holding pattern ahead of several key event risks later this week .  US equities markets are little changed while bond yields have nudged higher, the latter supported by a further rise in oil prices.  The USD has weakened across the board, although the NZD has underperformed and is up only modestly. 

There hasn’t been much to move markets overnight, with investors waiting for several key events later this week.  Wednesday night sees the release of US CPI and the FOMC minutes, the ECB meeting, and the EU Summit, at which the EU will decide whether to grant another Brexit extension.  RBA Deputy Governor Guy Debelle also speaks on the ‘State of the Economy’ tomorrow.  Unsurprisingly, market moves ahead of this have been contained. 

The major market mover has been oil, with Brent crude oil up 1.2% to $71 and WTI up 2% to $64 – their highest levels since November.  An escalation in the military conflict in Libya, with Tripoli’s airport attacked, has increased concerns that oil supply from the country could be disrupted, adding to tightness in the global oil market The escalation in the Libyan conflict comes against a backdrop of OPEC supply cuts and lower output from Venezuela and Iran.  The oil futures curve is in contango, indicative of tight supply.  No doubt we’ll see an OPEC-related tweet from President Trump in the not too distant future.

US Treasury yields have risen modestly overnight, with the rise in oil prices helping breakeven inflation to nudge higher.  The 10 year Treasury yield is up 2bps to 2.52%.  US equity markets have consolidated after last week’s strong rise.  The S&P500 and NASDAQ are close to unchanged on the day.  The S&P500 is around 1.5% from its all-time highs.  Corporate earnings will come into focus for the equity market later this week, with some of the large US banks reporting. 

The USD has weakened across the board over the past 24 hours.  The USD indices are down between 0.2% and 0.3%, although they remain towards the upper-end of recent trading ranges. 

The Canadian dollar and Norwegian krona have outperformed amidst the rise in oil prices, with the latter also benefiting from comments from Norges Bank Governor Olsen that the central bank expects to raise rates again in the next half year.  Meanwhile, the safe-haven Japanese yen and Swiss franc are at the bottom of the currency leader-board.  

The EUR has increased 0.5% to 1.1260 ahead of the ECB meeting on Wednesday night.   The focus of the meeting is on whether the ECB extends its forward guidance that rates won’t rise “at least through the end of 2019.”  Bloomberg noted that the ECB Governing Council was split on whether to move to a tiered system for negative interest rates – to reduce the financial burden on the banking system – and reported that there hasn’t been any detailed work by the ECB’s internal committees on the subject over the past few weeks.  Some have argued that the ECB should adjust how it applies negative interest rates if it expects to keep the policy in place for an extended period (i.e. if rate hikes are pushed back further). 

The GBP hasn’t shown much movement ahead of a crunch few days for Brexit negotiations.  Labour leader Jeremy Corbyn said there had been no change in the government’s ‘red lines’, i.e. Theresa May was not prepared to move towards the customs union solution favoured by Labour.  Technical talks between the two sides will continue today.  May heads to Paris and Frankfurt on Tuesday ahead of the EU Summit on Wednesday, hoping to convince the EU to grant an extension to Brexit.  Bloomberg reports that European officials are debating a compromise extension to a date between the 30th June date requested by May and 1st April 2020. 

Against a weaker USD backdrop, the NZD has increased modestly and is up 0.2% to 0.6740.  NZ rates fell between 1-3bps yesterday, and the curve flattened, in response to the moves in global rates after non-farm payrolls on Friday night.  There should be a small increase in NZ rates this morning. 

There is again little on the calendar data-wise tonight, with market moves likely to be contained until Wednesday night.

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