Equity Markets Hammered Again, with the GBP in Focus

Earlier in the Day:

Economic data released through the Asian session this morning included China’s January inflation figures, Japan’s December tertiary industry activity index and Australia new home loans for December, which was released together with the RBA’s monetary policy statement for February.

For the Aussie Dollar, it was a bad start to the day, with home loans sliding 2.3% in December, far greater than a forecasted 0.9% fall, following November’s 1.6% rise. While owner occupied housing commitments fell by 1%, the total value of investment housing commitments fell by 2.6% in December.

From the RBA’s quarterly monetary policy statement, key takeaways included:

• Consumption grew modestly, weighed down by slow income growth, with household income growth weak in spite of rapid employment growth and a falling unemployment rate.
• Wage growth remains low. Despite strong employment growth, spare capacity in the labour market continued to pin back wage growth.
• In 2018, growth is expected to increase to be above potential, which is expected to remove some spare capacity from the economy.
• Underlying inflationary pressures remain low, reflecting subdued labour cost growth and remaining capacity in the economy.
• In the retail sector, heightened competition and low rent inflation have weighed on inflation.
• Near-term outlook for growth in Australia’s major trading partners is a little stronger than at the time of the November statement.
• Growth in China is expected to moderate a little over the coming year, weighed by weaker property market conditions and environment-related restrictions.
• For the domestic economy, weak consumption growth was offset by growth in business investment and public demand.
• Underlying inflation is expected to increase to around 2% in early 2019 and to 2.25% by mid-2020

The Aussie Dollar slipped from $0.77859 to $0.77746 immediately after the release of the statement and home loan figures, with the RBA expected to remain in a holding pattern through 2018.

Inflation figures out of China were also on the softer side, with year-on-year rates of inflation for consumer prices and wholesale prices slowing at the start of the year. Consumer prices rose by 1.5% in January, year-on-year, easing from December’s 1.8%, while wholesale price inflation slowed from 4.9% to 4.3%.

The Aussie Dollar showed little response to the numbers however, moving from $0.77846 to $0.77839 upon release of the data.

Elsewhere, the Yen gave up early gains against the Dollar, down 0.31% to ¥109.08 at the time of writing, while the Aussie Dollar managed to recover from an intraday low $0.7759 to $0.7780, down 0.01%, with the Kiwi Dollar down 0.07% to $0.7213.

For both the Kiwi and the Aussie Dollar, the outlook continues to look bearish against the U.S Dollar, with yield differentials narrowing in favour of the U.S Dollar.

In the equity markets, volatility raged on following the overnight losses in the U.S, with the CSI300 tumbling 4.43%, closely followed by the Hang Seng, which was down 3.23% at the time of writing, with both markets predominantly retail investors who tend to invest by trend, while the Nikkei and ASX200 were down 2.73% and 0.85% respectively, with correction territory seeing some fear bear territory ahead.

Things could have been much worse for the majors, with the CSI seeing more than 5.5% losses earlier in the session.

The Day Ahead:

With no material stats out of the Eurozone this morning, the markets will be left to consider French and Italian industrial production figures this morning, though we will expect that the EUR will be on the side lines, with focus through the day likely to be on the Pound and the Dollar.

While the EUR was up 0.07% to $1.2256 at the time of writing, attention has begun to shift to the terms of the grand coalition, as the markets assess at what cost the coalition has come to Germany and the EU. With Merkel already having lost significant support, could there be a final twist?

Across the Channel, it’s another big day for the Pound, with December trade and production figures scheduled for release this morning, together with the NIESR GDP estimate later in the day.

Following some particularly hawkish commentary from BoE Governor Carney on Thursday, focus will now be more heavily on the British Government’s progress on Brexit talks, with a bad deal for Britain seemingly the only thing that can prevent a pre-summer rate hike this year, barring an economic meltdown.

Solid data this morning would certainly help the Pound, supporting Carney’s upbeat assessment of the UK economy, though any noise from Brussels or Westminster will likely overshadow the data.

At the time of writing, the Pound was up 0.19% to $1.3939, as the big bets return in favour of a bounce back to $1.45 levels.

Across the Pond, there are no material stats out of the U.S this afternoon, with market sentiment towards inflation and FED monetary policy having seen the Dollar Spot Index jump back to 90 levels.

While there are no stats scheduled for release, the markets will need to look out for any hawkish FED chatter that could drive yields higher and give the markets another hammering through the session.

At the time of writing the Dollar Spot Index was up 0.05% to 90.277, with the Dollar looking bullish for now.

Across the border, January labour market data out of Canada will provide some direction to the Loonie, which has certainly pulled back this month, with disappointing inflation figures ultimately doing the damage. For the Loonie bulls, forecasts are for more pain ahead, with the January unemployment rate forecasted to rise to 5.8%, with employment expected to have declined last month.

With the Loonie up 0.09% to $1.2592 against the Dollar, direction through the day will ultimately be hinged on this afternoon’s stats, with policy divergence favouring the U.S Dollar for now.