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Serious warning signs were flashing up when the August PMI unexpectedly dropped to a contractionary 49.4, and many were concerned that it could evolve into a more serious trend in manufacturing underperformance. But a surge in New Orders to 55.1 and Production to 52.8 helped lift the index back to a healthy 51.5 level. This has seen market pricing for a December rate hike from the US Federal Reserve (Fed) continue to solidify with the Bloomberg WIRP model now giving December a 60.2% probability. A probability of 70% is the sweet spot as Fed rate hikes have not occurred with market pricing below that level in over twenty years.
However, firmed prospects for a December rate hike were not taken well in the equity markets with the S&P 500 dropping 0.4%. Rates-sensitive sectors were the biggest losers with REITS losing 1.6% and utilities losing 1.4%. The prospects of higher interest rates makes the present value of steady cash flow producing assets such as property and utilities correspondingly less valuable. In this vein, we also saw a 0.7% loss in consumer staples, but telcos were surprisingly resilient only dropping 0.05%.
Germany’s DAX was closed overnight, which gave European markets a break from being buffeted by Deutsche Bank’s (DB) stock price. Nonetheless, DB’s ADR lost 0.3%, which is a pretty good performance in comparison to recent weeks.
The reality of 'Hard Brexit' (a formal exit of the EU single market) has been hitting the pound again. Cable, the GBP/USD, lost 0.9% overnight to drop to its lowest levels since 6 July. It is now trading back in the US$1.28 handle and even dropped to a low of US$1.2818 overnight.
Conversely, this was a positive for FTSE index, as long as you’ve hedged your currency risk, because the index has a high proportion of exporters who benefit from a lower pound. The FTSE closed the session up 1.2%.
FTSE- and ASX-listed Henderson Group’s announcement that it would buy out Janus Capital saw its stock jump 17%. And also helped lift active managers across Europe with Aberdeen, Jupiter and Schroders similarly gaining.
Despite the strong US ISM Manufacturing PMI, the further gains in oil held back the US dollar against a number of high risk premium and commodity related currencies. The DXY dollar index moved up 0.2%, but the JP Morgan EMFX index gained 0.3% with the Brazilian real gaining 1.3%.
The Aussie dollar was also buoyed by the oil market adding another 0.13% to close at US$0.7673. Although the AUD may have been receiving some support from expectations for the Reserve Bank of Australia (RBA) to leave rates on hold and talk down the possibility of future rate cuts at their meeting today. Australian August building approvals and September ANZ job ads are also released today.
The oil market continues to move higher after the OPEC deal. WTI oil moved 0.8% higher to US$48.64 and Brent gained 1.2% to US$50.79. We’ll have to see if these gains can survive the weekly EIA inventories report on Wednesday.
Despite the move lower in overnight markets, Asian markets by-and-large look set to open in positive territory.
The ASX SPI futures are pointing to a 19 point drop at the open, which is out of sync with the rest of the region and may be reversed intra-session.