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Firstly, we have seen the S&P 500 hit a new all-time high of 2403.87, although the bulls have failed to hold index above the 2400 level, curtesy of headlines that 'North Korea to proceed with sixth nuclear test', detailing 'we are ready to turn to ashes any US strategic assets'. The news also caused some inflows into the JPY, with USD/JPY, which was nicely above ¥114 to pull back 50 pips or so in rapid fashion. The US volatility index (VIX) trading down to 9.56%, but has closed at 9.96% and still at extremely subdued levels of implied volatility.
If it weren’t for the North Korea headlines the key focus for those Down Under has naturally been the 2017/18 budget. There is much to focus on, but from a political standpoint the Budget should provide a slight tailwind for the Turnbull government. The economic forecasts look upbeat, and forecasts of real GDP peaking at 3% through the years of 2019 to 2021. Treasury have raised their nominal GDP forecasts by 25 basis points for 2017 and 2018 (to 6% and 4% respectively), with the key input assumptions being iron ore at $55/t, tapis crude at $55 barrel, AUD/USD at $0.7600 and AUD trade-weighted at 65.
We will see a modest increase in borrowing from the debt markets, with total bond issuance expected to rise to A$579 billion by June 2019. While there are many other factors involved here, government debt as a percentage of GDP is likely to peak at 19.8% of GDP in 2018/19. There should be no significant implications here and overall the budget should be taken fairly well by the ratings agency view around Australia’s sovereign creditworthiness. One also suspects that despite the budget deficit being reduced by an average of 0.6% of GDP (per annum) that there is little to spur the Reserve Bank to move on the cash rate.
That being said, the speculated/leaked bank levy saw the ASX financial sector fall 2.4% yesterday, representing the biggest fall in the sub-index since June 2016 and taking 54 index points from the boarder market. The levy should shave 4% to 5% off earnings for the banks, so everyone is looking out for announcements on whether we see a repricing of lending rates to offset the hit to margins. CBA’s American Depository Receipt (ADR) suggests the stock could open around 0.4% higher this morning, but the banks are missing a catalyst here and we can see the financial sector (more broadly) has broken the January uptrend. A move through the March lows of 6600 (the sub-index is now at 6663) and we can start talking technical correction in the banking space. This will naturally represent a sizeable headwind for the broader ASX 200.
The AUD/USD has done very little overnight and since the start of European trade, we have seen the pair trade in a range of $0.7329 to $0.7367. FX traders’ have taken little inspiration from the Budget, with some support seen from a more positive feel to the bulk commodity complex. Here, we can see spot iron ore +1%, with iron ore, steel and coking coal futures (traded on the Dalian exchange in China) closing up 1.7%, 2.2% and 2.7% respectively. All eyes on China’s April CPI (consensus expecting 1.1%) and PPI (6.7% from 7.6% in March) due at 11:30am AEST, where a below consensus number in PPI could be taken badly by certain risk associated assets.
Staying in the commodity theme and we can see modest weakness in crude on the session, although there has been a slight rally off the session low of $45.33. The weekly API inventory data has shown a sizeable 5.8 million barrel draw in crude inventories, while gasoline inventories have gained 3.2 million. At the margin this is positive for crude given the size of the draw in crude stocks. However, traders will be extrapolating what this means for tonight’s (12.30am AEST) official Department of Energy (DoE) inventory report with consensus (guesses) currently expecting a 2.08 million draw in crude and 586,000 draw in gasoline. Clearly, the gasoline build (in the API inventory report) suggest there are downside risks to the official inventory report, as the market has been more sensitive to the gasoline inventories of late.
SPI futures have gained 19 points in the overnight session, taking in some of the positive move in S&P 500 futures between 4.00pm and 12.00am AEST, but has ultimately held the session highs when the S&P 500 fell on the North Korea headlines. We see the ASX 200 cash market opening at 5860, with materials likely to open somewhat stronger, with BHP’s ADR +1.1% (Vale closed +1.6%) and signs of stability in the banks.