Hard Brexit, soft Deutsche Bank fine

Asian markets all look set to open higher today after news that Deutsche Bank was likely to settle with the US Department of Justice for less than half the purported fine.

Deutsche Bank
Source: Bloomberg

Deutsche Bank gained 7.7% on Friday and was a major driver of risk-on sentiment across a range of asset classes.

The Aussie dollar gained 0.4% on Friday to close at US$0.7663. The US dollar moved down after the Deutsche Bank announcement while the safe-haven currencies of the Japanese yen and the Swiss Franc also sold off. Commodity-related currencies, such as EMFX, NZD and the AUD, all closed higher.

Commodities gained in the risk-on environment with copper seeing a big 1.1% gain. WTI oil continued to move 0.9% higher despite the Baker Hughes drill rig count gaining by 7 to 425. Oil gained 7.9% in September after the OPEC deal – its biggest monthly gain since April. But cracks are already starting to show with Iraq stating that it does not agree with OPEC estimates of its production levels. And there are major questions over how to police the production caps. At this stage there seems to be a high hurdle for getting an even more comprehensive deal together in November.

The S&P 500 closed up 0.8% on Friday, and the positivity surrounding the Deutsche Bank deal helped drive the financials sector up 1.6%. Energy was the next best performing sector. A similar sectoral performance in the ASX today would be very positive for the index.

US 3Q GDP estimates took a big hit on Friday after consumer spending missed market expectations. Personal spending in August was flat in month-on-month terms. This saw the New York Federal Reserve’s GDPNow estimate fall to 2.2% from 2.3%, and the Atlanta Federal Reserve’s estimate fall from 2.8% to 2.4%. There will be keen focus on the ISM Manufacturing PMI this evening with markets expecting it to bounce back to 50.3 from its current contractionary level of 49.4. The ISM is likely to have some big FX impacts this evening.

China’s PMIs have managed to hold in expansionary greater-than-50 territory. The Caixin Manufacturing PMI increased slightly to 50.1 from 50.0 on Friday. And the NBS Manufacturing PMI stayed unchanged at 50.4 despite expectations for a slight increase to 50.5. There were some concerns within the sub-components with new orders declining alongside the small and medium sized company indices. But so long as China keeps credit expansion growing at high levels the PMIs should hold up. But the negative externalities of this credit growth continue to rear their head with seven Chinese cities announcing property price controls over the weekend in an attempt to slow the wild property price growth seen in some segments of the market.

The Tory Party conference kicked off in the UK on Sunday. And new UK Prime Minister Theresa May has stated categorically that the Article 50 clause that will set off the UK’s formal two-year negotiations to leave the EU will be triggered by the end of March 2017. May has also made it clear that immigration control is going to take priority over membership to the EU single market. 'Hard Brexit' is now the path that the Tory party has chosen and that is unlikely to be relished by markets as these fears certainly seemed to have weighed on the pound over the past two weeks.

ASX SPI futures are pointing to a 30-point higher open for the ASX.

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