US construction collapse worries markets

A dramatic fall in US construction spending was balanced by a much better manufacturing PMI and solid data from the US Beige Book to help US markets close the session relatively flat.

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US credit markets did not recover quite as readily as equities, and were obviously concerned by the biggest monthly decline in construction spending since January 2011. The dramatic decline also saw US 2Q GDP forecasts lowered, with the Atlanta Fed’s GDPNow estimate moving to 2.5% from 2.9%. The DXY Dollar Index lost 0.5% off the data.

Many are decrying the woeful global data for driving yesterday’s selloff in the markets, but the data out of the EU and the US does continue to show slow improvement. The US and EU manufacturing PMIs both continued to see expansionary above-50 levels. And while US construction spending was unquestionably poor, it was noticeably at odds with almost every single other US housing data point for April. The concerns for global growth certainly should be more focussed on China and Japan.

Which brings us to the massive gain seen in the Japanese yen overnight. The USD/JPY cross dropped 1.1% overnight. Many are pointing to the fact that the proposed two-and-a-half year delay to the introduction of a 10% tax hike creates less of a need for further stimulus from the Bank of Japan at their mid-June meeting. But this had arguably already been price into the currency over the past week. The USD/JPY looked like it had pulled back a bit after pushing up into the 111 handle, but it really sold off sharply after yesterday’s release of China’s Caixin Manufacturing PMI saw a back-to-back monthly decline. Global concerns around China may have also prompted renewed buying of the Japanese yen as a safe-haven asset.

Markets in the region look set to open relatively flat, except for Japan where the Nikkei is expected to decline 0.6% from the yen strength. BHP and CBA’s ADRs both declined overnight, and so did copper and iron ore. This does not provide a strong set up for the ASX today, but it looks like it will open relatively flat.

The other big development was increased speculation that this evening’s OPEC meeting may not be a total non-event as rumours began to circulate that an output “ceiling” could be agreed on. This could be a more palatable proposal than the “supply freeze” deal, but it seems a ceiling that would have a meaningful impact on the market would still be quite difficult to agree on. Nonetheless, the WTI oil price gained 0.3% overnight and could move higher on any further positive news from the meeting.

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

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