Equities headed broadly south in Asia overnight

2 December, 2016

European Outlook: Equities headed broadly south in Asia overnight, with technology stocks leading the way amid warnings that any Trump induced stimulus is likely to be short lived and concerns about the health of the U.S. economy and stability in Europe start to weigh again. European stock markets already reversed lower with U.S. markets during yesterday’s PM session and U.S. and FTSE 100 stock futures are also in the red. Italy was the main exception again yesterday, with the MIB still holding on to a nearly 1% gain on Thursday as markets are still betting on a technocrat government taking over from Renzi after Sunday’s referendum on constitutional reform. European bond futures declined with stocks on Thursday, with Eurozone peripherals outperforming going into next week’s ECB meeting and amid a Reuters source story saying a 6 months QE extension without tapering is the option favoured by many. The U.K. meanwhile was focused on fresh sterling strength amid some hints that the government may be heading for a “soft” Brexit with the possibility of ongoing contributions to the EU budget in return for market access. Today’s economic calendar has Eurozone PPI, Swiss Q3 GDP and the U.K. Construction PMI.

US Reports Yesterday: Revealed a solid 53.2 November ISM reading and a 0.5% October construction spending rise that followed big upward Q3 revisions, both of which lifted prospects for GDP. We also saw a 17k Thanksgiving week spike in claims that reversed the remarkably tight 333k Veteran’s Day figure, however, while the available vehicle sales figures have posted a modest 1% drop-back after a prior 6% two-month climb.  NFP should exceed the consensus 175k and could be as high as 190K later today.

FX Update: The dollar has traded modestly softer into the London interbank opening, while the euro has traded perkily. EURUSD edged out a two-week high at 1.0690, and EURJPY forayed further into five-month high territory, despite the uncertainty about Italy’s referendum on constitutional reform this weekend. Markets are betting that a technocrat government will form should PM Renzi resign in the event of a “No” vote. The forex market has also been unperturbed by Reuters citing an unnamed source saying that most ECB council members are in favour of extending the QE program by six months beyond next March without tapering. USDJPY has remained buoyant, holding around the 114.00 level, but has remained below the nine-and-a-half-month high seen at 114.82 yesterday. Market participants are treading cautiously into the release of the November U.S. employment report today. The release it less essential than is often the case this month with expectations for the Fed to hike this month by 25 bp fully discounted and with markets anticipating fiscal expansion when president-elect Trump takes up the reins at the White House.

Fed Policy Outlook: The markets are fully priced for a December 14 hike, but key will be what’s indicated for the policy trajectory in 2017. Expectations are for relatively dovish stance to accompany the tightening. Note that the upcoming FOMC meeting includes the release of updated economic forecasts, along with the dot-plot, and a Yellen press conference. Most Fedwatchers are looking for two more tightenings next year, consistent with Fedspeak that’s been stressing that moves will be gradual. However, policy actions will still be data dependent, yet it’s still too early to predict the disposition of growth and inflation next year, and we doubt the FOMC will even try with respect to its updated forecasts. Hence, there is likely to be a rather innocuous statement and little change to the forecasts, that will limit expectations for aggressive moves. Yellen is also likely to council patience. Additionally, the leaning of the new voters on the Committee is to the modestly dovish side, with Evans, Kashkari, Harker, and Kaplan coming on board, replacing the more hawkish George, Mester, Bullard, and Rosengren.

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