The retrenchment in stocks and crude oil that we saw accelerate in the US yesterday afternoon weighed on overseas trading overnight and this morning but now appears to have run its course. US index futures are trading in positive territory this morning and crude oil has also been on the rebound with WTI up 2.5% although still below $30.00.


The main undercurrent to this week’s volatility so far appears to be traders recognizing that last week’s surprise interest rate cut in Japan was likely the end of the recent monetary stimulus cycle, and that in general, governments are less likely to come to the rescue of the markets going forward.

For example, crude oil has been bouncing up and down along with the rise and fall of rumrouns surrounding meetings about potential production cuts. Yesterday’s denials sent crude oil lower but signs that Russia still may be willing to talk if others can agree shored up support. Oil may remain active through today’s DOE stockpile reports. 

Hopes for more stimulus out of the ECB next month also appear to be fading. Continental employment figures released yesterday indicated improving job markets thus less need for more stimulus. In addition, ECB Executive Board member Mersch apparently cautioned traders that a review of QE may not necessarily lead to another increase in stimulus.  

Meanwhile in the US, Kansas City President George, a known hawk and a voter this year suggested yesterday that recent volatility is neither unexpected nor worrisome and that the Fed should continue its gradual rate hike plan. 

We are moving through a common mid cycle transition that has been drawn out by latecomers to the stimulus party which now appears to be coming to an end. We may see continued bumpiness in markets creating short term trading opportunities but it's important to traders to recognize that not needing stimulus is a sign of underlying strength.  

For example, despite all the recent market worries, China, Japan, Australia and India all posted improving Service PMI reports last night. Europe has been a bit more mixed this morning but shortfalls were small while the UK and Sweden came in well above expectations. The UK improvement along with continued gains in GBP today indicates that recent concerns about the Brexit referendum were overblown. 

Employment has also been big factor driving trading today. Better than expected headline New Zealand quarterly job figures out yesterday afternoon sparked a pop, drop and then a big rally in NZD while also pulled AUD higher. Meanwhile, the rebound in crude oil has boosted CAD, NOK and RUB today. 

A rally in oil heavy Norwegian stocks this morning bodes well for trading on the S&P/TSX. On top of this, big news in the retail sector with Lowes agreeing to purchase Rona for $24 per share suggests that the lower loonie has made Canadian retailers attractive takeover targets. This could spark additional takeover speculation in Canadian retailer stocks today.  


Corporate News

US home improvement retailer Lowe’s has agreed to acquire Canada’s RONA for $24.00 per share, or $3.2B, a 38% premium to recent trading levels.

General Motors        $1.39 vs street $1.20, sales $39.6B vs street $39.0B 

Merck            $0.93 vs street $0.91 


Economic News

Significant announcements released overnight include:

US ADP Payrolls        205K vs street 193K
US ADP Revision        267K up from previous 257K

US API crude oil inventories    3.8 mmbbls vs 1.7 mmbbls

Poland interest rate        1.50% no change as expected

UK BRC shop prices        (1.8%) vs previous (2.0%)
Norway unemployment rate    4.6% as expected
Eurozone retail sales        1.4% vs street 1.5%

NZ employment change        1.3% vs street 1.1% and previous 1.5%
NZ unemployment rate        5.3% vs street 6.1%
NZ participation rate        68.5% vs street 68.9%
NZ average hourly earnings    0.4% street 0.5%

Australia building approvals    (2.5%) vs street (7.2%)
Australia trade balance         ($3.5B) vs street ($2.4B)


Service PMI reports:

Australia            48.4 vs previous 46.3
China Caixin            52.4 vs previous 50.2
Japan Nikkei            52.6 vs previous 51.5
Singapore Nikkei        52.5 vs previous 52.1
India Nikkei            54.3 vs previous 53.6

Sweden            59.3 vs     street 57.6
Spain                54.6 vs street 54.3
Italy                53.6 vs street 54.0
France                50.3 vs street 50.6
Germany            55.0 vs street 55.4
UK                56.1 vs street 55.4

 

Upcoming significant announcements include:


8:15 am EST        US ADP Payrolls        street 193K vs previous 257K
9:45 am EST        UK Markit Service PMI        street 53.7
10:00 am EST        US ISM non-manufacturing PMI    street 55.1
10:30 am EST        US DOE crude oil and gasoline inventories