Overnight Market & Currency Developments – From Our Bankers

Overnight Developments:

  • USD and US 10‑year Treasury yields dipped briefly after Kevin Brady, the Republican chairman of the tax writing House ways and means committee, unveiled the Tax Cuts and Jobs Act. Here are some of the highlights:
    • Lowers individual tax brackets to zero, 12%, 25%, 35% but keep the top tax rate at 39.6% (currently: 10‑15‑25‑28‑33‑35‑39.6%)
    • Permanently lower the corporate tax rate to 20% from currently 35%.
    • Lower small business income tax rate to no more than 25% (currently similar to personal tax rates).
    • Set a repatriation tax rate of 12% for cash and 5% on non‑cash on profits of U.S. companies held abroad and brought back to the US.  This is slightly higher than Trump’s original proposal for a 10% repatriation tax rate.
  • Overall, the Tax Cuts and Jobs Act would add US$1.5 trillion to the budget deficit (equivalent to roughly 0.8% of GDP per year).  Markup of this act begins on 6 November.  A markup session is where the House ways and means committee goes through the bill line by line and amends the package before advancing it to the full House for a vote (likely to be by end November).  USD upside will be limited because it’s still unclear if this pro‑growth tax package will have enough Republican support to pass through Congress (House and Senate) by year‑end or Q1 2018.
  • USD was not materially impacted after President Donald Trump picked Jerome Powell as the next Fed Chair earlier this morning.  The choice of Powell was widely anticipated by market participants.  Powell is a centrist on the FOMC and is expected to maintain the Fed’s current gradual approach to interest rate normalisation. The next USD focus is the U.S. October non‑farm payrolls report (11.30pm Sydney).  We expect a large non‑farm payrolls increase (consensus: +312k) and monthly average earnings to stabilise consistent with solid employment conditions.  This is USD supportive.
  • AUD/USD held on to most of yesterday’s gains.  AUD faces some headwinds today because we expect a disappointing Australian retail sales report (11:30am Sydney).  We anticipate a soft 0.3% rise in September retail sales (consensus: 0.4%). There looks to have been some discounting in Q3. In real terms, we think retail trade will post a small 0.1% fall in Q3 (consensus: 0%). CBA’s Australia October services and composite PMIs will also be of interest today (9am Sydney).

 

Overnight Data:

  • US new claims for unemployment insurance fell by 5,000 to 229,000 in the latest week. Job layoffs, as monitored by Challenger, fell from 32,346 to 29,831 in October. Labour costs rose at a 0.5% annual pace in the September quarter (forecast 0.5%) with productivity up 3% (forecast 2.4%).
  • The Bank of England lifted interest rates for the first time in more than a decade with the Bank Rate up from 0.25% to 0.50%. The BOE vowed future rate rises will be limited and gradual.

 

Global Equity Markets:                                                                                                                  

  • Mainland European sharemarkets eased from 2‑year highs on Thursday, dragged down by health and technology stocks. Investors weighed mixed earnings results. The European STOXX 600 index fell by 0.5%. The German Dax lost 0.2% from record highs. But the UK FTSE rose by 0.9% with a weaker currency boosting exporters. In London trade, shares in Rio Tinto rose by 2.5% and BHP rose by 1.8%.
  • US blue chip shares were firmer on Thursday. Investors debated the details of President Trump’s tax plans. Late in the session investors embraced the choice of the new Fed Chair. Investors also await earnings from Apple and Friday’s employment report. The Dow Jones rose by 81 points or 0.3%. The S&P 500 rose by less than 0.1% but the Nasdaq eased by 1.6 points or less than 0.1%.

 

Commodities:                                                                                         

  • Global oil prices rose modestly on Thursday. Reuters quoted Saudi Arabian Energy Minister Khalid al‑Falih as saying that supply and demand balances were tightening and oil inventories falling, while compliance with the OPEC‑led pact to curb supplies had been “excellent”. Brent crude rose by US13 cents or 0.2% to US$60.62 a barrel. US Nymex rose by US24 cents or 0.4% to US$54.54 a barrel.
  • Base metal prices fell by up to 1.5% on the London Metals Exchange on Thursday with nickel and lead down the most. But tin bucked the trend, up by 1.3%. The gold futures price rose US80 cents or 0.1% to $1,278.10 an ounce. The spot gold price was trading around US$1,276 an ounce in late US trade. Iron ore rose US80 cents or 1.4% to US$59.30 a tonne.

 

Ahead:

  • In Australia, the CBA services sector gauge is released with retail trade data and new car sales figures.
  • In the US, non‑farm payrolls and the ISM services gauge are released.

 

Indicative Rates (Bank to Sell):

AUD / USD 0.7667 AUD / CAD 0.9745 USD / JPY 114.07
AUD / JPY 87.08 AUD / THB 24.63 GBP / USD 1.3061
AUD / EUR 0.6560 AUD / HKD 5.9200 NZD / USD 0.6915
AUD / GBP 0.5845 AUD / SGD 1.0407 NZD / EUR 0.5932
AUD / NZD 1.1073 AUD / FJD 1.5921 AUD / CNY 5.0671
AUD / CHF 0.7511 AUD / PGK 2.4374 All Ordinaries 6002.16
AUD / DKK 4.8712 EUR / USD 1.1508 Gold $US/oz 1276.38
AUD / SEK 6.4215 EUR / GBP 0.8926 Oil WTC $/b 54.50

 

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