It’s been a fairly eventful 24 hours or so in terms of event risks by which market participants have had to navigate through. The wash-up being that Asian equity markets should open either flat or a slight negative bias.
We can really look at the various themes into three main categories; these being political, economic and central bank meetings. Firstly, on the political front, there has been some focus on proceedings in the UK where Theresa May lost the backing of 12 MP’s who voted against her government for an amendment to the EU withdrawal bill. This effectively means Parliament has to vote on (or what is labelled as a ‘meaningful vote’) on any future Brexit deal, which could cause some headwinds to the process . GBP/USD traded down to $1.3385 but has recovered to reclaim the 1.34 handle. The focus now turns to Brussels, where Theresa May will join the EU Summit and whether there is agreement to move forward to trade negotiations.
It’s also been a lively night of political issuers in the US, with talk (source: Politico) that House Speaker Paul Ryan will step down in late 2018, although he later refuted these claims. After this week’s Alabama elections, there is building anticipation around the November 2018 US mid-term elections now, where Paul Ryan has a strong role to play. That said, the bigger focus and impact on markets has been on news Republican Senator, Marco Rubio, is opposing the Republican tax plan unless the refundable portion of child tax credits increases.
There has been a decent downside reaction in the Russell 2000, with the index currently lower by 1.2% and we have seen selling in the USD, with USD/JPY trading into ¥112, although the USD move on the day has been more pronounced against the CAD and AUD. USD/CAD has also been given a nudge lower by a more hawkish-than-anticipated narrative from the Bank of Canada, with governor Stephen Poloz talking quite constructively about the Canadian economy. AUD/USD has moved higher by 0.5% on the session, but recall most of that move took place in the wake of such good employment numbers yesterday. Still, the Rubio news has given this extra tailwind and the pair has pushed into $0.7680.
Perhaps the USD would be lower if it weren’t for a strong US November retail sales report, with the advanced print and the control group element both growing at 0.8%. The ‘control group’ is the basket of goods that feeds directly into the Q4 GDP calculation and we can see this retail sales print has already seen the Atlanta Fed upgrade its real-time GDP forecast 49 basis points to 3.31%. Good selling has also been seen in the 2- and 5-year part of the US Treasury curve, although there has been little move in the longer-end and we can see this also selling unfold in the interest rate markets, with the fed funds future now pricing a 68% chance of a March hike. This implied probability of a hike stood at 56% yesterday. So this is supporting the USD to an extent.
Marco Rubio’s demands may have somewhat dented the prospect of tax reform actually materialising, but recall the Fed only see a short-term impact from fiscal stimulus anyhow, with its 2018 GDP forecast being pushed up to 2.5%, but then expected to drop back to 2.1% in 2019. This in itself is interesting given they left expectations for interest rate hikes at three hikes (for 2018), so the Fed is prepared to tolerate higher growth and strong employment in a bid to gain inflation.
The Fed may want higher inflation and are prepared to let the economy overheat, but the ECB take this to a whole new level. There has been some focus overnight on the December ECB meeting, although there was little initial reaction in EUR/USD, German bunds and the DAX to the strong upgrades to the ECB’s economic forecasts. Here we see 2018 GDP now expected at 2.3% (up from 1.8%) and 1.9% in 2019 (1.7%), while its inflation forecasts have been pushed up 20bp in 2018 to 1.4% and unchanged in 2019 at 1.5%. As one would expect, Mario Draghi kept the stimulus dream alive, detailing an “ample” degree of monetary accommodation will remain necessary to push underlying inflation higher. So the ECB can upgrade its forecasts, but the central bank are still rolling out QE until September 2018 and perhaps even longer, although there is strong debate around this timing from market participants.
We have also seen narrative from the BoE, SNB, Norges Bank and the Mexican Central Bank, not to mention strong expansion in Eurozone flash PMI data, which is only going to support and even boost upcoming GDP calculations.
So plenty to focus on and aggregating this all together for the ASX 200 open, one can see Aussie SPI futures sitting down nine points from 16:10 aedt (the official ASX 200 close), so a touch of weakness expected on open in the ASX 200, but nothing too sinister. Keep in mind that in the past five days, any early strength in the ASX 200 has been sold, so this suggests there could be downside risks after the unwind and all known news has been discounted in stocks. With this in mind, it will be interesting to see if we can hold 6000 if the trend to fade the early move plays out again. Certainly, if we look at BHP and CBA’s ADR they are both indicating a flat open and one can also look at the S&P 500 as a guide and see downside moves in the materials, energy and financial sectors here. By way of other considerations, we have seen US crude oil push up 0.8%, with small gains in copper. Spot iron ore, on the other hand, closed -0.9%, with small losses seen in steel, iron ore and coking coal futures. 
So if we look around and search out the various thematics, it seems there are certainly a mix of positive and negative themes, but on the whole, we should open a touch lower, however, it’s hard to get too excited.
(5-day intra-day ASX 200 moves)

Originally published by Chris Weston, Chief Market Strategist, IG