Will the leap year change market sentiments?

Good Morning,

Happy Leap Day…  

Yes, it only happens one in four years and apparently women can propose on a leap year? 

Hope that you had a great weekend… Let’s have a great day…

On Friday, I attended a Venture Capital event sponsored by PWC and NAB Ventures.

The event focused on the CVC (Corporate Venture Capitalists) and their ability to leverage off their own distribution and resources, to invest in “up-and- coming”#fintech opportunities.

It appears that corporate Australia has realised that rather than competition with start-ups, they should in fact, buy them and integrate them to help them with their robo-advise, compliance, insurance, customer strategy & lending opportunities….

Makes sense, right?

Just this morning, ANZ has announced a partnership with Honcho….

So how did markets go?

On Friday night in the US, the Dow Jones closed 71 points lower, as GDP came in higher than expected, signalling that US interest rates may in fact rise this year.

In Oz, reporting season is now officially nearly over and focus will once again be on macro-economic data and whether the RBA will cut interest rates….

We certainly hope so, as this will provide a “much needed stimulus” to our economy…

The SPI is up 9 points this morning.

Market Wrap    

U.S. stocks closed mixed Friday, giving up most of their opening gains as oil reversed and inflation data increased expectations for a rate hike in the coming year.

"I think today's been quite a watershed day in some ways because of the core PCE data this morning," said Lee Ferridge, head of macro strategy, North America, at State Street Global Markets. 

Markets are thinking, "maybe we should start pricing the Fed back in," he said, noting the rise in the U.S. dollar against the euro following the report.

The three major averages still ended the week more than 1.5 percent higher for a second-straight week of gains. The Dow transports gained 1.6 percent for their sixth-straight week of gains, the first such win streak since the seven week of gains ended Nov. 28, 2014. 

Macro Data

The core personal consumption expenditures price index, which excludes food and energy, is the Fed's preferred inflation measure and showed a 1.7 percent rise in the 12 months through January, the largest since July 2014.

"While most thought June was off the table (for a rate hike), this kind of data puts the path to getting to a June rate hike very clear, especially if the volatility in the market dissipates," said Jeremy Klein, chief market strategist at FBN Securities.

Overall personal income and spending in January rose 0.5 percent, while core PCE rose 0.3 percent from the prior month.

"This is good news all around. Markets tend not to like rate hikes but when they're connected with economic growth that's a good (thing)," said Douglas Cote, chief market strategist at Voya Investment Management.

USD Climbs

The U.S. dollar index held about 0.9 percent higher against major currencies, with the euro near $1.094 and the yen at 113.97 yen against the greenback. Pound sterling fell below $1.3900 to hit a fresh low against the dollar, going back to March 2009.

Gold futures for April delivery settled down $18.40 at $1,220.40 an ounce, down 0.8 percent for the week.

Treasury yields held a touch below session highs in late trade, with the 2-year yield at 0.78 percent and the 10-year yield at 1.75 percent.

"The one thing that concerns me, why I'm not a buyer here, is the fear trade is unwinding at the moment," said John Caruso, senior market strategist at RJO Futures. 

"We've had a hell of a run up," he said of the week's gains in stocks. "Perhaps you've got some guys booking profits into the weekend."

Closer to Home

We should have a mixed day today, following weakness and oil.

We think the lagged impact from recent policy easing, as well as a more flattering base for comparison, means we may see some improvement in the headline data in coming months. 

Chang Liu, Capital Economics

Oil pared gains after Brent crude hit $US37 a barrel, retreating to $US35.10.

The Australian dollar's biggest drop in three weeks is welcome news ahead of the Reserve Bank of Australia's March meeting on Tuesday. Economists are expecting the central bank to keep interest rates on hold at 2 per cent.

The Australian currency traded as high as US72.57¢ on Friday before a sharp rally in the value of the greenback sent the Australian dollar to US71.27¢.

Bigger move in two-year Treasuries

Ten-year US Treasury yields rose to 1.762 per cent. Growth, inflation and consumer sentiment data supported the case for the Fed to act on its targeted four interest rate increases in 2016. Financial markets are still doubtful the Fed can manage such a bullish tightening schedule, but pricing around a single rate hike this year increased to a probability of 52.7 per cent.

The bigger move was in two-year Treasuries, where yields rose to 0.79 per cent from 0.72 per cent.

Fourth-quarter gross domestic product beat expectations, coming in at a revised 1 per cent from the 0.7 gain previously estimated by the Commerce Department. Consumer spending in January was recorded at the strongest pace in eight months, and one of the Fed's favoured measures of inflation, the PCE price index, increased 1.7 per cent from January a year ago, excluding food and energy.

On Friday, the US will release critical payrolls data for February. In January the US unemployment rate stood at 4.9 per cent.

"The pendulum has swung too far in terms of the belief that this Fed is all of a sudden operating with an easing basis," Tom Porcelli, RBC Capital Market's US economist, said.

Bad news for gold

The optimism around growth was bad news for gold, which snapped a three-day winning streak. The spot gold price fell 0.8 per cent to $US1222.65 an ounce.

Australian gross domestic product data is due on Wednesday. The median forecast is for 0.5 per cent growth during the quarter and a year-on-year rate of 2.6 per cent, according to Bloomberg's survey.

China Purchasing Managers' Index surveys for February are due on Tuesday, where economists will be counting on a continuation of momentum in the services economy and signs of stabilisation in manufacturing activity.

Capital Economics warns the Lunar New Year could distort figures because of factory shutdowns. "Looking ahead, we think that the lagged impact from recent policy easing, as well as a more flattering base for comparison, means we may see some improvement in the headline data in coming months," economist Chang Liu said.

China's central bank governor Zhou Xiaochuan on Friday said the People's Bank of China has "multiple" policy instruments it can use to avert any "risks".

Niv Dagan is an Executive Director of Melbourne based boutique funds management and corporate advisory firm, Peak Asset Management (www.peakassetmanagement.com.au). He is also a regular financial commentator on Sky Business.