Morning Report
Today's economic developments and market movements.
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Key themes: Global equity markets continued to capitulate after Friday’s softer-than-expected US payrolls report triggered a dramatic swing in risk senitment.
Asia got off to a bumpy start to the week, with Japan’s Nikkei experiencing its largest one-day fall since 1987. The tectonic shift in risk sentiment compounded by further gains in the Japanese Yen.
The second day of the equity sell-off didn’t show up in a rotation into fixed income. Yields were flat to higher across the curve in both the US and Europe.
The US dollar has gapped lower over the last two sessions despite its safe-haven appeal, nothcing up a 6-month low overnight.
Share markets: Friday’s bloodbath in equities continued overnight as the US and European markets opened for the week. Softer-than-expected US payrolls data on Friday triggered concerns the Fed has kept the brakes on the economy for too long, undermining the chances of a soft-landing. Already stretched positioning and some underwhelming earnings announcements compounded the significant shift in risk sentiment.
The S&P 500 tumbled a further 3.0%. The index is now 8.5% below its most recent peak on July 16. The NASDAQ dropped 3.4%, while the Dow Jones shed another 2.6%. Implied volatility in US equities jumped to the highest level since 2020 with the VIX index briefly spiking above 65 points before settling at 38.57 - its highest close since 2020.
The slide was a little shallower across the Atlantic but significant nonetheless. The Eurostoxx 50 dropped 1.5%, taking its cumulative 3-day loss to 6.2%. London’s FTSE 100 dropped 2.0% overnight and is down 4.0% this month.
It was a sea of red in Asian trade yesterday as equities were marked down following Friday’s moves offshore. The ASX 200 was down 3.7% - the biggest one-day fall since May 2020. Japan’s Nikkei tumbled a whopping 12.4%, the largest one-day drop since October 1987. The stronger Japanese Yen likely compounding the reaction to the broader swing in risk sentiment.
Interest rates: There were few signs of a further rotation from equities to fixed income as becnhmark yields were flat to higher in the US and Europe. This likely reflects that rate cut pricing has already moved a significant way and that equity market falls are being exacerbated by equity specific factors.
A measure of the spread between 10-year AAA rated corporate bonds and US treasuries blew out to its highest level since the middle of 2023. While in absolute terms the spread is not particularly elevated, the rapid move underscores how quickly perceptions have shifted on the underlying health of the US economy.
US 2-year treasury yields were 4 basis points higher to 3.92%, while 10-year yields were unchanged at 3.79%. Yields were up 2 and 4 basis points in the 10-year tenor in Germany and the UK, respectively.
There are now over 100 basis points of rate cuts (four 25-basis point moves) priced in from the Fed by the end of 2024, a significant swing from around 60 basis points earlier last week. Markets are now pricing in around an 80% chance the Fed cuts by 50 basis points at its September meeting.
Last week’s domestic inflation data and the global swing in rate expectations in recent days has pushed traders to up bets for the RBA to cut rates this year. An RBA rate cut is now fully priced in for November with an 80% chance of a second cut this year. That’s a starkly different rate profile to the start of last week when markets didn’t see any chance of a cut until earlier next year.
Foreign exchange: The US dollar has gapped lower over the last two sessions despite its safe-haven appeal. The DXY index dropped from 103.28 to a more than 6-month low of 102.16 before retracing slightly to close around 102.75.
The Aussie dollar has struggled on weaker risk sentiment despite a softer US dollar. The AUD/USD briefly tumbled to a more than 8-month low of 0.6350 before unwinding the move to trade around 0.6494 at the time of writing.
The Japanese Yen has been the biggest beneficiary of the weaker US dollar. The USD/JPY punched through 145 yesterday to reach a 7-month low of 141.70 and was trading around 144.17 at the time of writing. The USD/JPY has dropped over 11% since its recent peak in early July.
The Swiss Frac has been another strong performer against the US dollar, which is to be expected given the risk-off shift. The USD/CHF is now trading around 0.8519 compared to over 0.88 earlier last week.
The euro has outperformed its British counterpart; the EUR/USD jumped over 2 cents in as many sessions before pulling back slightly to trade around 1.0950. The Pound has had some sizeable intra-day volaility but has otherwise not managed a meanginful move higher, trading around 1.2779 at the time of writing
Commodities: Crude markets hit fresh lows back to the beginning of the year as the meltdown in stocks gathered momentum. West Texas Intermediate (WTI) futures are down 0.8% at US$72.94 per barrel. An outage at the massive Sharara oilfield in Southern Libya, impacting a significant portion of output, prevented the correction from being deeper.
Israel remained in brace position for a potential attack by Iran, with the PM Netanyahu stating “we are prepared for any scenario – both offensively and defensively” while the US bolstered its presence in the region by deploying additional ballistic missile defence-capable cruisers and destroyers to the region.
Metals plunged with copper very much at the forefront of the selloff. Copper is down 1.9% at $8,792. The continued rise copper inventory to fresh 4-year highs added to the weakness.
Iron ore markets largely ignored developments in global markets, with futures in Singapore up from the same time on Friday. While iron ore prices hold above $100, physical steel prices continue falling, with rebar prices on the cusp of hitting 7 year lows.
Australia: There were no major economic data releases yesterday.
China: The Caixin services index improved in July from 51.2 to 52.1, consistent with GDP growth around target. This is in contrast to last week’s manufacturing index which printed at a soft 49.8.
Eurozone: The Sentix index of investor confidence deteriorated further in August to -13.9, continuing the trend since June. However, the index is still around the middle of the range of the past five years, pointing to benign conditions.
United States: The ISM services index was largely as expected in July, rising from 48.8 to 51.4. Business activity, new orders and employment all improved 5pts to 54.5, 52.4 and 51.1 respectively. Prices paid were little changed, holding near the average of the past six months and around its long-run average.
The July Senior Loan Officer Survey reported “tighter standards and basically unchanged demand for commercial and industrial loans” in the June quarter. The survey also noted “tighter standards and weaker demand for all commercial real estate loan categories”.
For households, banks reported “basically unchanged lending standards and weaker demand across all categories of residential real estate loans”, with lending standards and demand unchanged for home-equity loans. Standards were unchanged for auto loans but tighter for other consumer credit. Demand was unchanged for credit cards, but weakened for other forms of consumer credit.
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