Morning Report
Today's economic developments and market movements.
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Key themes: A deep slide in US equities overnight grabbed headlines as weaker than expected earnings reports from Tesla and Alphabet spurred on a broader reassessment of tech valuations after a gravity-defying run since late last year.
The sell-off pushed equity market implied volatility to its highest level since April.
The 2-10-year portion of the US yield curve steepened with the 2-10-year spread closing at its narrowest since October 2022.
The US dollar index finished slightly softer despite gaining against the Aussie, the euro and the British Pound.
The Japanese Yen outperformed, with the USD/JPY falling to a 2-month low of of 153.11.
Share markets: The recent sell-off in US equities deepened overnight. Weaker than expected earnings reports from Tesla and Alphabet appear to be the catalyst, spurring on a broader reassessment of tech valuations after a gravity-defying run since late last year.
The tech-heavy NASDAQ led the slide recording a 3.6% decline - its deepest daily fall since October 2022. The S&P500 was also down 2.3% - its worst session since December 2022.
Equity market volatility, as measured by the VIX index, spiked to its highest level since April - the last time US equities materially pulled-back.
The ASX 200 was down 0.1% yeaterday and futures are pointing to a weak open this morning following a downbeat session overnight.
Interest rates: In the US, the 2-10-year portion of the yield curve steepened as the 2-year yield fell 6 basis points and the 10-year yield rose 3 basis points. The 2-10-year spread closed at its narrowest since October 2023 with the intra-day steepening the largest since December.
Interest-rate markets are pricing in around 2½ cuts this year. The first rate cut is fully priced in for September.
Physical yields were broadly unchanged in the domestic market yesterday. Aussie bond futures followed the broad moves offshore. The 10-year (futures) yield rose 4 basis points to 4.37%, while the 3-year yield was 1 basis point higher at 4.02%.
There is a 29% chance of an RBA rate hike priced by September 2024 with around a 25% chance of a hike at the August meeting. The first rate cut isn’t fully priced until August next year.X
Foreign exchange: The US dollar index finished slightly softer despite gaining against the Aussie, the euro and the British Pound. The DXY finished the session at 104.35 after trading between a high of 104.56 and a low of 104.12.
The Japanese Yen outperformed, with the USD/JPY falling from a high of 155.99 to a 2-month low of of 153.11 - around levels last seen after the Ministry of Finance first intervened in the Yen market in 2024 over the end of April and beginning of May.
The Aussie dollar continued as the laggard. The AUS/USD slicing through the 66c level in its fall from 0.6617 to to 0.6578, just south of where it’s currently trading. The Aussie has now fallen for eight straight sessions, during which it has shedded more than 2 cents. The Aussie has also underperfomed on the crosses, losing around 2 cents on the both the euro and the Pound. The New Zealand dollar is a notable exception, as it too has recently underperformed against most majors.
Commodities: Crude markets showed signs of stabilising helped by yet another slump in crude inventory. This is despite equity markets and other commodities being battered by the risk off move.
The West Texas Intermediate futures contract is up 0.8% at US$77.59 per barrel while Brent futures gained 0.6% to US $81.50 per barrel. The US Energy Information Administration reported that US crude inventory fell to the lowest since February. The data may have been impacted by some refineries remaining shuttered due to the impact of Hurricane Beryl.
Metals were again slammed with copper down another 0.8% to US$9,022 and nickel down 1.2% to US$15,835. That’s a fresh 4yr low for nickel. Aluminium bucked the trend though, unchanged at $2,295 as the market focussed on a Government Plan issued on Tuesday which requires aluminium producers to use more renewable energy and no longer approve any new coal fired power generation for smelting.
Iron ore markets continued the slump through US$100 with ongoing disappointment about China’s Third Plenum weighing on prices. Iron ore futures in Singapore are down another 0.3% to US$99.85.
Australia: There were no major economic data releases yesterday.
Canada: The Bank of Canada eased policy further at their July meeting, cutting the policy rate by 25bps to 4.50%. The move was widely expected by economists, while markets ascribed around a 90% chance to the move coming into the meeting.
In the statement and press conference, there was a clear focus on the need to balance economic risks, with inflation pressures abating and downside risks to growth present.
The Governing Council remains data dependent, assessing the policy stance meeting by meeting. But, given these expectations, still contractionary policy and with slack building across the economy, further rate cuts are expected.
Eurozone: The manufacturing PMI missed expectations, edging lower to 45.6 from 45.8. Services activity also weakened from 52.8 to 51.9, but remained comfortably above the threshold of 50 which separates expansion from contraction.
German consumer confidence iimproved in August, rising from -21.6 to -18.4 and beating expectations for a reading of -21.0. While the reading remains undecidedly soft by historical standards, in a more recent context, August marked the strongest reading since April 2022.
Japan: The preliminary manufacturing PMI edged lower in July from 50.0 to 49.2. This is around the middle of the range struck over the past 18 months. In stark contrast, the services index increased strongly, from 49.4 to 53.9, continuing the mostly strong run of readings since early 2023.
United Kingdom: The preliminary PMI measures were robust in July, the manufacturing index rising from 50.9 to 51.8, while the services measure edged up from 52.1 to 52.4.
United States: The preliminary PMI’s showed a clear divergence in manufacturing and services activity in July. The manufacturing index declined from 51.6 to its lowest reading this year at 49.5, consistent with modest contraction in the sector. In constrast, the services index gained modestly from 55.3 to 56.0 - the strongest reading since March 2022..
New home sales were softer than expected in June, declining 0.6% against an expectations for a 3.4% monthly gain. New home sales are currently 40% off their late-2020 peak and are around their lowest level of the last 18-months.
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