Morning Report
Today's economic developments and market movements.
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Key themes: There was a sharp reversal in risk sentiment overnight with price action across markets eerily similar to the market meltdown in early August, albeit to a lesser magnitude and with no clear catalyst for the move.
Equities posted losses across major markets with implied volatility spiking significantly on the sell-off.
Bond yields shifted lower across most developed markets as traders retained bets for sharp Fed rate cuts.
The US dollar was firmer, benefitting from the risk-off mood, gaining against most G-10 currencies, barring the traditional havens – the Japanese yen and the Swiss Franc.
Share markets: Equities finished lower globally led by the US. The S&P 500 was down 2.1%, the largest single day fall since 5 August. Tech stocks drove the decline but weakness was broad-based.
Concerns around violation of antitrust laws influenced Nvidia’s share price, reverberating through the sector. This contributed to the 3.3% decline in the tech-heavy NASDAQ. The Dow Jones was also down 1.5%.
European markets also finished weaker. The Euro Stoxx 50 dropped 1.2%, while the German Dax and London’s FTSE 100 closed down 1.0% and 0.8%, respectively.
Australian stocks finished mostly flat yesterday, down 0.1% in the day but a 1.2% decline in futures overnight suggests the ASX200 is in for a weak open.
Interest rates: The US treasury yield curve shifted down and flattened. The 2-year yield fell 5 basis points finishing at 3.86%, while the 10-year fell 7 basis points to 3.83%. The 2-10 year spread inverted further. Almost four rate cuts are fully priced in for the Fed this year.
The German and UK yield curves also flattened. The 2-year Bund and Gilt yields were bond down 4 basis points, while the 10-year yields were down 6 basis points.
The Japanese 10-year bond yield was up 1 basis point yesterday after the Bank of Japan Governor Ueda reiterated that further rate hikes are on the table if the economy evolves as expected.
Aussie bond futures also gained overnight (i.e. yields fell). The 3-year futures yield is down 5 basis points at 3.54%, while the 10-year futures yield is down 7 basis points at 3.94%. The implied odds of an RBA rate cut this year are sitting around 75% with the first cut fully priced in for February 2025.
Foreign exchange: The US dollar was firmer, benefitting from the deterioration in risk sentiment. The DXY index oscillated through the day trading from a low of 101.56 to a 2-week high of 101.92. The lower yield structure in the US will likely prove a headwind for the DXY as it nears 102.
All G-10 currencies barring the Japanese yen and Swiss Franc sold off against the US dollar, the Yen and the Franc benefitting from their usual safe-haven characteristics. The USD/JPY fell to 145.16 after starting the day near its high at 147.21. While nothing novel, Ueda’s comments reiterated the BoJ’s confidence in the Japanese economy and doubled down on their hawkish stance, supporting the Yen.
The Aussie dollar sold off sharply, again the victim of a rapid turn in risk tolerance. After recently chopping sideways in the 0.6750-0.6800 region following a three big figure rally since the start of August, the AUD/USD pulled back to an intra-day low of 0.6708 and is only trading slightly above the overnight low in early trade this morning. This was the largest single day decline in the AUD/USD since 7 June.
Commodities: Oil futures tumbled, the West Texas Intermediate (WTI) contract was down 4.4% to US$70.34 per barrel. This was the largest decline since 16 November 2023. Prices are now lower than they were at the start of the year and nearing the low for the year of US$69.28.
The crunch lower in prices was a harsh reminder that OPEC+ is set to return 180k barrels per day to the market as soon as October according to recent press reports, though this is subject to final agreements.
Iron ore fell 3.3% to US$93.75 nearing the low of US$91.75 on 19 August. The rebound in prices over the last two weeks has been somewhat surprising given weak underlying fundamentals and we suspect prices to continue to trudge lower over the medium term.
Metals remained under pressure. Copper was down 2.5% and nickel 1.0%. The London Metal’s Exchange index was down 1.0%.
Australia: We received the final partial indicators for June quarter GDP growth yesterday. The Australian economy is expected to have grown 0.3% in the June quarter. This would see annual growth ease to 1.0% – the softest growth momentum since the early 1990s recession.
The domestic demand impulse (spending by consumers, businesses, and governments) is expected to have lifted 0.4% in the quarter, underpinned by strong growth in public demand, particularly public consumption.
Private demand remains extremely weak. Consumer spending has broadly flat-lined since the December quarter 2022 due to the squeeze on household budgets from bracket creep, higher interest rates and elevated (albeit moderating) inflation.
This is spilling over into the business sector, with business profits and capex falling in Q2. Those industries at the coal face of the consumer-led slowdown have been hit particularly hard.
The external sector is now expected to contribute around +0.2ppts to growth in the June quarter, on the back of a 5.6% increase in service exports (mainly to foreign students). On the other hand, total inventories (private non-farm and public) are expected to detract 0.3ppts from growth in the June quarter, driven by private non-farm inventories
United States: The ISM manufacturing index lifted in August to 47.2 but missed expectations. The headline index has now been below 50 for all but one of the past 22 months. New orders deteriorated, falling from 47.4 to 44.6 for its 25th reading below 50 of the past 28 months.
While the employment index lifted in August, it regained less than half July’s decline and, at 46, remains consistent with a meaningful decline in labour demand amongst manufacturers. It is worth noting that, in the 5 years before the pandemic, the ISM manufacturing employment index averaged 52.9 versus August’s 46.
There was also some concern over the prices paid component of the survey, an indicator of upstream price pressures. At 54, the current reading is below the average of 2015-2019 of 55.8, during which core PCE inflation averaged 1.6%.
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