Morning Report
Today's economic developments and market movements.
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Key themes: Crude surged after comments from US President Joe Biden, suggested that attacks against Iranian oil infrastructure were on the table. Israel is weighing retaliation against Iranian missile strikes earlier in the week as the G-7 continued to urge for restraint to prevent a broader escalation.
Equities retreated as the risk mood soured further, the VIX jumping above 20 for a third consecutive session. The US dollar firmed, supported by the haven bid, while US treasury yields popped higher across the curve.
The Aussie dollar broke to the downside, pushing through support at 0.6850 as a reversal in Hong Kong equities raised the sustainability question for the Chinese stimulus sugar hit.
Share markets: The souring risk sentiment saw most major equity indices retreat, but losses were capped to less than 1%. In the US, a stronger than expected ISM services index provided some support. The Dow Jones suffered the largest pull-back falling 0.4%, while the S&P 500 fell 0.2% and the NASDAQ was flat.
In the UK, the FTSE 100 initially rallied on comments from the Bank of England (BoE) Governor Andrew Bailey’s that alluded to the potential for faster policy easing. However, this was promptly wiped out later in the session on the broader deterioration in risk sentiment with the index closing 0.1% lower.
The Japanese Nikkei posted bounced 2.0% yesterday after incoming Prime Minister Shigeru Ishiba pushed back on the need to raise rates imminently and announced there would be additional policy measures to assist with cost of living.
Equity markets remain closed on the Chinese mainland for the Golden Week holiday but shares pulled back in Hong Kong with the Hang Seng retreating 1.5% as investors considered whether the stimulus induced rally is a little over-extended. The ASX 200 closed 0.1% higher, but futures pulled back overnight.
Interest rates: US treasury yields popped higher across the curve as firm ISM services activity data strengthened Jerome Powell’s recent comments which erred on the side of a more measured easing cycle and dockworker strikes bubble away in the background. The 2-year and 10-year yields rose 6 basis points to 3.71%, and 3.85%, respectively, the 10-year yield hitting its highest level since early September. Markets are still expecting another two 25-basis point rate cuts this year but are split on whether one will be a 50 basis point move, the odds of this are priced at 45%, this is down from around 60% earlier in the week.
Expectations of a faster decline in interest rates in the UK saw the 10-year and 2-year bond yield both decline and the curve steepen across the two maturities. The 2-year bond yield was down 5 basis points while the 10-year was down 1. Yields in Germany followed the broader rise in yields. The 2-year bund yield was up 4 basis points to 2.08% while the 10-year yield was up 5 basis points to 2.14%
Aussie bond futures yields were firmer overnight. The 3-year futures yield rose 3 basis points to 3.52%, while the 10-year futures yield was up 4 basis points to 4.05%.
FX: The US dollar remained well bid, supported by the flaring geopolitical backdrop. The DXY index rose from a low of 101.62 and broke through 102 on its way to a 6-week high of 102.10. The DXY has since pulled back and was trading around 101.95 at the time of writing.
The Aussie remained under pressure, undermined by the risk mood. The AUD/USD broke through support around 0.6850 on its way to an intra-day low of 0.6830. While the announced stimulus in China and firmer commodity prices puts the Aussie on solid footing, downside risks are growing as yield support has been gradually eroded by increasing signs of a more gradual easing in the US and softer domestic data.
Comments from incoming Japanese Prime Minister Shigeru Ishiba completed the reversal of the firming Yen which was triggered by his announced victory. The USD/JPY rose to 146.51 and has since opened higher in early trade this morning. The Haven characteristics of the Yen should ameliorate some of the US dollar strength from the geopolitical flare up, but the slipping probability of more assertive policy tightening is likely to see the Yen continue to trade on the back foot.
The British Pound dipped significantly yesterday against the greenback as the short end of the UK yield curve sank lower on comments from Andrew Bailey. The Pound has now erased more than half of its gains since bottoming in early September after falling to a low of 1.3092 yesterday. The euro downside was a little more contained with the EUR/USD slipping from 1.1049 to a low of 1.1008 before retracing part of the move to trader around 1.1032 at the time of writing.
Commodities: Crude surged after comments from US President Joe Biden, suggested that attacks against Iranian oil infrastructure were on the table. Israel is weighing retaliation against Iranian missile strikes earlier in the week as the G-7 continued to urge for restraint to prevent a broader escalation. West Texas Intermediate oil futures surged 5.1% to US$73.71 per barrel and are up another 0.3% in early trade this morning.
Iron ore futures gained another 0.8% yesterday to US$109.02 but have opened 0.9% lower this morning. Price action over the last few days has looked to consolidate the recent move higher with the US$105-US$110 range looking likely near-term in the absence of a new catalyst for a significant shift. Further out, the risks are likely to remain tilted to the downside given the underlying fundamentals and the fact that the price looks to be capturing an optimistic amount of upside from announced stimulus.
United States: The non-manufacturing ISM index surprised on the upside increasing by 3.4pts to 54.9, the highest reading in nineteen months and the level broadly consistent with the long run average. Among other details, the business activity and new orders components were the most positive, both rising by more than 6pts to 59.9 and 59.4, respectively. Meanwhile, the employment component was significantly weaker dipping back below 50 after two months in the expansionary territory. Prices paid were up for a third consecutive month to 59.4, the highest level since the start of the year.
The factory orders data largely reinforced the message from the durable goods orders (released earlier and confirmed in the final release today), that the manufacturing sector lost momentum August. The total orders were down by 0.2%mth after increasing 4.9%mth in September. Excluding transportation, the factory orders were down 0.1%mth, after increasing 0.3%mth in July, to leave the average for the two months in Q3 only a touch above that for Q2.
United Kingdom: The BoE Governor Andrew Bailey suggested that the BoE could be “a bit more aggressive” on lowering interest rates. His comments hint at a possible shift from the forward guidance provided by the Monetary Policy Committee MPC in September, when the monetary policy statement said that “a gradual approach to removing policy restraint remains appropriate”.
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