Morning Report
Today's economic developments and market movements.
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Key themes: Results from the US Presidential election were front of mind. President-elect Donald Trump’s victory drove movements across financial markets with Trump trades being realised.
US Treasuries sold off with yields hitting multi-month highs and the yield curve steepening across the 2-10-year portion.
Equities markets rallied with new records being set in the US. Markets were mixed outside the US. European and Hong Kong markets were weak while the Indian and Japanese markets lifted. Australian equity markets will react to the news at open this morning with futures suggesting positive start to the session.
Commodity markets were weaker off the back of US dollar strength.
Share markets: US equities rallied with the S&P 500 gaining 2.5% to a record high of 5929. The NASDAQ rose 2.9% to a record high of 18983 while the Dow Jones was up 3.6% to a record high of 43729. Anticipation around more lax tax and regulation underpinned this result.
Outside the US, equity markets were mixed. Benefitting from the contagion of US strength, Japan's Nikkei rose 2.6%. India's NIFTY rose 1.1% though remains well below the record high set in September.
Equities across Europe were weaker led by the Euro Stoxx 50 which fell 1.4% to a 12-week low. The German Dax fell 1.1% while London's FTSE 100 was down just 0.1%. Downside from US tariffs were priced in to these markets.
The weakness was most pronounced in Hong Kong with the Hang Seng falling 2.2% as the likelihood of tariffs increased with Republicans' likely control over both the House and Senate. The fall in Shanghai's CSI 300 was more muted at 0.5%.
While Trump's victory was confirmed after the close of Australian equity markets yesterday, markets were anticipating the result late in the session. The ASX 200 gained 0.8% but remained below the record high set on 30 September. Futures markets suggest a strong open ASX futures up 0.4%.
Interest rates: US Treasury yields lifted across the curve with the back-end up the most. The 10-year bond yield was up 16 basis points to 4.43%, around 80 basis points above its recent low of 3.61%. The 2-year bond yield was up 10 basis points to 4.27%. The 2-10 year yield curve steepened with the spread widening to 16 basis points.
The odds of Fed cut increased for November but pulled back for subsequent meetings. Odds of a November cut are now at 94% while they are 59% for December. Now there are 100 basis points of cuts priced in by the end of 2025, compared with 120 basis points a week ago.
Outside the US, performance in bonds was mixed. Much like equities, European bond yields shifted down. The German 2-year Bund yield fell 12 basis points to 2.17% while the 10-year bond yield fell 2 basis points to 2.4%. The UK's 2-10 year curve steepened as the 10-year bond yield rose 3 basis points to 4.56%. There was little space to manoeuvre with a Bank of England meeting coming up.
The Japanese 10-year bond yield rose 4 basis points to 0.98%.
Australian bond futures were little changed with the 3-year future yield remaining as is at 4.13% and the 10-year yield shifting up 2 basis points to 4.66%. Expectations for RBA rate cuts continued to get pushed out with a February 2025 cut now just 32% priced in, while a May cut is only just fully priced in.
Foreign exchange: US dollar strength drove movements in currency markets. The DXY rose to 105.07 at the time of writing hitting a 4-month high.
The Japanese yen was the worst performing G-10 currency. The yen rose to 154.5 against the US dollar at the time of writing, the highest in four months.
The euro and the British pound were in the middle of the pack. At the time of writing, the euro fell to 1.0736 against the USD, the lowest since mid-April. The GBP/USD pair saw a less dramatic fall to 1.2889.
The Aussie dollar was one of better performers amongst the G-10, second only to the Canadian dollar. Early in the session the pair moved in the Aussie's favour from a high 0.6638 close to open to a low of 0.6512. As election results became more certain, the pair drifted back up finishing at 0.6581 at time of writing, a three-month low. Today's Fed cut should add some support for the Australian dollar.
Commodities: Commodity markets were weaker as equity and currency markets powered ahead on the news of the election. The West Texas Intermediate (WTI) futures were down 0.7% at US$71.61 reflecting prospects of a firmer stance on Iran. The price decline also reflected an increase in crude inventory with the US Energy Information Agency reporting an increase of 2.9 mega barrels of distillate, the biggest increase since July. Production remain unchanged at a record 13.5 mega barrels.
Gold fell 2.8% to 2668 likely due to strength in the US dollar and greater certainty around US politics in so far as having a clear idea of who will be in charge.
Iron ore fell 1.4% to US$103.60 no doubt reflecting uncertainty around Chinese demand for steel.
Australia: There were no major data releases.
United States: Donald Trump has comfortably surpassed the 270 electoral college votes necessary to become the 47th President of the United States. Counting is ongoing for both the Senate and the House, but the Republicans look to have taken control of the Senate and are ahead in the House. If the Republicans take both the House and Senate, President Elect Trump will have considerable scope to enact new policy across tax, regulation, spending and trade. Equity markets have rallied strongly on the result, anticipating tax and regulatory reform will boost the profitability of US companies. However, long-term government yields have also jumped to 4.45%, almost 85bps higher than the low of mid-September 2024. Concerns over the deficit and debt and inflation are clearly on the minds of investors.
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