Morning Report
Today's economic developments and market movements.
Morning Report PDF (PDF 268KB)
Key themes: The risk off tone triggered a selloff in equities, particularly tech stocks, while treasuries rallied which saw yields declined across the curve.
Risk sensitive currencies including the Aussie were sold off, with haven currencies including the Japanese Yen outperforming.
The volatile session could set the tone for the week with significant events scheduled including the Fed’s and ECB’s first meeting for 2025 and the release of top tier economic data on both the domestic (Q4 inflation report) and global fronts.
Share markets: The widespread selloff in tech stocks weighed on global equity markets. The release of Chinese startup DeepSeek new AI technology, which is reported to be just as good as US developed technology but produced at a fraction of the costs, sparked concerns about US leadership in the sector.
US tech stocks fell almost 6% overnight, with Nvidia stocks losing almost 20% of its value. Defensive stocks such as consumer staples and health care helped to partly offset some of the loss. On the back of increased uncertainty, the VIX (volatility index) soared to almost 20, the highest since mid-December.
The S&P 500 closed 1.6% lower with the NASDAQ closing 3.1% in the red. With capital flowing into defensive stocks, the Dow Jones outperformed finishing 0.7% in the green.
The selloff in tech stocks extended to Europe which saw major equity indices finish in the red. The Euro Stoxx 50 closed 0.6% lower, the FTSE 100 was flat, while the DAX finished 0.5% in the red.
The ASX200 index gained 0.4% on Friday to finish the week 1.2% in the green. Nine of the eleven sectors finished higher, led by consumer discretionary stocks. Futures are pointing to a soft open this morning, following the rout in global equity markets.
Interest rates: Treasuries rallied as sentiment took a plunge which saw yields come down across the curve. The US yield curve flattened with the 2-year bond yield declining 7 basis points to 4.19%, while the US 10-year bond yield declined 9 basis points to 4.53%. Money markets are pricing in virtually no chance of a rate cut when the Fed meets this week and around 50 basis points of cuts through 2025.
Yields were generally lower across Europe, with 10-year bond yields down 3.7 basis points to 2.53% in Germany and 4.3 basis points lower in the UK at 4.58%. Money markets have almost fully priced in a 25-basis point cut when the ECB meets this week and around 95 basis points of cuts through 2025.
The Aussie yield curve shifted lower. The 3-year and 10-year futures yield both declined 8 basis points to 3.82% and 4.43%, respectively. The first full rate cut is expected by April 2025, with around an 80% chance of a cut in February. There are around 75 basis points of cuts expected over 2025.
Foreign exchange: Risk sensitive currencies, including the Aussie, were lower given the risk off tone. The Aussie declined to a session low of 0.6275 against the Greenback, before settling at below 0.63. The all-important December quarter inflation read will determine price action this week, with a stronger than expected outcome likely to support the Aussie.
The US dollar finished broadly unchanged, reaching a high of 107.81 before falling to a low of 106.96. The DXY was trading at 107.38 at time of writing.
The flight to safety saw the Yen outperformed, with the USD/JPY down by as much as 1.5% to 153.72 (lowest values since early December) before settling at 154.61 at time of writing. Following the rate hike last week, money markets are currently pricing in one more rate hike this year.
The British Pound was stronger against the Greenback, reaching a high of 1.2523 (highest since early January) before closing 0.1% higher at 1.2498. The euro was broadly unchanged against the Greenback, after reaching a session high of 1.053 the euro roundtripped back to its opening value.
Commodities: Crude markets also declined on the back of the risk off tone. Trump’s calls for OPEC to reduce prices have weighed on sentiment, though according to a Bloomberg poll of traders and analysts, the OPEC+ meeting on 3 February is expected to recommend no change in production plans. The West Texas Intermediate (WTI) is trading at US$73.01 per barrel.
In metals markets, copper and aluminium were lower with the disappointing China PMI released on Monday adding to the risk off sentiment and concerns about global growth.
Iron ore markets remain below USD$105 with the 62% index last at $104.80 and the March SGX contract at $103.30. Vale will report its Q4 iron ore production and sales later today, with poor weather likely impacting volumes.
Australia: There were no significant data releases yesterday.
On Friday, the composite S&P Global PMI ticked higher to 50.3 points in January from 50.2 points in December. The services sector remained above neutral (or 50 points) while manufacturing output stabilised. The employment sub index declined for a second successive consecutive month. Average input costs increased at an accelerated rate in January, consistent with output prices rising at its fastest pace in six months.
Euro area: The IFO Business indicator for Germany increased to 85.1 points in January from 84.7 points in December. This was stronger than the 84.7 points the market was expecting. The current conditions sub index increased by 1 point to 86.1 points, with the expectations index edging lower. The read showed that the soft conditions continued ahead of the snap election taking place next month.
China: The economy continues to tread water with activity in the manufacturing sector falling into contractionary territory while outside of manufacturing activity stepped down to more neutral levels. This is consistent with the 3.3%yr fall in industrial profits over 2024, which followed a 2.3%yr decline in 2023. On the positive side, profits increased by 11%mth in December supported by fiscal measures, which helped to narrow the annual outcome.
The official NBS manufacturing PMI declined into contractionary territory in January for the first time since September 2024. The manufacturing PMI declined to 49.1 points from 50.1 points in December. Output and new orders declined while foreign orders and employment remained weak. Input costs and selling prices were also softer over the month.
The official NBS non-manufacturing PMI also slipped to 50.2 in January from 52.2 points in December. Domestic orders declined ahead of the Lunar New Year, with foreign sales also falling. Input prices rose for the second consecutive month while output prices were softer.
United States: The University of Michigan consumer confidence gauge was revised lower to 71.1 points in January from the preliminary read of 73.2 points. Both the current conditions and expectations sub-indices were revised lower compared with the preliminary read.
The Dallas Fed Manufacturing Index was up almost 10 points to 14.1, the highest level since late 2021. Production index rose seven points, while new orders component was up six points suggesting strong growth at the start of the year. Chicago Fed National Activity Index rose from -0.01 to 0.15 in December, registering the first positive reading since May.
US new home sales were up 3.6%mth in December to 698k, still about 10k below the average Q3 level, with stronger sentiment among buyers and home builders likely providing some support.
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