Morning Report
Today's economic developments and market movements.
Morning Report PDF (PDF 271KB)
Key themes: Tech stocks rebounded as investors flock to ‘buy the dip’ across most developed markets. However, most indexes have yet to recover from the declines seen on Monday.
Bond yields were up at the 10-year maturity reflecting added risk of inflation as tariffs remain front of mind.
Also reflecting tariff news, oil prices rebounded while metals continued their upswing.
The US dollar rebounded and appreciated against all G10 currencies. Weakness was led by the Japanese yen and Aussie dollar.
Japanese markets were softer with the currency edging lower, the Nikkei underperforming compared to other majors and the 10-year bond yield falling marginally.
Share markets: Following news of DeepSeek’s release of their AI Chatbot, markets ‘bought the dip’ leading to a 2.0% gain in the tech-centred NASDAQ, while the S&P500 was up 1.0% and the Down Jones 0.3%. A 3.4% gain in IT companies drove the increase in the S&P 500 while most other sectors declined. Still, the NASDAQ and S&P 500 have yet to recover from yesterday’s weak session.
European markets also recovered. Europe’s Euro Stoxx was up 0.1% while London’s FTSE 100 was up 0.4%.
The Japanese Nikkei underperformed falling 1.4%. This in part reflects concerns that demand for semiconductors from the US may subside in the wake of the new technology – IT stocks fell the most (4.5%) with semiconductor stocks leading the way.
The Indian NIFTY50 rose 0.6% following the Reserve Bank of India’s announcement of increased liquidity which is expected to pave the way for a rate cut next month. This is also coupled with expectations of solid earnings reported by the largest companies out this week.
The ASX 200 was down 0.1% led by real estate stocks.
Interest rates: Rates markets saw yields lift more at the 10-year maturity than 2-year. The US 2-year bond yield remained at 4.19% and the 10-year at 4.54%. This comes on the heels of a Fed meeting early tomorrow morning. Markets and economists alike are expecting the Fed to pause with just 1 basis point priced in. The next rate is fully priced in for June and a second cut for 2025 is almost priced in for December. Tariffs and their impact on inflation continue to be front of mind for markets with expectations that stickier inflation may lead the Fed to remain ‘higher for longer’ which has impacted market pricing at the long end.
In Europe, the 2-year German Bund was little changed at 2.26% while the 10-year gained 3 basis points to 2.57%. The UK 2-year gilt was up 2 basis points to 4.30% while the 10-year gilt was up 3 basis points to 4.61%.
Though a small move, the Japanese 10-year bond yield fell 1 basis point to 1.19%. Combined with movements in the Japanese yen and stock market, sentiment towards Japan has dampened as markets assess the impacts of US trade on the Japanese economy.
In the futures market, the Australian 10-year bond yield remained as is at 4.45% while the 3-year is down 1 basis point to 3.83%. Market pricing suggests a 79% chance of a February cut with April fully priced in. Markets are pricing in three cuts for 2025.
Foreign exchange: The US dollar was reinvigorated after a weak start to the week. The DXY Index rose to 107.90, regaining some of yesterday’s fall but remaining below the high seen on Friday prior to the release of DeepSeek’s chatbot. It traded in a tight range of 107.686 and 108.054. 108 once again seems to be a technical level for the DXY, the index struggled to remain meaningfully above it.
All G10 currencies weakened against the greenback, the two worst performers being the Japanese Yen and Australian Dollar. The already weak Canadian dollar depreciated the least, trading at 1.4397 against the US dollar, at time of writing, as anticipated tariffs from the US have so far failed to materialise.
The Japanese yen unwound most of its strength from yesterday as markets grappled with the possibility of lower chip demand from the US feeding into Japanese export growth. At time of writing, the yen is trading at 155.51. Yen tested 156 twice in yesterday’s session but failed to break through proving it a technical level.
The Australian dollar fell to 0.6254 cents against the greenback. Much of the depreciation occurred at open with the AUD/USD pair angling down for most of the day until US markets opened. A softer than expected CPI report could see further depreciation in the pair as expectations for a February cut increase.
Commodities: Crude oil prices bounced after the White House spokeswoman Karoline Leavitt confirmed that the Feb 1 deadline for potential tariffs on Canada, Mexico and China “is still on the books”. WTI futures were up 1.0% to US$73.89 per barrel. This comes despite a Bloomberg report of Russian exports of oil products expecting to hit a 11-month high of 2.3mbpd.
Metals slid on tariff news with copper sliding 2.0% to US$9006.56, while aluminium fell below US$2,600, bringing losses for the week to 2.6%. The US imports around 38% of its copper while about 82% of its annual aluminium consumption comes from Canada and Mexico. Given their importance to manufacturing, tariffs on these commodities will feed through to higher producer prices.
Iron ore markets are essentially closed for Lunar New Year with prices largely unchanged at $103.5. Vale reported Q4 iron ore production at 85.28mt, -4.6%yr with weather impacts and lower demand from China for higher grade ore a driver. FMG announced plans to buy Red Hawk Mining to gain access to an undeveloped mine 30km from its Solomon project in WA. The project has a mineral resource estimate of 243mt of iron ore, offering FMG the potential to increase production as required in the future.
Australia: There were no significant data releases yesterday.
United States: Durable goods orders surprised significantly on the downside falling 2.2%mth in December. The move followed a 2.0%mth decline in November. But the underlying growth was much stronger than the headline figures suggested. Excluding transportation, orders were up 0.3%mth, and core orders (capital goods excluding defence and aircraft) gained 0.5%mth fallowing a 0.9%mth rise in November. In Q4 as whole, core orders rose 0.9%qtr, the steepest in two years, pointing to strong demand in the industrial sector, which might represents a temporary boost ahead of the anticipated rise in import tariffs.
The Richmond Fed Manufacturing Survey showed that business conditions improved at the start of this year. The headline survey index gained 6pts rising to an eight-month high of -4. All three survey sub-indices – shipments, new orders and employment – increased from December levels. The employment indicator turned positive for the first time in eleven months which could see further hiring pointing to jobs gains in the manufacturing sector ahead.
Having peaked at 112.8 in November, the highest level in almost three years, the Conference Board Consumer Confidence Index eased for a second month in a row in January falling to 104.1, a level broadly in line with the 2024 average. Both the present situation and expectations indices were lower, but while the former was below the 2024 average, the latter was comfortably above, suggesting that consumers remain relatively optimistic about the future. One concern that might curb their assessment of the outlook is the labour market, with the main survey indicator in this area – a share of respondents who think the jobs are plentiful minus a share who think jobs are hard to get – decreased to a four-month low and was below the average levels in the second half of last year. The move is consistent with upside risks to the unemployment rate.
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