Markets Daily
US equities surrendered early gains and US yields rose, AUD easing back to 0.6810. Today’s calendar includes RBA July minutes and UK May unemployment and wages.
Yesterday
Friday’s broad-based US$ decline extended to Monday’s Asian trade, all G10 and many Asian currencies posting notable gains. AUD/USD rose from 0.6790 to 0.6830. Regional equities were also cheered by the positive lead from Wall Street, the ASX 200 a little firmer than most with a 1.2% gain. New Zealand Q2 CPI jumped 1.7%qtr, 7.3%yr, more than expected.
Currencies/Macro
The US dollar fell against most major currencies on the day. EUR/USD rose from 1.0080 to as high as 1.0201 before consolidating at 1.0145. GBP/USD followed a similar path, rallying as high as 1.2033 then trimming gains to 1 cent, at 1.1950. USD/JPY slipped from 138.60 to 138.10. AUD/USD is up a net 20 pips at 0.6810, with a high of 0.6854. NZD/USD ranged between 0.6148 and 0.6186, curiously underperforming despite strong CPI data yesterday. AUD/NZD rose a net 55 pips to 1.1070.
US homebuilder confidence (NAHB) fell, the headline index down from 67 in June to 55 in July (est. 65), extending a decline which started in November 2020. All components fell sharply. Homebuilders are facing surging mortgage rates and declining affordability with prices at or near record peaks. And rising costs of land, labour, and materials are weighing on builders, though the report did indicate lumber costs have been easing with lower building activity.
Interest rates
US bond yields rose following the return of positive risk sentiment, as bonds took a bearish lead from Europe. 2yr government bond yields rose from 3.11% to 3.19%, and 10yr government bond yields rose from 2.90% to 3.02%.
Australian bonds took trend from the US, as domestically we have RBA Deputy Governor Bullock speaking on the impacts of policy decisions on the household sector. 3yr government bond yields (futures) rose from 3.20% to 3.27%, while 10yr bond yields (futures) rose from 3.46% to 3.56%. Markets are fully priced for a 50bp hike at the next RBA board meeting. Cross market spreads narrowed slightly overnight, with the AU-US 10yr bond spread now at 55bps.
Credit indices reflected the shift in sentiment during the session with Main closing 2bp tighter (120.5) but CDX was a bp wider by the close (91.5) after giving up early gains. Cash credit remained firm and the strong open paved the way for primary activity in the US where 3 of the large cap banks hit the market with jumbo deals, with the average NIC of ~5-8bp (depending on tenor) a positive outcome compared to levels we’ve seen recently. JPM priced a USD7bn split evenly across a 6nc5yr (T+175, BBSW+212) and an 11nc10yr (T+193, BBSW+232), MS sold USD4bn across a 4nc3yr (T+152, BBSW+173) and 11nc10yr (T+192, BBSW+230) and WFC priced USD6.5bn including a USD3bn 6nc5yr (T+175, BBSW+208) and USD2.5bn of 11nc10yr (T+195, BBSW+231)
Commodities
Crude markets regained the $100 mark as the focus shifted to indications from Saudi Arabia that production would be driven by market conditions rather than politics. The August WTI contract is up $4.47 to $102.06 while the Sep Brent contract is up $4.45 to $102.04. The Iraqi oil minister Ihsan Abdul Jabbar told Bloomberg that oil will trade above $100 for the rest of the year requiring producers to manage supply and that “we will discuss that with our partners” at the OPEC+ meeting August 3. Supplies from Libya are set to return after Prime Minister Abdul Hamid Dbeibah replaced the leadership of the National Oil Corp late last week. Natural gas markets across Europe weakened as traders tried to price in risks surrounding the restart of the Nord Stream pipeline. Press reported that Gazprom had declared force majeure though the notice was retroactive and covered past and current shortfalls rather than future. Germany’s biggest buyer of Russian gas, Uniper SE, remained in bailout talks with the German government given it has been receiving only 40% of contractually committed gas volumes from Gazprom since mid-June. The August TTF European natural gas contract is down 1.5% and approaching the lows for the month.
Metals finally saw a decent bounce on optimism that China would look to stabilise the economy after the sharp weakening in Q2. Copper is up 2.7% to $7,384 while aluminium jumped 3.6% to $2,427 and nickel is up a hefty 6% to $20,560. Wires reported that the Chinese authorities may allow homeowners to temporarily halt mortgage payments on stalled property projects without incurring any impact on credit scores. The plan was said to be part of a wider set of proposals to stabilise the slump in the property sector in China. Regulators were also said to have asked CCBC to explore a pilot program to purchase stalled projects with the aim of converting them to apartments for long term rental.
Finally note that iron ore markets bounced back above $100 on news of China’s attempts to stabilise property markets. The August SGX contract is last up $4.40 at $102.40 while the 62% Mysteel index is up $4.50 at $100.85. Various news sources continue reporting that China is planning a state-backed iron ore company to oversee everything from mine investments through to buying iron ore. Momentum behind the SOE appears to have picked up after Chinalco chair Yao Lin and Baowu Steel executive VP Guo Bin recently resigned from their positions.
Day ahead
At 11:30am Syd/9:30am Sing, the RBA Board’s July meeting minutes will provide colour around the second consecutive 50bp hike and risks to the outlook, with particular attention on the discussion over the size of the hike. Meanwhile, RBA Deputy Governor Bullock will speak on how households are placed for interest rate rises at the ESA Business Lunch in Brisbane, 1:05pm AEST.
Eur/UK: The final estimate for the Eurozone’s June CPI will confirm the major contributions from food and energy inflation. The UK’s ILO unemployment rate is expected to hold at its pre-pandemic level in May (market f/c: 3.8%).
US: Near-term input supply constraints and tightening financial conditions are weighing on the outlook for housing starts and building permits (market f/c: 2.0% and -2.7% respectively).
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