Markets Daily
Equity jitters intensified with fears of hawkish Fed signals later this week, US and European indexes falling sharply. EUR/USD slid back under parity (low since 2002) while AUD/USD held its ground at 0.6875. Today’s data focus is August PMIs, especially in the Eurozone.
Yesterday
The data calendar was empty. China’s central bank cut its benchmark 1-year loan prime rate by 5bp to 3.65% and cut its 5-year rate by 15bp to 4.30%. Markets expected 10bp cuts in both rates. AUD/USD seemed to find some support from this second consecutive weekly monetary easing in China, ticking up from 0.6870 early to just over 0.6900. Regional equities mostly outperformed Wall Street’s sharp losses Friday, Japan’s Topix near-flat and China shares rallying, but the ASX 200 closed -1.0%, only slightly better than the S&P 500’s lead.
Currencies/Macro
The US dollar rose against all G10 currencies except AUD on the day. EUR/USD fell from 1.0047 to 0.9926, a fresh low since December 2002. GBP/USD fall about 60 pips to 1.1765. USD/JPY found support from higher Treasury yields, up 50 pips to 137.50. AUD/USD probed as high as 0.6929 but returned to 0.6875, net flat. NZD/USD fell from a high of 0.6215 to 0.6157 – a one-month low. AUD/NZD rose slightly to 1.1145.
The Chicago Fed’s national activity index for July rose to +0.27 (est. -0.25, prior revised down to -0.25 from -0.19). Production related indicators contributed +0.16 to the overall index (compared to -0.19 contribution in June). The report also noted that 55 of the indicators improved while 30 deteriorated.
ECB council member Nagel (Bundesbank) said: "given high inflation, further interest rate hikes must follow…the past few months have shown that we have to decide on monetary policy from meeting to meeting…it will be crucial to keep medium-term inflation expectations stable at 2%". He acknowledged, though, that the economic situation is not making the situation easier and that "if the energy crisis worsens, a recession seems likely next winter, while inflation could hit 10% in the autumn months…for 2023, the probability is growing that price growth will average above 6%".
Interest rates
US bond yields rose, taking a bearish lead from Europe and the curve shape was largely unchanged. 2yr government bond yields rose from 3.24% to 3.34%, and 10yr government bond yields rose from 2.94% to 3.04%.
Australian bond yields rose, taking trend from global price action, the long end underperformed their US counterparts. 3yr government bond yields (futures) rose from 3.26% to 3.35%, and 10yr government bond yields rose from 3.45% to 3.61%. Markets are full priced for a 25bp hike in September, and pricing in an 80% chance of a 50bp hike. Cross market spreads widened on the back of AU underperformance, with the AU-US 10yr bond spread now at 59bps.
Credit indices reflected the weaker sentiment to open the week with Main out another 6.5bp to 110 as Euro energy threats play out, with CDX also 3.5bp wider to 84.5 while US cash spreads remained more contained to be 1-2bp wider. Primary was mixed with a solid open in Europe, but no activity in the US amid expectations for a light supply week. Europe saw 7 issuers price EUR4.5bn in addition to the ESFS’s EUR5.5bn deal. BT was the largest issuer, pricing EUR1bn across 5/12yr, with Santander pricing a GBP500M 6nc5yr Sen Pref. at UKT+250 (BBSW+214) and Rabo completing a EUR750M 10.25nc5.25yr Tier 2 deal at MS+195 (BBSW+267).
Commodities
Brent crude oil was volatile, sliding from $97 to lows under $93 then back to $96.82/bbl, net +0.1%. Saudi Arabia’s energy minister said that extreme volatility and lack of liquidity in oil futures means an increasing disconnection from fundamentals and that OPEC+ may be ‘forced’ to cut production.
Despite China’s further rate cuts, notably -15bp from the 5-year loan prime rate to 4.3%, base metals mostly closed lower, Comex copper -0.5% after a strong finish to last week. Gold fell about $11 to $1736/oz as the US dollar strengthened.
Spot iron ore rose for the first time since 11 August, +0.9% to $100.20/tonne. Shipments of iron ore from Australia to China fell last week while Brazil’s shipments rose, with the net arrivals in China up 2.1%.
Day ahead
S&P Global/Markit advance August PMI surveys are due in various countries, including the little-watched Australian PMIs. The manufacturing PMI was a healthy 55.7 in July, the services PMI a lukewarm 50.9.
Japan: The August Nikkei-sponsored PMIs will provide a timely update on the outlook for services and manufacturing, with the former at 50.3, the latter 52.1 in July.
Eur/UK: European consumer confidence is expected to remain near its lows in August (market f/c: -28). A further weakening in the Eurozone S&P Global manufacturing and services PMIs is also anticipated in August (market f/c: 49.0 and 50.5 respectively). Similarly for the UK, the S&P Global PMIs are expected to decline but remain in positive territory (market f/c: 51.0 and 51.6 respectively).
US: The Richmond Fed index is expected to weaken further in August but near-term volatility remains (market f/c: -5). With the housing sector under significant pressure, another decline in new home sales is anticipated in July (market f/c: -2.5%). The S&P Global manufacturing and services PMIs are pointing to smaller/mid-sized firms facing greater pressure from weakening conditions (market f/c: 51.9 and 50.0 respectively).
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