Markets Daily
Unexpectedly weak US data hurt the US dollar and weighed on bond yields. AUD/USD bounced to 0.6925. Today’s calendar features little to distract markets from the Jackson Hole Fed conference Friday.
Yesterday
The only data of any note was Australia’s flash August PMIs from S&P Global/Markit. The services index slipped to a soft 49.6 from 50.9 in July, the manufacturing index to 54.5 from 55.7. The poor equity mood in Europe and the US on Monday extended to Asia-Pacific on Tuesday, with most key indexes down substantially. The ASX 200’s -1.2% close was one of the weaker performances. AUD/USD was very mixed, trading 0.6856 to 0.6900, eventually returning to around 0.6880.
Currencies/Macro
The US dollar fell sharply after the US PMI data. EUR/USD rose from 0.9901 (another low since 2002) to above 1.0000 for a while, then back to 0.9975. GBP/USD rose a net 0.6% to 1.1835. USD/JPY tumbled from 137.50 to 135.82 before recovering to 136.65. AUD/USD rose as high as 0.6963 before steadying around 0.6925, net up half a cent or 0.75%. NZD/USD rose a net 50 pips to 0.6215. AUD/NZD returned to 1.1145.
US preliminary August S&P Global/Markit PMIs disappointed. Manufacturing fell to 51.3 (est. 51.8, prior 52.2), and there was a sharp fall in services to 44.1 (est. 49.8, prior 47.3). The composite PMI fell into contraction territory at 45.0 (from 47.7). The report cited sliding demand, with new orders at the lowest pace in over two years, and concerns that interest rate rises and inflation were affecting consumer spending.
The Richmond Fed’s manufacturing survey fell to -8 in August (est. -4, prior zero). New orders were notably weak. New home sales in July disappointed, down 12.6% to 511k (est. -2.5% to 575k). The pace was the lowest since 2016 and reflected higher borrowing costs and a pullback in demand.
European flash August PMIs were also weaker but near expectations. Eurozone manufacturing fell to 49.7 (est. 49.0, prior 49.8), services falling to 50.2 (est. 50.5, prior 51.2), for a composite reading of 49.2 (est. 49.0, prior 49.9). The report noted declining demand and sliding confidence, although there was evidence of pricing pressures and supply constraints easing.
UK PMIs were mixed, manufacturing falling to 46.0 (est. 51.0, prior 52.1), services almost unchanged at 52.5 (est. 51.6, prior 52.6), and the composite at 50.9 (est. 51.0, prior 52.1). The report noted challenges for the UK economy and poor prospects for growth.
ECB member Panetta said that the potential for recession in the region is rising and that a recession would mitigate inflationary pressures. He saw market rates as being close to neutral levels and repeated that policy is data dependent.
Interest rates
US bond yields fell following the weak US PMI data, and the curve steepened slightly. 2yr government bond yields fell from 3.35% to 3.23% before rebounding to 3.30%. 10yr government bond yields fell from 3.07% to 2.99% before rebounding to 3.04%.
Australian bond yields underperformed US bond yields overnight, 3yr government bond yields (futures) rose 1bp to 3.35% via 3.41%, and 10yr government bond yields (futures) rose 6bps from 3.60% to 3.66%. Markets are fully priced for a 25bp hike in September, and pricing in a 90% chance of a 50bp hike. Cross market spreads widened on the back of AU underperformance, with the AU-US 10yr bond spread now at 61bps.
Credit indices were more contained after the weakness seen across the last 2 sessions with Main half a bp wider to 110.5 and CDX was flat at 84.7. Primary activity continued in Europe with 4 fins issuers in the market for a total of ~EUR2.8bn including Credit Agricole with a EUR1bn long 7yr at MS+12, and on the local front NAB competed its EUR750M 7yr covered at MS+28 (BBSW+101, IPT MS+30, books EUR900M).
Commodities
Comments from Saudi Arabian Energy Minister Abdulaziz bin Salman that “the paper and physical markets have become increasingly more disconnected,” and that “witnessing this recent harmful volatility disturb the basic functions of the market and undermine the stability of oil markets will only strengthen our resolve” lifted crude prices with the October WTI contract up $3.38 to $93.74 and the Oct Brent contract up $3.74 to $100.22. News that Kazakh crude flow may be interrupted due to damage assessment after dive teams uncovered cracks on two moorings at the CPC terminal on the Black Sea added to the positive sentiment. Finally, comments from US NSC spokeswoman Adrienne Watson that “reports that we have accepted or are considering new concessions to Iran as part of re-entering the 2015 nuclear deal are categorically false” pointed to the hard stance the US appears to be taking on Iranian nuclear negotiations, adding to the bid tone in crude markets.
Metals were generally higher with copper up 1% at $8,105 and aluminium up 1.5% at $2,428 though nickel fell 2% to $21,890. On the one hand the power crises in China and Europe have impacted output from smelters; on the other demand is being impacted by the rising risks of global recession. Aluminium producer Speira GmbH was reported to be considering cutting production at its German smelter to 50% of total capacity in response to surging energy costs. The plant has capacity to produce 160kt. China’s move to cut the 5yr loan prime rate by a larger than expected 15bps also helped sentiment in metals. The premium from prompt copper versus the 3-month contract rose to a 6-month high of $50.75.
Finally note that iron ore markets appear to have stabilised above $100 as the authorities sought to support the property market and production cuts in the drought-impacted Sichuan region lifted prices. The Sep SGX contract is last at $104.85, up $1.15 from the same time yesterday, while the 62% Mysteel index is up $1.50 at $101.70.
Day ahead
The RBA Head of Domestic Markets Jonathan Kearns will be speaking on “Climate Change Risks in the Financial System” in Sydney at 9:05am Syd.
US: Although durable goods orders are expected to remain positive, Q2’s investment partials have indicated a clear deterioration in capital spending (market f/c: 0.8%). Another decline in pending home sales is anticipated in July (market f/c: -2.8%). Minneapolis Fed president Kashkari is due to speak.
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