Markets Daily
Trading was light overnight, with UK markets closed for the State Funeral of Queen Elizabeth II, but sentiment improved into and through the US session.
Yesterday
Local markets were muted, with Japan on public holiday and limited data of note. President Biden said the US would defend Taiwan in the event of an unprecedented attack, adding to the already cautious tone ahead of this week’s key FOMC meeting. AUD traded 0.67430-0.6690 and continues to look fragile, while local bourses shed further modest ground (ASX -0.4%, Nikkei -1.1% and Shanghai -0.4%).
Currencies/Macro
Trading was light overnight, with UK markets closed for the State Funeral of Queen Elizabeth II, but sentiment improved into and through the US session. Key European bourses closed either side of unchanged with US equity indices holding gains of around 0.7% despite another soft US (NAHB) housing survey.
The USD unwound earlier gains to trade just under Friday’s closing levels, though JPY (-0.2%) and notably NZD (-0.5%) remained soft.
EUR once again managed to regain levels above parity at 1.0025 (+0.1%) and GBP edged up to 1.1440 from another slip to test 1.1350-60.
AUD also rebounded to 0.6730 (+0.2%) though NZD struggled (-0.5% at 0.5960). AUD/NZD firmed soundly through 1.1250 towards key resistance around 1.1300.
US September NAHB Housing Index slipped to 46 (est. 47) from 49 in August to record nine consecutive declines as sales continue to look soft through September as Fed hikes and inflation concerns weigh on the sector.
There were no data releases in UK due to markets and the majority of businesses being closed for the State Funeral of Queen Elizabeth II.
Eurozone data releases were also limited. Regional constriction for July did lift slightly, by +0.3%m/m, having declined in the prior four months.
Interest rates
US bond yields rose and the curve continued to flatten, as markets continue to price in higher chances of a more hawkish Fed this week. 2yr government bond yields rose 7bps to 3.94%, and 10yr government bond yields rose 3bps to 3.48%.
Australian bond outperformed relative to their US counterparts, and the futures implied yield curve steepened. 3yr government bond yields fell 2bps to 3.52%, and 10yr government bond yields was flat on the day at 3.73%. Markets are fully priced for a 25bp hike at the October meeting next month, and pricing a 92% chance of a 50bp hike. The AU-US 10yr bond spread narrowed on the back, of AU outperformance, now at 23bps.
Credit was mixed, following broader market sentiment, with CDX grinding tighter to 87 (-2) and Main at 101 (-), while cash spreads ended a fraction tighter in the US. Primary issuance was muted on the day, with a sole deal in Europe from OMA Savings Bank, and all four potential US IG issuers stood down into the volatile conditions.
Commodities
Oil saw a modest bounce on the day after Brent again fell below $90, helped by a late pop in stocks and a softer US$ ahead of the run central bank meetings in the days ahead. The October WTI contract Is last up 34c at $85.45 while the November Brent contract is up 45c at $91.80. Refined products have been hit hard in recent sessions too with headlines suggesting that China is set to increase exports of fuel. The October ULSD contract tested the 5-month low before rebounding 4.4% on the day. Meanwhile the natural gas sector saw further weakness with Bloomberg citing documents showing that Germany has allocated another €2.5bn to purchase natural gas after spending close to €1.5bn sourcing from five companies between March 10 and June 1. The October TTF contract is down 3% and at a 2-month closing low while prices in Asia have dropped just over 20% in the last week on weaker Chinese imports.
Metals were mixed ahead of the FOMC outcome with nickel last up 1.7% at $24,670 and aluminium down 1.2% at $2,249. Copper is largely unchanged at $7,772. The focus on Maike Metals and the potential impact on Chinese copper imports is rising. Bloomberg ran a story noting that the company which handles a million tons a year, or 25% of China’s copper imports, is suffering a liquidity crisis. JP Morgan and ICBC Standard Bank were said to be pulling back from metal financing in China.
Finally note that iron ore markets remained below $100 with the October SGX contract last at $99.00, up 90c versus the same time in the previous session while the 62% Mysteel index fell 85c to $97.25. The reopening of Chengdu lifted sentiment in futures markets while blast furnace utilisation rates in Tangshan picked up to 3-month highs as we move into a period that normally sees peak construction activity in China.
Day ahead
Aust: Further detail on the Board’s views surrounding the current pace of rate hikes will be the key focus of the RBA’s September Meeting Minutes.
Japan: Consumer inflation pressures are expected to continue building in August, albeit from a weak base (market f/c: 2.9%yr).
US: Housing starts and building permits will remain under pressure in August as tighter financial conditions continue weigh on demand and input constraints limit supply capabilities (market f/c: 0.3% and -4.5% respectively).
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