Markets Daily
UK bonds rallied sharply on fiscal policy reversal while US equities continued their seesaw pattern, rebounding steeply. Sterling and the Aussie led gains against the US dollar, AUD/USD recovering to 0.6290. Today’s calendar includes a speech by RBA’s Bullock and the October RBA minutes.
Yesterday
Risk appetite was negative to start the week, given Wall Street’s slide on Friday and Sunday’s speech by China President Xi reiterating that the Covid-zero policy would continue. However, US equity futures rose steadily during Sydney trade, S&P E-minis +0.6% and some regional indexes recovering to modest gains. However, the likes of the ASX 200 (-1.4%), Japan’s Topix (-1%) and Taiwan’s Taiex (-1.2%) remained underwater. The British pound was strongest in the G10 as markets priced in a substantial policy U-turn by new UK Chancellor Hunt. AUD/USD rose from 0.6200 to 0.6240, still well down on early Friday levels.
Currencies/Macro
The US dollar fell against all G10 currencies except the Japanese yen, led by the British pound and the Aussie. EUR/USD rose from 0.9720 to 0.9840. GBP/USD rose 1.8 cents or 1.6% to 1.1355 as the UK government confirmed it won’t cut taxes. USD/JPY rose 30 pips to 149.00, printing fresh highs since 1990. AUD/USD extended its local session recovery to 0.6290, up 1.4% overall but still below Friday’s highs. NZD/USD rose 1.2% to 0.5630, leaving AUD/NZD up about 20 pips on the day at 1.1165. (Levels pre-NZ CPI).
The New York Fed’s Empire State manufacturing activity survey fell more than expected in October, to -9.1 (est. -4.3, prior -1.5). Producers face headwinds from rising interest rates and recession risks, but have benefited from an inventory rebuild following supply chain disruptions.
ECB's Guindos said inflation will start to ease next year. He also admitted that a technical recession in the Eurozone cannot be ruled out, but believed it would be mild. ECB’s Rehn said that tighter financial conditions "can be seen and felt" and that "the risk of stagflation has increased".
UK Chancellor of the Exchequer Hunt confirmed the abandonment of proposed tax cuts and reduced support for household energy bills to improve public finances. The decisions reverse almost all of the £45bn in tax cuts and benefits the PM announced in September.
Interest rates
US bonds rallied, taking a bullish lead from gilts (10 year yield -36bp), but retraced almost all its gains following a return of the market’s risk appetite. 2yr government bond yields fell from 4.46% to 4.40% but finished flat on the day, 10yr government bond yields followed suit, falling from 4.00% to 3.91% before rebounding to 4.00%.
Australian bonds took trend from global price action, as domestic markets await key risk events next week including the new Federal Budget and Q3 CPI outcomes. 3yr government bond yields (futures) fell from 3.62% to 3.52%, before rebounding to 3.56%, 10yr government bond yields (futures) fell from 4.06% to 3.93% before rebounding to 4.00%. Markets are fully priced for a 25bp hike at the next RBA meeting. The AU-US 10yr bond spread narrowed on the back of AU outperformance, currently at -1bps.
Credit indices continued their outsized moves with Main and CDX both ~5bp tighter last night (to 126.5 and 98.5 respectively) reflecting a more positive risk backdrop, while cash spreads were more subdued. Primary activity was limited to low beta names in Europe with BPCE’s EUR1.75bn 5.5yr covered deal (MS+13) the only non-SSA transaction, while the US saw 4 IG issuers price USD2.9bn including a USD750M LRCN AT1 deal from BNS (the Limited Recourse Capital Note structure effectively provides tax deductible interest from a capital note for Canadian issuers), the first USD issuance from this structure.
Commodities
Crude markets are finishing a choppy session largely unchanged with the November WTI contract down 9c at $85.52 while the December Brent contract is up 8c at $91.72. The prospects of fresh lockdowns in China weighed on sentiment though OPEC+ supply cuts and simmering tension between Saudi Arabia and the US remains supportive. Bloomberg noted that trading companies are racing to book storage in Rotterdam ahead of EU sanctions on Russian crude coming into effect December 5. And refined product markets remain super tight with the November Rotterdam diesel contract up 2.7% and the US equivalent rising 2.9% to a fresh 4 month closing high. In industry news, Harold Hamm reached a deal to buy Continental Resources and take the company private, giving the company “freedom to explore” according to the shale billionaire.
Germany will keep all three remaining nuclear power stations open until Q2 2023 in an attempt to head off an energy crunch this winter. The plants were to be closed December 31 under plans drawn up by the previous government. Additional crisis measures including a possible dynamic price cap for gas markets sent futures to fresh 4-month lows. The November TTF contract has lost 32% so far this month, hitting lows back to mid-June.
Metals were weaker with aluminium leading the charge lower. Traders are concerned that LME warehouses may become flooded with unwanted Russian metal, and the biggest percentage gain in stocks in 19 months added to that concern. Aluminium is down 2.7% at $2,244 while zinc also fell 2.7% to $2,862. Copper remains closely tethered to $7,500, closing down 0.1% at $$7,531.
Finally note that iron ore markets were lower with the November SGX contract down 35c at $92.20 while the 62% Mysteel index fell $2.40 to $93.25. The delay in the release of Chinese economic data including trade, industrial production and GDP data weighed on sentiment, with the backdrop of more lockdowns not helping either. Rio will report quarterly production today while BHP will report tomorrow.
Day ahead
RBA Deputy Governor Bullock is due to speak on “Policymaking at the Reserve Bank” to a finance conference at 11:05am Syd. At 11:30am Syd we see the minutes of the RBA Board’s October policy meeting, with a focus on the factors weighed when deciding to opt for the surprise 25bp rate hike decision.
China was due to release Q3 GDP and September activity data today but yesterday announced that the data would not be released and no new date was set. We are also still waiting for the September trade report that was listed for last week. The inescapable assumption is that the data will show economic weakness, upsetting the narrative of the five-yearly Communist Party congress that continues until Saturday.
The ZEW survey of Germany investor/analyst expectations will likely remain in historically weak territory in October, consensus -69 for current situation and -67 for expectations.
US: Weakness in domestic and global demand are key risks for industrial production moving into year-end (market f/c: 0.1%). The October NAHB housing market index will continue to highlight the immense pressure on the housing sector (market f/c: 43). Atlanta Fed president Bostic is also due to speak.
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