Markets Daily
Risk appetite improved sharply in NY trade Friday on a media report claiming the Fed was planning to slow the pace of rate rises. Equities rallied while yields and the US$ tumbled, AUD/USD rebounding to 0.6400. Today’s global data focus is flash October PMIs, while NZ and India are on holiday.
Friday
Australia’s data calendar was empty. Regional equity sentiment was mostly downbeat, including the ASX 200 closing -0.8%. AUD/USD drifted slightly lower in very tight ranges, from 0.6280 to 0.6260.
Currencies/Macro
Risk sentiment was leaning to the soft side in London trade when an article by an influential Wall Street Journal Fed watcher was published. The WSJ said that the FOMC was set to raise the funds rate by 75 basis points in November, matching market pricing, but would debate how to signal smaller rate hikes ahead, such as easing back to 50bp in December.
The resulting slide in US yields undermined the US dollar and sparked a sharp rally in equities, the S&P 500 closing up 2.4%. All G10 currencies rose against the greenback, led by the Aussie and Kiwi. AUD/USD was at its daily low of 0.6210, rallying steeply to around 0.6390 and starts the week around 0.6400. NZD/USD bounced from 0.5600 to 0.5775. EUR/USD starts the week up about 0.8% versus Friday morning, at 0.9865. Yield-sensitive USD/JPY tumbled from around 151.50 to the high 147s.
UK September retail sales volumes were weaker than expected, -1.5%mth, -6.2%yr ex-auto fuel, though the jostling to decide the next prime minister was the main focus. GBP/USD fell as low as 1.1061 before the WSJ article, rallied to close at 1.1305 and extended gains Monday morning to 1.1380, in apparent response to former PM Boris Johnson’s withdrawal from the leadership contest. Former Chancellor Rishi Sunak seems set to take over.
Interest rates
US bond yields were mixed on Friday, the curve flattened as markets debated the possibility of “overtightening” after Fed’s Daly said that policy makers should start planning for a slowing of rate hikes. 2yr government bond yields fell 14bps on the day, from 4.60% to 4.47%, while 10yr government bond yields rose from 4.14% to 4.33% before retreating to 4.22%.
Australian bonds took their cue from US price action, with the curve also flattening overnight. 3yr government bond yields (futures) fell from 3.82% to 3.76%, while 10yr government bond yields (futures) rose from 4.23% to 4.31%. Markets are fully priced for a 25bp hike at the next RBA meeting. The AU-US 10yr bond spread widened on the back of AU underperformance, currently at -1bps.
Credit indices were mixed again with Main little changed reflecting another soft risk session in Europe, while CDX was more positive, closing 5bp tighter (at 94) despite a weak open to be at the tights for the new series, however cash failed to respond, closing 1-3bp wider on the day, but marginally tighter over the week. Primary activity was sluggish to close the week with Northumbrian Water completing the first GBP corporate deal since early September to be the only IG issuer for the day.
Commodities
Oil managed to register a small gain on the week as concerns about global recessions risks and China lockdowns were largely negated by the coming OPEC+ production cut and Russian crude embargo in Europe. The December WTI contract was up 54c Friday, closing at $85.05 while the December Brent contract rose $1.12 to close the week at $93.50, up 2% on the week. US officials are said to be aiming to set a price cap on Russian oil exports above $60, higher than earlier $40-60 range signalled to keep Russian barrels flowing. Russian officials have said that they will not sell oil to countries that are backing the cap. The Saudi energy minister met with his equivalents in China and India and agreed to “strengthen co-operation to address emerging risks and challenges” noting that “the kingdom continues to be China’s most reliable partner and supplier of crude oil.”
Meanwhile EU leaders endorsed plans for a price cap on gas Friday, agreeing to pursue work in order to reduce energy costs. Germany dropped its opposition to the cap, though the price level or size of market move is still to be agreed. The November TTF contract dropped 20% last week while the US November Henry Hub contract lost 23% last week, closing below $5 for the first time since March on forecasts of a milder winter. Shell took a 9.375% stake in the Qatar North Field South expansion project. The project will expand production by 16mta with first gas from 2027.
Metals markets were better bid Friday with copper up 1.19% to $7,650 while aluminium rose a more modest 0.41% to $2,218. Trafigura warned that copper stocks have fallen to perilously low levels with inventories at 4.9 days of global consumption and expected to hit 2.7 by end year. The deadline for feedback for the LME on a potential Russian metal ban is Thursday this week. The LME launched a discussion paper on the 6th of October. Global aluminium inventory jumped 35% last week with press reporting that Glencore has delivered significant amounts of Russian-origin aluminium to LME registered warehouses in Gwangyang, South Korea.
Finally note that iron ore markets finished the week on a slightly more positive note with the November SGX contract up 50c from the same time Thursday at $91.50 while the 62% Mysteel index rose $1.1 to $92.10. With the 20th Congress now behind us, output curbs in Hebei should come to an end though Covid lockdowns appear to be impacting supplies of raw materials from Xinjiang. Blast furnace maintenance in Shanxi is also limiting demand for iron ore. The World Steel Association last week forecast that steel consumption in China will drop 4% in 2022 due to a slump in the property sector. Spot rebar prices closed below RMB4,000 for the first time since Dec 2020.
Day ahead
Holidays include Labour Day in New Zealand and Diwali/Deepavali in India and Singapore.
Today’s data focus is the flash October S&P Global/Markit PMIs in Australia, Japan, the Eurozone, US and UK. The most market-sensitive releases are in Europe. The final September Eurozone manufacturing PMI was 48.4, services 48.8. The US services index in September was a weak 49.3 but the longer-running services ISM remains firmly in expansionary territory.
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