Markets Daily
Risk sentiment improved further amid a slew of weaker US economic data which supports the case for a Fed slowdown. US equities rallied to a one-month high, and the US dollar fell sharply, AUD/USD up to 0.6400. Today we see Australia Q3 CPI and the Bank of Canada decision.
Yesterday
Australia’s calendar was empty ahead of the federal budget. China remained in focus after the steep equity underperformance in the wake of the CCP Congress. China and Hong Kong shares were down again in morning trade, until a sharp rally into the lunch break which inevitably sparked talk of state intervention. Official support was however withdrawn from the Chinese yuan in terms of the daily fixing rate (midpoint of the daily band). The fixing had been set around 7.10-7.11 since late September, even as spot USD/CNY pushed higher. Indeed Monday’s spot close was 1.97% above the fixing i.e. on the boundaries of the +/-2.0% daily band. The People’s Bank of China raised the fixing rate by 0.6% to 7.1668, which sparked another round of yuan decline. This caused only a small wobble in AUD/USD, dropping 20 pips to 0.6315, in what was an otherwise very muted session, the Aussie ultimately up 15 pips to 0.6325. Regional equities were mostly a bit firmer, including the ASX 200, +0.3%.
Currencies/Macro
The US dollar fell substantially against all G10 currencies on the day, most of its losses occurring around the US data releases. EUR/USD rose from 0.9860 to 0.9970, GBP/USD up 2 cents to 1.1475. USD/JPY fell from 148.90 to 147.90. AUD/USD rallied from 0.6325 pre-data to 0.6395. NZD/USD rose from 0.5700 to 0.5755. AUD/NZD rose from 1.1090 to 1.1110.
US house prices (Corelogic 20 city) fell -1.6% in August, the largest monthly fall since 2009, reducing the annual pace to +13.1%y/y (est. 14.0%, prior 16.0%). FHFA house prices in August fell -0.7% (est. -0.6%, prior -0.6%) – the largest monthly fall since 2001. Consumer confidence (Conference Board) in October fell to 102.5 (est. 105.9, prior 107.8), with both the present situation and expectations components falling. 1-year ahead inflation expectations rose from 6.8% to 7.0%. The October Richmond Fed manufacturing index fell to -10 (est. -5, prior 0), with almost every component weakening.
Germany’s IFO business survey fell only slightly to 84.3 in October (est. 83.5, prior 84.4). The current conditions component fell slightly while expectations unexpectedly rose. The positive surprise overall may reflect energy price support programs, as well as the recent dip in wholesale gas prices.
Interest rates
US bond yields fell on Tuesday, following some weak economic data that supported a potential Fed slowdown. 2yr government bond yields fell from 4.50% to 4.39% earlier in the session but rebounded to 4.48%, and 10yr government bond yields fell from 4.20% to 4.05%, before recovering slightly to 4.09%.
Australian bond yields took trend from global price action, while domestic markets await for today’s CPI outcome. 3yr government bond yields (futures) fell from 3.69% to 3.52%, and 10yr government bond yields (futures) fell from 4.12% to 3.94%. 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 -14bps.
Credit spreads were firmer last night with Main 5bp to tighter to 116.5, CDX continuing to grind tighter as it closed in another bp to 93 and US cash was also a bp or 2 tighter as post earnings supply continues. Europe priced 4 IG deals (ex-SSA) for a total of ~EUR2bn including Pernod Ricard with a 2 part SLB deal split over a EUR600M 6yr at MS+55 and a EUR50MM 10yr at MS+93 with the SLB linked to GHG emissions and water consumption, and in the fins space SHBASS priced a EUR750M 5yr senior preferred deal at MS+85 (BBSW+153) post its 3Q update last week. In the US, 3 issuers priced USD12bn including a jumbo USD9bn deal from UnitedHealth 7 tranches across all major maturities from 2-40yr as it looks to fund the USD7.8bn Change Healthcare acquisition (with LHC Group and EMIS still to come).
Commodities
Crude prices were mixed as tight supplies and waning demand outlooks kept prices rangebound. The December WTI contract is last up 37c at $$84.95 while the December Brent contract is down 33c at $92.93. In a sign of further deterioration of relations between Saudi Arabia and the US, the Saudi energy minister Price Abdulaziz bin Salman said, “People are depleting their emergency stocks” and using it “as a mechanism to manipulate markets”. He warned, “losing emergency stocks may become painful in the months to come.”
The focus in energy markets is turning to fuel supplies into the winter with the November RBOB gasoline contract jumping almost 6% to a 3-month high. And Europe’s biggest oil refinery suffered its second malfunction in two weeks. Shell simply stated that a malfunction was forcing the Pernis plant near Rotterdam to again flare gas following the second incident in two weeks. Meanwhile European natural gas prices for next hour delivery went negative as a glut of LNG deliveries weighed heavily on prices. The November TTF futures dropped below EUR100/MWh and natural gas prices in the US Permian Basin also traded negative prices for the first time in 2 years due to the 5-month closure of the Freeport LNG facility plus maintenance at the Gulf Coast Express & El Paso gas pipes.
Metals were mixed with copper down 0.5% at $7,516 and zinc down 1.96% at $2,900 while nickel rose 1.22% to $22,520 and aluminium jumped 1.8% to $2,215. The sentiment in Chinese markets post the Party Congress weighed on copper even as on warrant stockpiles dropped to the lowest level since April at the LME. The LME faces an existential decision this week with feedback from members on any action on Russian metals due by Thursday. The CME global head of metals stated our “job is not to interfere in the markets. It’s not our job to impose sanctions but governments.”
Finally note that iron ore markets dropped below $90 as traders reacted to the slump in Chinese equities post the Party Congress. The November SGX contract is down 75c from the same time a day ago at $89.50 while the 62% Mysteel index is down $1.45 at $89.95. Steel inventory levels expanded again mid-October in China, with volumes up 8.6% from the beginning of the month. And Swedish steel producer SSAB CEO Martin Lindqvist said “Quite a few of our competitors have taken down blast furnaces … I think we’ll see capacity cuts in Europe.” Jeffries Group estimates about 20% of European steel production is already curtailed.
Day ahead
Australia’s Q3 CPI will be released at 11:30am Syd. Food, dwellings, electricity and domestic holidays are expected to continue driving headline inflation higher, though various state government energy rebates should provide an offset, the extent of which is highly uncertain. Hence, Westpac anticipates 1.1% and 1.5% rises for the headline and trimmed mean CPI measures, respectively (market f/c: 1.6% and 1.5% respectively), taking the headline’s annual pace to 6.5% (market 7.0%).
NZ: ANZ business confidence is set to remain subdued in October given weaker activity and elevated inflation gauges.
US: Wholesale inventories should post another robust gain in September (market f/c: 1.0%). The downtrend in new home sales should resume in September after August’s unexpected bounce (market f/c: -15.3%).
At today’s policy meeting, the median forecast is for the Bank of Canada to raise its policy rate by 75bp to 4.0%, though a sizeable minority of economists look for 50bp. Market pricing is also mixed, around 68bp, effectively guaranteeing a market reaction.
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