Markets Daily
Equities rallied and the US dollar fell further, brushing aside China’s insistence that it won’t relax its Covid policies. AUD/USD recovered early losses to return to 0.6480. Today’s calendar includes Australia November Westpac consumer sentiment and October NAB business confidence.
Yesterday
Risk appetite stepped lower at Monday’s open, in the wake of weekend news that top Chinese officials had taken pains to stress that China’s strict Covid policy had not changed. AUD/USD dropped from 0.6470 at Friday’s close to around 0.6410 and then traded quietly, mostly around 0.6430. Regional equities were mostly positive, after Wall Street’s sharp gains Friday. The ASX 200 closed up 0.6%.
Currencies/Macro
The US dollar fell against most G10 currencies on the day amid positive risk sentiment. EUR/USD rose from 0.9900 to 1.0025. Sterling was strongest on the day, with press reports of a tight fiscal plan to be announced on 17 November, GBP/USD up 1.2% to 1.1520. USD/JPY rallied for a while then returned to 146.50, about flat on the day despite higher US yields and equities. AUD/USD rose from 0.6410 in the London morning to 0.6480. NZD/USD recovered from early Monday losses to be up about 10 pips on the day at 0.5940. AUD/NZD is net flat at 1.0910.
German industrial production in September rose 0.6%m/m (est. +0.1%m/m, prior revised to -1.2%m/m from -0.8%m/m). The annual pace was +2.6%y/y (est. 2.0%y/y, prior revised to +1/.6%y/y from +2.0%y/y). Eurozone Sentix investor confidence survey at -30.9 was less weak than forecast (est. -35.0, prior -38.3, pandemic low was -42.7).
The ECB's Villeroy (France) said, "as long as underlying inflation has not clearly peaked, we shouldn't stop on rates", indicating a focus on core, rather headline, inflation.
Interest rates
US 2yr treasury yields rose from 4.67% to 4.72%, while the 10yr yield rose from 4.15% to 4.22%. Markets currently price the Fed funds rate to be 58bp higher at the next meeting in December, peaking at 5.15% in June 2023.
Australian 3yr government bond yields (futures) rose from 3.41% to 3.49%, the 10yr yield from 3.91% to 3.98%. Markets currently price the RBA cash rate to be 23p higher at the next meeting in December, and to peak at 4.03% in October 2023.
New Zealand markets are pricing the RBNZ OCR to be 68bp higher at the next meeting on 23 November, and to peak at 5.24% in May 2023.
Credit indices maintained the momentum from Friday with Main closing another 2bp tighter at 107 and CDX in 1.5bp to 88.5, however cash spreads were little changed as primary markets kicked into full gear. Europe saw 16 issuers priced ~EUR19bn (ex-SSA) while the US saw 15 borrowers in the market for USD21.6bn as supply moves ahead of the US CPI on Thursday and Veterans Day on Friday (bond markets closed, equity open). Europe saw corporate supply including Nestle (EUR1.5bn across5/8/12yr) and VW (EUR2.5bn across 3/5/7/5yr) together with a large mix of financials that included ANZ’s EUR2bn 2yr covered deal at MS+14 (BBSW+64), Swedbank (EUR1bn 3yr Sen Pref at MS+73) and ING (EUR2.25 bn across 5nc4 and 11nc10yr) in EUR, HSBC with a dual tranche GBP (12nc7yr) / EUR (10nc5yr) and Barclays with a tier 2 GBP deal (GBP1bn 10nc5yr at UKT+425). The US was led by Oracle’s USD7bn 4 tranche offering and support from Qualcomm (USD1.9bn, 4 part) and EBay (USD1.15bn, 3 part), while in financials we saw Bank of America Corp with a USD2bn 6nc5yr sustainability deal (T+182) and Lloyds Bank with a USD1bn 11nc10 Tier 2 deal at T+375 with these 1yr callables seemingly gaining traction in the US.
Commodities
Monday saw a choppy session for crude markets, with WTI opening down circa 2% from the Friday close on Chinese officials’ denial of zero-Covid changes before steady gains saw the December contract up on the day mid-afternoon followed by a 2% slide into the close to be last down 79c at $91.82. The January Brent contract followed a similar pattern, last down 61c at $97.96. Russian crude exports are surging ahead of the Dec 5 EU ban and G7 price cap. Seaborne volumes rose to 3.6mbpd, the highest since June according to Bloomberg tracking data, with more ships leaving Russian ports without signalling the final port of discharge. Chinese imports of crude rose 4% to 43.14mt in October, or 10.2mbpd after Beijing issued an extra 15mt of fuel export quotas late September. Saudi Arabia lowered its December selling price for its Arab light benchmark by $0.40 to $5.45 a barrel premium over the average of the Oman and Dubai benchmarks. Prices into Northern Europe were raised by 80c while into the US were unchanged.
Meanwhile gas markets in the US surged as a cold blast was forecast bringing snow across the Pacific Northwest and below average temperatures across much of the country. The December Henry Hub contract is up 8% from the Friday close and 16% over the last two sessions. Eversource Energy has written to US President Biden, highlighting that FERC has “acknowledged for many months that New England will not have sufficient natural gas to meet power supply needs for the region in the event of a severe cold spell this winter”.
Metals gave back some, though not all, of the aggressive gains seen Friday, as China denied significant changes to tough zero-Covid polices. Copper is last down 1.9% at $7,949 while nickel is last down 1.8% to $23,380. Aluminium is last down 0.7% at 2,339 though zinc is up 0.2% at $2,880. Chinese imports of copper ore rose 3.8%yy and 8.8%ytd yy, though October saw the lowest volume imported for the year.
Finally note that iron ore markets gave some ground back with the December SGX contract down a modest 55c from the same time yesterday at $86.75 while the 62% Mysteel index fell 5c to $87.70. China imported 94.975mt or iron ore in October, up 3.7%yy. A survey by CISA of inventory levels at major steel mills saw a decline in late October, dropping to the lowest level since late August. Steel mills in the Shanxi and Henan provinces have been shutting down blast furnaces and bringing forward year end maintenance due to poor demand and low margins. Vietnam’s top steelmaker Hoa Phat halted output at 4 blast furnaces due to declining demand.
Day ahead
At 10:30am Syd, it will be interesting to gauge whether Westpac-Melbourne Institute Australia Consumer Sentiment will respond positively to the RBA’s slower pace of rate hikes in November, as it did in October. The overall index was 83.7 in October, with post-RBA responses limiting the monthly fall to -0.9%
At 11:30am Syd, any prospective signs of easing conditions will be the key focus of the October NAB business survey. The September conditions index was an extremely strong +25, the confidence index close to its long-term average at +5.
NZ: The unrelenting pressure from inflation will likely see inflation expectations remain elevated across short and longer-term horizons in the RBNZ’s Q4 survey.
Japan: Real household spending capacity is expected to remain under pressure in September, limiting the reopening rebound in consumption (market f/c: 2.6%yr).
Eurozone: A small bounce in retail sales is anticipated in September, led by an upside surprise in Germany, though broad-based weakness across the region is set to endure (market f/c: 0.4%).
US: High interest rates will continue to weigh on consumer credit growth in September (market f/c: $30bn). Small business optimism is meanwhile consolidating but it will likely remain fragile in October given the uncertain outlook (market f/c: 91.3). Regional Fed presidents Collins, Mester and Barkin are also due to speak.
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