Markets Daily
US bank failures continued to drive massive falls in bond yields, as markets priced less Fed tightening. The USD fell against all majors, AUD up to 0.6670. Broad US equity indices were little changed despite the slide in bank stocks. Today’s important data includes Australia March Westpac consumer sentiment and February NAB business confidence and US February CPI.
Yesterday
All eyes were on the US after Friday’s failure of Silicon Valley Bank. A flurry of headlines came in the Sydney morning, most notably the Fed/Treasury/FDIC pledge to guarantee all deposits of both SVB and crypto specialist Signature Bank. The Fed also announced a new Bank Term Funding Program offering loans of up to 1 year to depository institutions. US yields fell, accelerating after a US bank switched its call to no change from the FOMC this month. Equities took heart from the Fed announcements and the fall in yields, S&P 500 futures up about 1.8%, Nasdaq futures near 2%. This seemed to help AUD lead all G10 currencies on the day against a sliding greenback, bouncing from 0.6585 to 0.6665. However the ASX 200 closed down -0.5%.
Currencies/Macro
The US dollar fell against all G10 currencies, Kiwi and Aussie leading gains. EUR/USD rose from 1.0645 to 1.0730. GBP/USD rallied 1.5 cents or 1.2% to 1.2180. USD/JPY fell 1.8 yen or -1.4% to 132.20. AUD/USD printed a high of 0.6717 but then settled back to 0.6670, +1.3% on the day but in line with late Sydney trade. NZD/USD rose from 0.6140 to 0.6264 then eased to 0.6220, +1.5%. AUD/NZD fell from 1.0785 to 1.0697 – a three-month low – before steadying around 1.0715.
The continued fallout from the failure of Silicon Valley Bank, and then crypto-linked Signature Bank of New York, dominated markets. US, EU and UK officials emphasised that their financial sectors did not face any systemic risks.
UK authorities confirmed that HSBC will take over the UK arm of SVB (for the token consideration of £1). HSBC plans to inject £2bn into the acquisition and that the operation will run without major changes.
Interest rates
US bond yields tumbled sharply once again, as investors continued the flight to safe haven assets as expectations of the Fed’s rate hike path has shifted significantly from the SVB’s collapse. 2yr government bond yields fell 61bps, to 3.98%, and 10yr government bond yields fell 13bps to 3.57%. Markets are now pricing in a 50% chance of a 25bp hike at the FOMC meeting this month.
Australian bond futures took its trend from US price action, but underperformed their US counterparts. 3yr government bond yields (futures) fell 24bps to 2.94%, and 10yr government bond yields fell 13bps to 3.35%.
Credit was in firm risk off mode and primary markets were closed as the SVB fallout continued despite the Fed’s efforts to backstop deposits and liquidity. Credit indices were sharply wider with Main out 12.5 to 94.5 and CDX out 8 to 91 to now be comfortably at wides for the year, with cash credit matching that move and banks significantly underperforming.
Commodities
Brent crude traded below $80 for the first time in over a month as risk sentiment deteriorated and traders headed for the exit, though prices bounced slightly into the end of the session as Nomura forecast a 25bps cut from the Fed next week and an end to QE. The April WTI contract is down $2.22 at $74.46 while the May Brent contract is down $2.37 at $80.41. Bloomberg reported that “there's no signs of flows being impacted by the 500kbd output cut that Russia said it would impose in March” and “India overtook China as the biggest buyer of Russian seaborne crude in early November and has continued to buy more than its neighbour [China] ever since”. And in gas markets, prices reversed some of the gains seen late last week with forecasts of windy warmer weather later this week pushing prices lower. After jumping 21% Friday, the April TTF contract fell 6.2% Monday though major strikes at French ports saw the Dunkerque LNG terminal extend its force majeure to the end of this week.
Metals took heart from rate cut calls and the 100bps drop in US 2yr yields in the last 3 sessions with aluminium up 0.3% at $2,320, copper up 0.7% at $8,928 and nickel up 2.7% at $23,180. Gold jumped 2.3% to an almost 6 weeks high of $1,912 while silver jumped close to 6%. Rio announced it had commenced digging for copper at its Oyu Tolgoi mine in Mongolia. At its peak in 2030, the mine will be the world’s 4th largest source of copper in the world, producing more than 500kt/y.
Finally note that iron ore markets gained for a third session with the April SGX contract up $2.85 to $132.40 and the 62% Mysteel index up $2.50 to $132.45. Guinea signed a pact with Rio Tinto, China Baowu Steel and the Winning Consortium confirming its 15% ownership of the massive Simandou project. Spot rebar prices are at highs back to June last year and up 9% so far this year.
Day ahead
At 10:30am Syd, Australia Westpac-MI consumer sentiment for March could reflect rate hikes and cost of living pressures still weighing heavily. February’s survey showed a savage -6.9% slide to a very weak 78.5, with a very clear negative impact from the RBA’s hawkish tone that month.
At 11:30am Syd we see the February NAB Australia business confidence survey. The conditions index peaked last September as the economy slows but as of January was still well above average, at +18. The confidence index was +6, in line with long term averages.
In the UK we will see February jobless claims and Nov-Jan unemployment, the latter expected to edge up to 3.8% while average earnings growth ex-bonuses remains swift at 6.6%yr.
US CPI inflation for February is expected to recede slightly, headline estimates being 0.4%m/m and 6.0%y/y (prior 6.4%y/y), and ex-food and energy estimates being 0.4%m/m and 5.5%y/y (prior 5.6%y/y). There will be interest in whether shelter inflation has started to decline.
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