Markets Daily
Sentiment deteriorated in European trade Friday, focused on the banking sector. However, the mood improved in the US session, with stocks closing higher. This helped AUD trim losses to 0.6650. Today’s low-key calendar includes the March Germany IFO business survey.
Friday
The Aussie traded a very tight range, 0.6660 to 0.6689. The Judo Bank/S&P Global flash March PMIs for Australia were soft, the services index slipping to 48.2 from 50.7 and manufacturing down to 48.7 from 50.5. Regional equities struggled for direction, the ASX 200 closing down 0.2%.
Currencies/Macro
Concerns over the banking sector unsettled European markets on Friday. There were sharp slides in European banking shares, led by UBS and Deutsche Bank, which spilled over to sharp declines in European and global yields, led by European short-dated rates and falls in risk currencies as European bourses declined.
However, flash PMIs for March were better than anticipated in Europe and US and the stabilising of stocks as US markets opened produced a sizeable unwinding of yield declines and recovery in FX and commodity markets.
The US dollar and Japanese yen were strongest in the G10, with other currencies down between -0.2% (CAD) and -0.9% (SEK and NOK). EUR/USD fell as far as 1.0713, then trimmed losses to 1.0760. GBP/USD fell about half a cent to 1.2230. AUD/USD rolled over from 0.6690 early Europe to a low of 0.6625, recovering only to 0.6645 at the weekend close. NZD struggled to bounce off its European lows, overall down -0.7% at 0.6205. USD/JPY slipped below 130.00, then returned to 130.70.
Eurozone flash March PMIs (S&P Global/Markit) beat estimates with the composite rising to 54.1 vs est. 52.0, with growing divergence between strong services (55.6 vs est. 52.5) and struggling manufacturing (47.1vs est. 49.0).
UK February retail sales volumes surprised with headline +1.2%m/m (est. +0.2%m/m) with January revised to +0.9%m/m from initial read of +0.5%m/m).
UK flash March PMIs were not as robust, with the composite slipping to 52.2 (est. 52.7, prior 53.1), services still holding better, but dipping to 52.8 (est. 53.0, prior 53.5)
US flash March PMIs were stronger than anticipated. Composite lifted to 53.3 (est. 49.5, prior 0.1) again with services leading gains (53.8, est. 50.3, prior 50.6) and manufacturing 49.3 (est. 47.0).
US March durable goods were mixed. Preliminary headline orders slipped -1.0%m/m (est. +0.2%m/m) with non-defence orders +0.2%m/m (est. flat) and minor downside revisions to January data.
Interest rates
US treasuries continued their rally, the yield curve shifting lower as the banking sector turmoil and risks to a recession remain in focus. 2yr government bond yields fell 7bps to 3.77%, and 10yr government bond yields fell 3.38%.
Australian bond yields were mixed, and the curve steepened. 3yr government bond yields (futures) fell 1bps to 2.80%, and 10yr government bond yields (futures) rose 2bps to 3.23%. The AU-US 10yr bond spread widened on the back of AU underperformance, currently at -15bps.
Credit indices followed the shift in sentiment through the session with Main seeing significant weakness early (out to 102) before closing 2.5bp wider at 97, and CDX also saw a recovery off its session wides of 89.5 to close 1.5bp tighter at 85. Cash credit remained difficult with the DB underperformance across cash and CDS (~300) clear and banks more broadly under pressure, however sentiment did improve through the US session. Primary activity was largely absent with Wessex Water the sole IG deal for the session with its GBP300M sustainability bond.
Commodities
Crude markets closed down modestly Friday though up on the week as the US authorities continued grappling with banking concerns. The May WTI contract closed down 70c Friday, back below $70 at $69.26 while the May Brent contract closed down 92c at $74.99. WTI closed up 3.5% on the week while Brent closed up 2.8% as record US crude plus refined products helped stabilise sentiment, as did news of Russia’s extension of the 500kbpd to June. Over the weekend, Russia’s Deputy Prime Minister Novak commented that Russia would reach the pledged output cuts “in coming days”, aiming to “narrow the discount on its oil exports”. Even with the bounce last week, crude is down circa 9.5% over the last 4 weeks and is on course for its steepest Q1 drop since 2020 as concerns about a US recession, robust Russian flows into Asia and strikes at French refineries have all hit sentiment.
Metals were mixed with copper down 1% Friday to $8,945 though aluminium rose 0.8% to $2,344 and nickel finally managed a solid bounce, up 5% to $23,680. Nickel will resume Asian trading today, marking a crucial step in its return to ‘normality’ though the recent ‘bags of stones’ scandal has certainly not helped the LME’s image. Copper inventory has fallen 25% so far this month as demand in China rises. Co-head of metals and minerals at Trafigura, Kostas Bintas told the FT Commodity Summit in Lausanne that “it’s very likely in the next 12 months that we will see a new high” for copper questioning “what’s the price of something the whole world needs but we don’t have any of?”. Gold jumped 9% last week though again failed to gain a foothold above $2,000 despite trading above that level on three days last week.
Finally note that iron ore markets had their worst week since October as Chinese steel mill stockpiles increased slightly in mid-March and traders fretted about moves by the NDRC to inspect physical inventory, as well as increased monitoring of deliveries, sales and futures positions weighed on sentiment. The April SGX contract is down 85c at $118.50 though the 62% Mysteel index closed up $1.70 at $121.05.
Day ahead
China: Growth in industrial profits should build as broader momentum continues to build.
Germany: The IFO business climate survey is showing clear signs of improvement, though recent volatility around the banking sector is a risk for March (market f/c: 91, with the current assessment 94, expectations 88).
US: The Dallas Fed index is set to remain in subdued territory in March (market f/c: -10).
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