Markets Daily
Asia’s equity weakness extended to the US though Europe was little changed. AUD traded a very tight range around 0.6675. Today’s data calendar is fairly crowded but with low-key releases including US durable goods orders and consumer confidence.
Yesterday
With an empty data calendar, the main topic of discussion was the stunning events in Russia over the weekend with mercenary Wagner Group occupying a key Russian city before agreeing to stand down. But there was little sign of market reaction, perhaps due to divided opinions over the implications. Oil prices were only fractionally higher and US equity futures held modest gains through Asia, only to weaken as London came online. AUD/USD barely moved from 0.6680. The ASX 200 closed -0.3% while China’s CSI 300 played catchup after being closed Thu-Fri, -1.4%. The Japanese yen strengthened somewhat as officials expressed their concern, the yen having hit a 7-month low on Friday.
Currencies/Macro
Major currencies were mostly little changed over the day. EUR/USD is about 10 pips higher at 1.0905. GBP/USD was choppy for a while, then returned to 1.2710. USD/JPY slipped as low as 142.94 in the wake of Japanese official comments but then a small bounce in US Treasury yields helped to trim losses to 143.50, net -20 pips. AUD/USD traded one of its tightest daily ranges in months, 0.6668 to 0.6694. The Kiwi outperformed most majors, NZD/USD up 0.3% to 0.6165. AUD/NZD fell 40 pips to 1.0830.
In the US, the June Dallas Fed manufacturing index at -23.2 was below estimate of -20.0 (prior -29.1). The report cited declining output, but also price pressures evaporating, while wage pressures remained elevated.
Germany’s IFO business survey was weaker than expected in June, with business climate at 88.5 (est. 90.7, prior 91.5), current assessment at 93.7 (est. 93.5, prior 94.8) and expectations, at 83.6 (est. 88.1, prior 88.3).
Interest rates
US 2yr treasury yields ranged between 4.69% and 4.76%. The 10yr yield roundtripped from 3.73% to 3.68% and back. Markets are pricing the Fed funds rate, currently 5.125% (mid), to be 21bp higher at the next meeting on 27 July, but only a further 6bp higher in November.
Australian 3yr government bond yields (futures) fell from 3.90% to 3.85%, while the 10yr yield fell from 3.96% to 3.90%. Markets are pricing the RBA cash rate, currently 4.10%, to be 9bp higher at the next meeting on 4 July, and a cumulative 37bp higher by November.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be only 3bp higher at the next meeting on 12 July and to peak at 5.63% in October.
Credit indices extended Friday’s move wider with Main a bp wider to 79.5 and CDX out 1.5bp to 74, however cash spreads were fairly muted to open the week. We saw a solid open for primary markets with 8 issuers pricing EUR5.67bn in Europe as Porsche completed the largest corporate deal on the day, pricing EUR1.25bn across 4/7yr, and in the fins space, RBC priced a EUR750M 5yr at MS+105 (BBSW+166). The US saw 6 issuers price USD5.3bn which included Prologis completing a USD2bn, 3 tranche deal (5/10/30yr) that will help fund the USD3.1bn acquisition of logistics asset from Brookfield that was also announced last night; in the high yield space, Viking Cruises completed its first deal since 2021 (USD720M) with the group also upgraded by Moody’s; and on the local front, ANZ completed USD1.5bn of 2yr at T+65/SOFR+75 (BBSW+77).
Commodities
Crude markets saw modest gains as analysts factored in the risks of further civil unrest in Russia. The August WTI contract is up 41c at $69.57 while the August Brent contract is up 51c at $74.36. Goldman argued that the impact of the attempted coup in Russia may be limited because markets will focus on the fundamentals which have not changed. They also noted that a gradual refill of the SPR and a slowing in US supply could provide tailwinds for the markets in the next few months. RBC disagreed and noted that the “significant concern was that President Putin would declare martial law preventing workers from showing up to major loading ports and energy facilities potentially halting millions of barrels of exports”. Saudi Aramco CEO Amin Nasser noted that oil fundamentals remain “generally sound for the rest of the year” at a conference in Kuala Lumpur. Oil guru Javier Blas highlighted that Saudi Aramco is selling its flagship Arab Light crude at a record high per barrel premium against the US benchmark, deterring demand for it, and as such “is pricing itself out of the market”. Vortexa noted that oil in floating storage rose 15% in the past week to the highest since November 2020.
In energy markets, the Energy Institute noted that European pipeline gas imports in 2022 were about 151bcm (versus 222bcm in 2021) while LNG imports increased to 171bcm in 2022 from 108bncm a year earlier, showing how quickly Europe was able to cut its dependence on Russian piped gas and build LNG import infrastructure. Gas prices in Europe settled lower again last night, unfazed by developments in Russia with the July TTF contract down 8.4% over the last week. US Henry Hub prices continue rising with the July Henry Hub contract hitting 3-month highs as very hot Texas weather is forecast to continue. The state’s main electricity grid operator noted it relied on gas for more than half of its power generation at times over the last week.
Metals were generally lower with aluminium and zinc down 1.3% to $2,146 and $2,334 respectively while nickel fell a hefty 4.4% to an 11-month low. Copper bucked the trend though and remains unchanged after earlier trade above $8,450. Codelco’s Andina mine resumed operations after closing due to rainstorms that began on Thursday last week. Ivanhoe Mines executive co-chair Robert Friedland warned on Bloomberg that “copper is heading for a train wreck” and that when “push finally comes to shove”, copper can go up 10 times. The plunge in nickel was put down to fresh signs of weakness in the Chinese economy and the almost 20% increase in supply from Indonesia so far this year.
Iron ore markets softened slightly as Chinese markets reopened from the Dragon Boat festival with steel mill stockpiles climbing in mid-June. The July SGX contract is down 40c from the same time yesterday at $109.10 while the 62% Mysteel index rose 25c to $111.30. Mysteel noted that 14 mills have reduced prices to boost sales due to a summer drop off in demand.
Day ahead
Australia: The Q2 ACCI-Westpac business survey will deliver an important update on the current trends and pressures evident in the manufacturing sector.
We will see a flurry of second-tier US data releases. Resilient new build housing demand at a time of low inventory is facilitating growth in the FHFA and S&P/CS home price indices (market f/c: 0.5% & 0.35% respectively) and supporting prospects for new home sales (market f/c: –1.2% after +4.1% in April).
Further weakness in US durable goods orders is anticipated in May (market f/c: –0.8%), in line with evidence from regional surveys like the Richmond Fed manufacturing index (market f/c: –12 for June). The Conference Board’s consumer confidence index should improve slightly in June (market f/c: 104 vs May 102.3).
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