Markets Daily
Risk aversion extended from Asia to Europe and US trade, equities sharply lower and the AUD down to 0.6540. US long bond yields rose after strong labour data and increased government borrowing plans. Today’s calendar includes Australia June trade balance and Q2 retail sales, July services PMIs in China and the US and the Bank of England rates decision.
Yesterday
The day started on a sour note as Fitch Ratings cut its US sovereign credit rating from AAA to AA+, citing political dysfunction in debt ceiling standoffs and a lack of will to reduce deficits. This prompted strength in haven currencies Japanese yen and Swiss franc though the US dollar started to rally later against risk-sensitive currencies. That included AUD which extended Tuesday’s decline from 0.6620 to as low as 0.6566, its weakest point since 1 June. Regional equities were a sea of red, the ASX 200 fairly typical, closing -1.3%.
Currencies/Macro
The US dollar was flat against the Japanese yen but posted solid gains against the rest of the G10, A$ and NZ$ weakest. EUR/USD fell from 1.0990 to 1.0940, GBP/USD down 65 pips to 1.2715. USD/JPY dropped as low as 142.24 amid risk aversion but later returned to 143.30 as Treasury yields rose. AUD/USD extended its two-day decline to 0.6527, a low since 1 June, steadying around 0.6540. NZD/USD fell from 0.6120 to 0.6069 – a one-month low. AUD/NZD fell from 1.0780 to 1.0752.
US ADP private payrolls in July rose 324k (est.190k, prior revised from 497k to 455k). This is the fourth consecutive large gain in private sector jobs it but last month was obviously a very unhelpful guide to the official data (due Friday).
The US Treasury increased its bond issuance for August, and projected higher issuance for September and October. It will sell $103bn of longer-term debt next week.
Interest rates
US 2yr treasury yields fluctuated between 4.85% and 4.94%, but were little net changed at 4.88%. The 10yr yield however rose from 4.02% to 4.08%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be 6bp higher at the next meeting on 21 September.
Australian 3yr government bond yields (futures) fell from 3.77% to 3.71%, while the 10yr yield fluctuated between 4.00% and 4.07%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 2bp higher in September, 13bp higher by April.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be 2bp higher at the next meeting on 16 August and to peak at 5.63% in November.
Credit spreads reacted to the combination of the US downgrade and strong ADP print with indices another couple of bp wider in both Main (72) and CDX (66.5) and US cash also 3-5bp wider. A large portion of the reaction to the Fitch news has been centred on disagreement with the agency’s forecasts of a US recession, and trade deficit and government debt assumptions, and therefore while the US downgrade is not likely to exert the same pressure on credit markets as the S&P move in 2011, last night’s orderly shift wider was not a surprise. Supporting this was a return of primary activity in the US with 4 issuers (3 really) pricing USD12.2bn despite the backdrop.
Commodities
Crude markets were buffeted by good news and bad news, with bad news winning out at the end of the day. The good news was a record 17mb draw on crude stockpiles reported by the EIA following the previous session’s 15.4mb draw reported by the API. That leaves inventories at the lowest since January, driven in large part by exports surging above 5mbpd to 5.283mbpd. Despite this, the September Brent contract is down $1.88 at $79.49 while the October Brent contract is down $1.45 at $83.46. The draw on stocks last week was 2.5mb larger than the previous record set in 2016, but traders were sceptical about the size of the draw, given monthly revisions to EIA data. A measure of implied gasoline demand (4-week average of product supplied) has dropped by 520kbpd over the last 4 weeks, an unprecedented drop for this time of year. That’s more than double the largest decline over the same period for EIA data, suggesting a sharp drop off in consumer demand.
Metals continued their sharp correction from Monday’s 3 ½ month highs with copper down another 1.45% to $8,506 while aluminium fell another 2% to $2,210 and nickel by 3.6% to $21,550. Copper is down 4.2% from the Monday/ Tuesday high while tin is down 8%. The general risk-off tone was a key driver for the sharp reversal in metals with the US downgrade and Trump indictment adding to the negative tone. Production data from Chile’s Cochilco showed that the Escondida mine had its best month for copper output in 3 ½ years with a total of 111.4kt in the month.
Iron ore markets slipped further given limited signs of fresh policy stimulus and ongoing weakness in residential property markets in China. The September SGX contract is down another $3.45 from the same time yesterday to $102.55 while the 62% Mysteel index fell $2.25 to $106.55, down almost 9% from the 3 ½ month highs seen early last week. Hot rolled steel futures have also dropped sharply in the last week with a 4.5% correction from the 4-month high seen last Thursday. Seven Chinese property developers including Country Garden were downgraded by UBS noting that policy support is “unlikely to change the relative dynamics between stocks in the sector”. Reuters reported that some city governments in China have made it harder for developers to access cash from property sales held in escrow accounts in a move aimed at ensuring greater completion of unfinished projects.
Day ahead
At 11:30am Syd, Australia Q2 real retail sales are likely to come in weak as prices drive expansion in spending rather than volumes (Westpac f/c: -0.6%qtr, market f/c: -0.5%qtr).
Australia’s trade surplus is expected to fall in June from May’s massive $11.8bn. We look for export values to have fallen -4.3%, with commodity prices lower and goods volumes set to pull back. We see imports -2.4%mth, for a surplus of $10.4bn.
NZ: The July ANZ commodity price index will reflect downward pressure on prices.
At 11:45am Syd we see the July Caixin/S&P Global services PMI. This seems set to cool but remain upbeat, benefiting from reopening dynamics (market f/c: 52.4 versus 53.9 in June).
The Bank of England MPC is very much expected to raise rates again as inflation and wages remain strong. Economists are divided only on the size of the move, with most looking for +25bp to 5.25% but a sizeable minority including Westpac viewing 50bp as more likely. Market pricing reflects this divide, sitting at +32bp, with the bank rate seen peaking close to 5.75%.
US: The July ISM non-manufacturing PMI seems likely to remain consistent with modest economic growth (market f/c: 53.0, prior 53.9). Factory orders in June are expected to show weakness as downside risks materialise. Initial jobless claims are expected to remain around historic low. Productivity for Q2 is expected to rise slightly still not outpacing wages growth.
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