Markets Daily
European and US bond yields rose further, the 10-year Treasury reaching a high since 2007. AUD remained around 0.6400. The calendar remains low key today. US data includes July home sales and August manufacturing sentiment.
Yesterday
Markets expected China’s regular interest rate review to be routine, delivering the 15 basis point cut that was already announced last week for the medium term lending facility. Hence there was a market wobble as the mortgage-linked 5-year loan prime rate was kept at 4.2% and the 1-year rate was trimmed just -10bp to 3.45%. US equity futures slipped and AUD/USD dipped about 15 pips to 0.6395. The Aussie however was overall subdued, with nothing of note on the local calendar this week. China and Hong Kong equities clearly underperformed again on a mixed day for regional equities. The ASX 200 closed -0.5%.
Currencies/Macro
The US dollar made sharp gains against yield-sensitive JPY but otherwise was little changed or a touch softer against most majors. EUR/USD rose 0.2% to 1.0895. GBP/USD rose 0.2% to 1.2755. USD/JPY rose about 80 pips or 0.6% to 146.20. AUD/USD ranged between 0.6387 and 0.6421, steadying around 0.6410. NZD/USD recovered from a dip to 0.5897 (a low since November) to 0.5925. Using New York closes, the Kiwi rose 5 pips over the day, snapping a 9-day losing streak. AUD/NZD steadied around 1.0825.
The European and US data calendars were largely empty. There was some interest in the Wall Street Journal opinion column by Jason Furman, former chairman of the White House Council of Economic Advisers under President Obama, arguing that the Fed should raise its inflation target from 2% to 3%, though its next formal strategy review is not until 2025.
Interest rates
US 2yr treasury yields rose from 4.94% to 5.00%, while the 10yr yield rose from 4.25% to 4.34% (highest since 2007). Markets are pricing the Fed funds rate, currently 5.375% (mid), to be 5bp higher at the next meeting on 20 September.
Australian 3yr government bond yields (futures) ranged between 3.88% and 3.92% while the 10yr yield rose from 4.24% to 4.28%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 1bp higher in September, and to peak at 4.22% in May.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be 4bp higher at the next meeting on 4 October and to peak at 5.70% in November.
Credit indices reflected the shift in sentiment with Main giving up early gains to close half a bp wider at 78.5 while CDX erased early losses to be a bp better at 69.5, while US IG cash was little changed. Supply was reflective of conditions with Europe seeing 4 issuers in the market pricing EUR4.5bn, however the US was more sluggish on a weak open.
Commodities
Crude markets ended the day lower in light, choppy, summer trading as the focus turned to the potential for the return of supply from Iraq. The September WTI contract is down 53c at $80.72 while the October Brent contract is down 30c at $84.50. In a further sign that flows from the semi-autonomous Kurdish region in northern Iraq may be about to restart, Iraq’s oil minister arrived in Ankara to discuss issues including the restart of the Ceyhan pipeline which has been closed since late March. Bloomberg reported TankerTrackers.com data that showed Iran’s oil exports at an estimated 2.2mb for the first 20 days of August with the vast majority of this going to China. Kpler recently reported that Chinese imports of sanctioned Iranian oil are running at the highest level in at least a decade. In fuel markets, TotalEnergies confirmed it was forced to halt one of two fluid catalytic crackers (FCC) at its Antwerp refinery. The FCC has capacity for about 74kbpd with the complex able to process 338kbpd according to Bloomberg.
Natural gas prices rose to a two-month high as workers at export facilities in Australia prepare for strikes. The September TTF contract rose 12% and is up 18% over the last week while the equivalent in Asia is up 28% in the last week. New discussions between Woodside and the labour unions are set for tomorrow and if disputes aren’t resolved by the end of the day, then workers have already “unanimously endorsed” giving a seven-day notice of strike action, meaning strikes could start September 2.
Metals were modestly higher in light summer trade with copper up 0.6% at $8,288 and zinc up 1% at $2,323. There was little fresh news driving those gains which came despite higher US yields and a surprise from the PBoC with the 5yr loan prime rate being left unchanged.
Iron ore markets saw further modest gains with the September SGX contract up $3.70 from the same time yesterday at $107.90 while the 62% Mysteel index was up 45c at $110.20 which is a 3-week high. However, the October hot rolled coil contract closed at a 1-month low in line with falling steel prices as concerns about demand from construction and lack of policy response continue.
Day ahead
US: Fragility in existing home sales will likely persist in July as restrictive policy settings continue to weigh on supply-side expansion (market f/c: –0.3%). The Richmond Fed manufacturing index is also expected to remain weak in August given subdued new orders (market f/c: –10). Richmond Fed president Barkin and Chicago Fed president Goolsbee are due to speak at different events.
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