Markets Daily
Bond yields fell amid some dovish Fedspeak, in turn depressing the USD and lifting equities, reversing earlier losses on the Israel conflict. AUD rebounded to 0.6410. Today’s data includes Australia October Westpac consumer sentiment and September NAB business confidence.
Yesterday
Markets took a risk-off tone in response to the shocking weekend Hamas attack on Israel. Havens JPY, CHF and USD gapped higher at the Sydney open. Equities softened, S&P 500 futures -0.7% after the bounce Friday. The Aussie opened around 0.6360, down from the weekend close of 0.6386. This was hardly a dramatic fall, perhaps finding some insulation from the bounce in energy prices, Brent crude oil up 3-4%. Markets were thinned by holidays in Japan, Korea and Taiwan. However, China reopened for the first time this month. The ASX 200 closed up 0.2%, torn between Friday’s +1.2% on the S&P 500 and the response to war.
Currencies/Macro
The US dollar was a little firmer against most majors through London trade but then slipped in NY on Fed commentary. EUR/USD dipped to 1.0520 but later recovered to 1.0565, only a touch lower overall. GBP/USD recovered to be flat on the day at 1.2240. USD/JPY fell from 149.20 to 148.50. AUD/USD consolidated its initial 25 pip fall on the risk aversion sparked by the Hamas-Israel conflict but then kicked up to 0.6410, mostly after the comments from Fed VC Jefferson. NZD/USD rose a net 0.5% over the day to 0.6020, outperforming most majors. AUD/NZD fell from 1.0660 to 1.0624 – a four-month low – then trimmed losses to 1.0650.
Dallas Fed president Lorie Logan said the recent surge in long-term yields may mean less need for the Fed to raise its benchmark interest rate again: “Higher term premiums result in higher term interest rates for the same setting of the fed funds rate, all else equal…Thus, if term premiums rise, they could do some of the work of cooling the economy for us, leaving less need for additional monetary policy tightening.” Fed Vice Chair Jefferson echoed this, saying: “Looking ahead, I will remain cognizant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy.”
Fed governor Barr commented on the labour market: ”We have made significant progress on bringing inflation towards the direction we want. There’s a lot more that has to happen to continue to see inflation come down but I’m not overly focused on one number coming in…The labour market remains tight overall, but there are elements showing supply and demand are coming into better balance, such as lower growth in average hourly earnings and a decline in the quits rate”.
Eurozone October Sentix investor confidence saw expectations rise to -16.8 (prior -21.0), but current conditions fall to -27.0 (prior -22.0), for a near unchanged headline index at -21.9 (est. -24.0, prior -21.5). German industrial production in August fell -0.2%m/m and -2.0%y/y (est. -0.1%m/m and -1.5%y/y).
Interest rates
US treasury bond market was closed for Columbus Day holiday, but futures did trade. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be 5bp higher at the next meeting on 2 November, with a 35% chance of a hike in December.
Australian 3yr government bond yields (futures) fell from 3.97% to 3.88%, while the 10yr yield fell from 4.55% to 4.43%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 5bp higher on 7 November, with a 50% chance of a hike by May. New Zealand rates markets price the OCR, currently at 5.50%, to be 9bp higher on 29 November, with an 80% chance of a hike by April 2024.
Credit saw a subdued session as geopolitical risk and the US holiday dominated. Europe saw a softer session for credit with Main 1.5bp higher at 87 and cash credit also softer, however this did not reflect the shift in sentiment late in the session that saw rates more positive and a late rally in US equity.
Commodities
Oil prices surged in Asian trade on the shocking developments in Israel with WTI up 5.4% on the highs and Brent up 5.2% on the highs. However, both contracts have given back some of the gains with the November WTI contract up $3.54 at $86.33 while the December Brent contract is up $3.51 at $88.09. The main focus from analysts was whether Iran may become involved in the conflict, with the WSJ reporting that Iranian security officials had helped Hamas plan the surprise attack at a meeting in Beirut. As we have been noting over recent weeks, the US and Venezuela were reported as being “advanced in talks that could provide sanctions relief by allowing at least one additional foreign oil firm to take Venezuelan crude oil for debt repayment if President Maduro resumes negotiations with the opposition” according to Reuters. US sources said talks “have progressed substantially in recent weeks”.
European gas prices surged by the most since August as Chevron closed the Tamar gas platform. Iran was also noted as a key exporter of nitrogen in the region, adding to the pressure on European natural gas prices. The November TTF contract closed up 15%. About a third of globally traded LNG passes through the Straits of Hormuz. Finland and Estonia were preparing to inspect an undersea gas pipeline for a potential leak after an “unusual” drop in pressure which halted flows. And Chinese coal prices hit 6-month highs as traders focused on the winter heating season and supply security.
Metals continued their push higher with copper, nickel and tin all seeing further solid gains. Copper is last up 0.8% at $8,111 while tin is up 2% at $25,140 and nickel up 2.1% at $18,975. There was little fresh news though copper is up close to 3% from last week’s lows as the key players in the copper market descend on LME week in London. Wires reported that executives at Maike Metals International had lost contact with the company’s founder He Jinbi. Maike Metals is the largest importer of refined copper in China. Harbor MD Jorge Vazquez stated that aluminium “supply is booming” and this will lead to “the biggest surplus we’ve seen in the history of the industry”. Harbor is forecasting a 2mt surplus in the primary aluminium market over the next two years as recycled metal output surges and demand remains weak.
Iron ore markets fell to 1-month lows on stagnant demand with Goldman warning of an “L-shaped recovery in the coming years” in the Chinese property sector. The November SGX contract is down $4.45 to $110.00. Meanwhile SHFE January rebar futures are down circa 6% from the mid Sep highs.
Day ahead
At 10:30am Syd, the October Westpac-MI Consumer Sentiment survey will provide a timely update (survey conducted last week) on households' views around the RBA's extended policy pause and lingering cost-of-living issues. The September reading was a gloomy 79.7.
At 11:30am Syd, the NAB business survey has shown that conditions have been little changed of late, well off the highs seen last year, but still above long-term averages at +13. The confidence index is weak though, +2 in August.
Japan: The current account surplus for August will reflect strong primary income resulting from a weak yen (market f/c: ¥2972bn).
The Fed’s Bostic, Waller and Kashkari are due to speak. Governor Waller is one of the most prominent hawks so any change of tone from him would be notable.
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