Markets Daily
A risk averse mood prevailed Friday, markets concerned about escalation in the conflict in Israel. Equities were weak and oil rose sharply, though currencies were muted, AUD only a touch lower at 0.6305. Today’s light calendar includes RBA comments at a crypto conference and the October NY Fed Empire State survey.
Friday
China released September data on consumer prices, producer prices, the trade balance and credit/money supply. CPI inflation remained very low by global standards, 0.0%yr vs 0.1%yr in August, with PPI -2.5%yr. China’s trade surplus rose to $77.7bn, with exports -6.2%yr, imports -6.2%yr. China new loans rose CNY2310bn versus CNY1358bn in August, aggregate financing growing CNY4120bn, up from CNY3124bn in August. Regional equities were mostly weak, including the ASX 200 which closed -0.6%. AUD/USD traded tight ranges, returning to 0.6315.
Currencies/Macro
The US dollar was little changed net on Friday versus most major currencies, recovering from a decline in Asia. EUR/USD slipped slightly to 1.0515. GBP/USD probed 1.2220 then eased to 1.2145. USD/JPY starts the week down 30 pips from Friday morning, around 149.50. AUD/USD dipped to a low of 0.6286 in New York trade (matching the YTD lows) but starts the week around 0.6300/05, barely changed from Friday morning. NZD/USD fell from 0.5930 to 0.5885 on Friday but gapped up to 0.5920 on Monday’s open, perhaps on relief at the clear NZ election result. AUD/NZD rose from 1.0650 to 1.0700 Friday, only to slide back to 1.0650/60 today.
October US consumer sentiment (University of Michigan) fell to 63.0 (est. 67.0, prior 68.1), with expectations falling to 60.7 (est. 65.7, prior 66.0) and current conditions to 66.7 (est. 70.3, prior 71.4). Inflation expectations rose, the 1-year ahead measure to 3.8% from 3.2%, and the 5yr-ahead measure to 3.0% from 2.8%.
Eurozone industrial production in August was mixed, with a monthly gain of 0.6%m/m (est. +0.1%m/m) but an annual fall to -5.1%y/y (est. -3/4%y/y, prior -2.2%).
NZ’s general election resulted in a shift to the centre-right bloc. The official result will be declared on 3 November, after special votes have been counted. Coalition negotiations are then likely.
Interest rates
US 2yr treasury yields fluctuated between 5.01% and 5.06%, while 10yr yields fell from 4.69% to 4.61%, flattening the curve by around 7bp. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be 3bp higher at the next meeting on 1 November, with a 40% chance of a hike in December.
Australian 3yr government bond yields (futures) fell from 3.98% to 3.92%, while the 10yr yield fell from 4.51% to 4.41%. 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 March. New Zealand rates markets price the OCR, currently at 5.50%, to be 7bp higher on 29 November, with a 70% chance of a hike by April 2024.
Credit spreads were weaker on Friday with Main giving up 4bp to 85.5, but still closing 1.5bp tighter on the week, while CDX was 2bp wider at 77 to be 1.5bp wider on the week. US IG cash was also a touch wider on Friday but little moved over the course of the week as Primary issuance slowed. Europe recorded ~EUR18bn of supply this week to fall short of expectations, while the US saw just of USD13bn completed. Looking ahead, US bank earnings have raised expectations for potential supply and the market is therefore looking for ~USD25-30bn this week.
Commodities
Crude markets surged Friday on warnings from Iran that a new front was possible if the blockade of Gaza and attacks on civilians continue. The November WTI contract closed up $4.78 at $87.69 while the December Brent contract closed up $4.89 at $90.89 with wires noting aggressive call buying as investors looked to hedge possible upside risks. In addition to developments in Gaza, traders were focused on the US enforcing sanctions on two tankers, one of which has been booked numerous times by a variety of oil majors. Yellen told the WSJ last week that the US is “looking at enforcement very carefully and we want to make sure that market participants are aware we take this price cap seriously … we mean business about abiding by the cap”. There were also calls from Republicans to “stop Iran from being able to produce the oil”.
In gas markets, Chevron workers voted to keep industrial action planned for October 19, helping send European markets sharply higher. The November TTF contract surged 40%+ last week with a cold snap intensifying across northern Europe plus the closure of the Tamar gas platform. Estonian PM Kaja Kallas said she wasn’t ruling out Russian involvement in the damage to the Balticconnector pipeline though Russian President Putin said he ”didn’t even know this pipeline existed”. And in coal markets, China reported another strong month of imports in September with the volume at the second highest on record on a seasonally adjusted basis and up 46% over the last 3 months versus last year.
Metals finished the week on a soft footing with copper back below $8,000, down 0.66% at $7,938 while nickel closed below $19,000, down 0.8% on the day at $18,580. Rising inventory was weighing on sentiment for both copper and nickel. Copper inventory at LME warehouses saw the 13th week of consecutive gains last week, hitting highs back to October 2021 while Shanghai copper inventory rose 46% last week. Gold surged back above $1,900 as traders watched Iranian comments nervously. After hitting a 7-month low earlier this month, it has jumped by almost 7% on geopolitical risk.
Iron ore markets saw modest gains with the November SGX contract up $1.35 from the same time Friday while the 62% index closed unchanged at $118.25. News that China may be considering fresh fiscal stimulus helped sentiment into the end of the week though CISA reported steel mill stockpiles climbed early October to be more than one standard deviation above the average for this time of year weighing on steel markets.
Day ahead
RBA Assistant Governor (Financial Mkts) Brad Jones will speak at the AFR Cryptocurrency Summit in Sydney (10:15am).
China (12:20pm Syd): PBoC’s 1yr lending rate is expected to be maintained at 2.50% at today’s decision, although some expect a reduction to 2.40%.
In the US, the New York Fed’s Empire State manufacturing survey is expected to fall, although there is growing optimism over the six-month demand outlook.
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