Markets Daily
Equity markets remained upbeat, the S&P500 closing at another record high. Despite that, AUD slipped to 0.6570. The calendar was quiet. Today we see Australia December NAB business confidence and the Bank of Japan policy decision.
Yesterday
AUD probed higher for a while, to 0.6614, with the regional risk mood mostly positive, but then tapered off to 0.6685, about flat overall. The ASX 200 mostly followed Wall Street’s lead, up 0.8%. Japan also rallied sharply, but Hong Kong and China came under pressure yet again. The data calendar was light.
Currencies/Macro
The US dollar was little changed versus most majors on the day, but commodity currencies underperformed defensive ones. EUR/USD edged down 15 pips to 1.0880. GBP/USD returned to 1.2705. USD/JPY ranged between 147.62 and 148.33. AUD/USD slipped 30 pips in the New York afternoon to 0.6570. Underperformer NZD fell 40 pips or -0.7% to 0.6075, including two-month lows. AUD/NZD rose 30 pips to 1.0820.
The US Conference Board’s Leading Index for December rose to -0.1% (est. -0.3%, prior -0.4%). Although the index still indicates economic weakness, the six-month contraction is less than in November, and less than the first half of 2023.
Interest rates
The US 2yr treasury yield is little changed net at 4.39%, while the 10yr yield fell from 4.12% to 4.10%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting on 1 February, with a 35% chance of a cut in March. Australian 3yr government bond yields (futures) fell from 3.82% to 3.80%, while the 10yr yield fell from 4.26% to 4.24%. Markets are pricing the RBA cash rate to be unchanged at the next meeting on 6 February, with a 50% chance of a cut in August. New Zealand rates markets price the OCR, currently at 5.50%, to be unchanged on 28 February, with a 60% chance of a rate cut in May.
Credit spreads were little changed with Main half a bp tighter at 59, CDX out half a bp to 55 and US IG cash flat top a bp tighter as primary activity continued, extending the strong open to 2024. In Europe 11 issuers (ex-SSA) priced ~EUR8.1bn with the bulk of the supply in the banks space. In the US, 5 issuers priced USD6.7bn.
Commodities
Crude markets tested 2-month highs on signs that Iran was being sucked into more open and direct conflict in the Middle East and the drone attack that shut down the Novatek gas condensate terminal on the Baltic Coast, threatening the flow of Russian crude. The Feb WTI contract is up 2.4% at $75.19 while the March Brent contract is up 1.8% at $79.98. Prompt time spreads have flipped back into backwardation with the Feb/ March WTI spread at a 10-week high of 36c while the March/ April Brent spread is at 44c. Both are highs back to November. Bloomberg noted that at least 16 ships have suffered direct hits by Houthi drones or missiles since mid-November according to Ambrey Analytics though all were able to continue their voyages under their own propulsion. Deputy NSA Jon Finer said, “deterrence is not a light switch” and it “will take time to play out” though he did say that the Biden administration “will have more to say about it soon” hinting at further action against Houthi rebels. Still the return of circa 270kbpd from the Sharara field in Libya after a 3-week stoppage helped to cap gains and Indian press reported that the country was considering reinstating crude shipments from Iran after the Indian external affairs minister travelled to Tehran last week.
Despite the developments in the Red Sea and Baltic Sea, gas prices in Europe continued pushing lower with the February TTF contract down just over 15% year to date. About 50% of Europe’s LNG imports originated in the US last year while Qatar accounted for just 13% of imports.
Metals remained weak with copper down 0.26% at $8,3289 and aluminium down 0.5% at $2,155. Despite news of mines and smelters closing, nickel also fell another 0.22% to $16,000. BMO noted “the pressures in the global nickel market are becoming increasingly apparent”. LME nickel inventories have almost doubled since late August last year as the market has been flooded by a wave of new material from the world’s top producer Indonesia. The AIA reported global aluminium production rose 2.1%yy in December.
Iron ore markets saw small gains despite sharp losses on mainland property stocks. The February SGX contract is up $1.30 from the same time yesterday at $131.00 while the 62% Mysteel index is up 50c at $130.65. Over the weekend, Reuters reported that China has instructed some heavily indebted local governments to halt some state-funded infrastructure projects given that Beijing is concerned about potential default due to local government debts and weaker growth prospects.
Day ahead
At 11:30am Syd, the December NAB business survey will provide an update on the softening trend in Australian conditions and downbeat business mood. The previous readings were +9 on conditions, -9 on confidence.
The Bank of Japan is widely expected to leave policy settings unchanged: -0.1% policy rate, 0% target on the 10-year JGB yield but with a 1% indicative cap. The bank continues to closely monitor inflation’s downtrend from post-pandemic highs. This meeting includes quarterly forecasts, with some expectation of slightly lower CPI projections for FY2024. There had been some talk of policy tweaks at this meeting but the New Year’s Day earthquake in western Japan reinforced expectations that April is more likely for a change. There is no fixed time for the policy announcement though it should be after 1:30pm Syd. Governor Ueda’s press conference is expected at 5:30pm Syd.
Eurozone: The recovery in consumer confidence should continue to face intense headwinds surrounding interest rates and the cost-of-living (market f/c: –14.3).
US: Fragility in manufacturing conditions should remain apparent in January’s Richmond Fed index (market f/c: –6). The New Hampshire presidential primary takes place, with results due during Wednesday Sydney time.
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