Markets Daily
Friday's risk-off moves related to Israel's strike on Iran was unwound in bond and currency markets, as retaliation fears dissipated. Equities fell though, the S&P500 down 0.9%.
Currencies/Macro
As reports of an Israeli strike on Iran spread during Asia-Pacific trading on Friday US10yr yields fell more than 10bp at one stage, while US equity futures were nursing losses around 2%. But as it became clear that key Iranian nuclear facilities were untouched and Iranian officials were downplaying the event global markets regained their composure.
The US dollar index closed unchanged on the day overall. EUR rose from 1.0630 to 1.0657 via 1.0677, while USD/JPY rose from 154.40 to 154.65, as markets unwound safe haven flows triggered by Israel's strike on Iran in earlier Friday trade.
AUD rose from 0.6395 to 0.6418 offshore, having traded down to a new 2024 low at 0.6363 in Friday local trade as geopolitical risks jumped when news broke of explosions in Iran. NZD rose from 0.5880 to 0.5888 via 0.5906. AUD/NZD rose from 1.0880 to 1.0906.
FOMC member Goolsbee said: “So far in 2024, that progress on inflation has stalled. You never want to make too much of any one month’s data, especially inflation, which is a noisy series, but after three months of this, it can’t be dismissed.”
ECB President Lagarde said: “Risks to the inflation outlook are two-sided. Upside risks include heightened geopolitical tensions, as well as higher wage growth and more resilient profit margins than anticipated. Downside risks include monetary policy dampening demand more than expected, and an unexpected deterioration in the economic environment in the rest of the world.”
Interest rates
The US 2yr treasury yield rose from 4.94% to 4.99%, while the 10yr yield rose from 4.55% to 4.62%. Markets price the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting on 2 May, with an 85% chance of a cut by September.
Australian government bond yields (futures) rose from 3.80% to 3.85%, while the 10yr yield rose from 4.26% to 4.32%. Markets currently price the RBA cash rate to be unchanged at the next meeting on 7 May, with a 70% chance of a cut by November.
New Zealand rates markets price the OCR, currently at 5.50%, to be unchanged at the next meeting on 22 May, with an 80% chance of a cut by October.
Credit indices recovered from early weakness to see Main unchanged and CDX half a bp tighter to 57 on Friday, however that remained 2bp wider on the week. Cash spreads were little changed and early volatility saw off any potential supply on Friday. Primary activity was dominated by financials last week with ~90% of the USD31.5bn of IG supply completed coming from the bank sector (including ~USD26bn from WFC, GS, MS and JPM) as post earnings supply picked up. We will see more regional banks and corporates emerge from reporting blackout this week which is likely to see a more diverse funding.
Commodities
Brent initially soared above $90 after Israel launched a direct strike on Iran. However, as Iranian media downplayed the attack, prices quickly fell back, and we closed Friday with only modest gains. The May WTI contract is up 0.5% at $83.14 while the June Brent contract is up 0.21% at $87.29. Iranian media confirmed the attack with explosions reported near Isfahan, close to some of the country’s nuclear facilities. Reuters reported that Iran had no plans to strike back immediately. Traders appeared to be assuming that the moderate nature of the attacks and Iranian denials meant that we are not about to spiral into outright confrontation. And with clear signs of weakening in diesel markets, with heating oil/ gasoil contracts in the US, Europe and Asia all flipping into contango and hitting lows back to late January last week, the supply demand picture for crude is becoming less supportive. Ship tracking data from Kpler did point to Russian diesel exports plunging though, with shipments in the 10 days through April 13 down 25% versus the same period over the previous 5 years. Chevron, Exxon and Total will report Q1 earnings this week while the World Energy Congress will commence in Rotterdam on Monday.
Metals continued surging with copper up 1.45% at $9,876 while aluminium jumped 2.08% to $2,669 and nickel surged 4.1% to $19,326. Tin rose yet another 4.7%, bringing gains for last week to 10%, and gains for the month so far to 30%. There was little fresh news though operations at the Zijin Mining Group copper and cobalt mine in the DRC were suspended due to worries about excessive radiation. The COMMUS mine produced about 129kt of copper last year, about 4.2% of world output. Meanwhile, Zambia’s state power utility issued force majeure notices on power supply to copper mines including those run by First Quantum and Barrick Gold. BHP reported copper production rose 10% to 1360kt. As noted last week, Indonesia has reduced tin shipments amid licensing delays while a high-profile corruption probe has involved tin smelter executives and traders. Flows from Myanmar have also been impacted by military developments while unrest in the DRC has also impacted flows there.
Finally note that iron ore markets showed some signs of peaking after the sharp run up through April. The May SGX contract is up $1.15 from the same time Friday at $115.90 while the 62% Mysteel index is down 35c at $116.90. In a sign that close to record Chinese steel exports is pressuring steel producers around the world, Chile slapped anti-dumping tariffs on Chinese steel products with a 33.5% import tax on steel balls and 24.9% on steel bars. The move follows US President Biden last week calling on the USTR to triple the tariff on Chinese steel from 7.5% to 25% that was levied on top of Trump’s steel tariffs.
Day ahead
China: Chinese banks will likely keep 1 and 5 year loan prime rates steady at 3.45% and 3.95% respectively for a 2nd consecutive month at today’s fixing, after the PBOC left its 1-year rate steady on 15th April.
Eurozone: Consumer confidence should be buoyed by firming prospects of a rate cut.
US: The Chicago Fed national activity index has been underperforming aggregate momentum.
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