Morning Report
Today's economic developments and market movements.
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Key themes: The risk mood remained fragile owing to risks around the US election, ongoing geopolitical conflict and uncertainty around the pace of monetary policy easing.
Equity markets across most major developed economies closed lower.
US Treasuries sold off (i.e. yields rose) and G10 currencies weakened against the US dollar, with most falling to multi-month lows.
The Aussie dollar underperformed, Aussie equities strengthened slightly yesterday and bond futures remained broadly as is.
High inventories and improving sentiment around geopolitical conflict saw oil prices fall.
Share markets: US equities retreated for a third consecutive session. The S&P 500 closed 0.9% lower while the Dow Jones was down 1.0% and the NASDAQ 1.6%.
In Europe, the Euro Stoxx 50 closed 0.3% lower and London's FTSE 100 closed down 0.6%. The German DAX slipped 0.2%.
Asian stocks were mixed yesterday. Shanghai's CSI 300 rose 0.4% while Hong Kong's Hang Seng was up 1.3%. In Japan the Nikkei fell 0.8%.
The ASX 200 ticked up slightly by 0.1% after a 1.7% decline the day prior.
Interest Rates: US Treasury yields were higher across the curve as investors continue to discount the chance of an aggressive Fed rate cut cycle and the risk premium widens on uncertainties around the US election and the broader geopolitical backdrop. The 2-year bond yield was 5 basis points higher to 4.08% and the 10-year yield was up 4 basis points to 4.25%. Swap pricing implies an 89% chance of a Fed rate cut in November. Traders expect at least one rate cut by the end of the year with the odds of second sitting around 50%.
In Europe, Germany’s 2-year bund yield fell 7 basis points to 2.10% while the 10-year was down 1 basis point to 2.30%. UK's Gilt curve shifted up at the 2-year and 10-year duration by 2 and 3 basis points respectively to 4.09% and 4.20%.
Overnight, Aussie bond futures yields were little changed with the 3-year bond future down by 1 basis point to 3.93% and the 10-year remained as is at 4.47%. Expectations for a rate cut in 2024 are down to just 6.5% with the first cut fully priced in for May 2025.
FX: The US dollar continued to probe higher, climbing against its G10 counterparts. The DXY rose to a 2-month high of 104.57 before pulling back to finish around 104.4.
The Aussie dollar was the second weakest out of the G10, hitting a 2-month low of 0.6614 against the US dollar after starting the session at 0.6682. A small tick up late in the session saw the AUD/USD pair finish around 0.6635 at the time of writing.
The Japanese Yen continued to weaken against the US dollar on the widening interest rate differential. The USD/JPY broke above the 153 mark on its way to a 12-week high of 153.19 before retreating back to 152.64 at the time of writing. This was the largest single-day increase since 6 September with yen not having been north of 153 since the end of July. With the Bank of Japan likely to remain on hold in the face of political uncertainty, market volatility and a lack of wage pressure, there remain further downside risks to the yen, particularly if the US dollar remains firm.
The sell-off in the euro persisted with the EUR/USD falling to a more than 3-month low of1.0761 before retracing some of the move to trade around 1.0783 at the time of writing. This was the third consecutive daily slide in the euro, continuing a broad sell-off since the start of October.
Commodities: West Texas Intermediate futures closed down 1.8% at US$70.77 almost fully reversing the 2.2% increase the session prior. This comes as the Energy Information Administration (EIA) reported a 5.5m barrel increase in crude stockpiles, the highest since August. Crude production remained at a record high of 13.5m barrels per day. More positive sentiment around a Middle East ceasefire also contributed to the softer price action.
Gold was down 1.2% to US$2,715.4 after briefly touching a record high of US$2,758.5 earlier in the session.
Metals were mixed. Copper was up 0.2% to US$9490 while aluminium rose by 0.87% to US$2656.
Iron ore slipped to below US$100 as focus shifts to rising production and strong inventories. Iron ore was down 1.9% to $98.7. Further support for iron ore is likely to be sparse as announcements of Chinese stimulus measures come to an end.
Australia: There were no major data releases.
Canada: Following three consecutive 25bp cuts, the Bank of Canada accelerated the pace of monetary policy easing and lowered the target for the overnight rate by 50 basis points to 3.75%. The move was in line market expectations. In its communications, the central bank highlighted that inflation returned to the 2% target falling significantly in the last few months and that lower interest rates are needed to maintain it at that level. While risks around inflation outlook were assessed to be broadly balanced, the forward guidance indicated that further interest rate cuts most likely will be required. With Q2 GDP growth driven by government spending and strong population growth leaving per-capita GDP falling, financial markets are pricing in a possibility of further outsized interest rate cuts in the near future. The central bank stressed it will make policy decisions on the meeting-by-meeting basis based on incoming economic information.
United States: The Beige Book provided Fed’s latest assessment of economic conditions across twelve of its business districts. It suggested that economic activity was little changed in all districts but two, where modest growth was reported. Negative impact from hurricanes to agriculture, tourism and the general business activity in the Southeast was noted. Employment was assessed to have increased slightly, but demand for workers was somewhat lower, with hiring focusing on replacement rather than expansion of workforce. Wage growth was described as modest, with multiple districts reporting that the pace of increase is slowing. Most districts saw only slight increases in selling prices, but input cost pressures were described as moderate. Indications from the housing market were generally positive, however, the report noted that uncertainty about interest rate outlook is impacting some buyers.
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