Markets Daily
US and European PMI data disappointed Friday, weighing on equity prices and bond yields. AUD/USD returned to 0.6920. Today’s light calendar includes July Germany IFO business sentiment.
Friday’s markets
Equity sentiment was mostly a little firmer, though the ASX 200 slightly underperformed the region, closing flat. AUD/USD softened slightly, from 0.6935 early to 0.6910. The flash July S&P Global/Markit PMIs for Australia showed weakness emerging, the services index down to 50.4 from 52.6, manufacturing more resilient at 55.7, from 56.2 in June.
Currencies/Macro
The US dollar was mixed Friday, outperformed by safe havens yen and Swiss franc. It fell sharply on the dismal US services PMI but later steadied. EUR/USD fluctuated between 1.0130 and 1.0255. GBP/USD spiked as high as 1.2064 after the US PMIs but starts the week little changed net, around 1.2005. USD/JPY fell from 137.50 to 136.15, the yen outperforming as US Treasury yields fell. AUD/USD is about flat versus Friday morning at 0.6925, having traded 0.6894 to 0.6977. NZD/USD returned to 0.6255, leaving AUD/NZD at 1.1075.
The advance July US PMIs from S&P Global/Markit were disappointing. Manufacturing fell to 52.3 (est. 52.0, prior 52.7), services plunged to 47.0 (est. 52.7, prior 52.7), and composite to 47.5 (est. 52.4, prior 52.3) – lowest since May 2020. Most components recorded declines.
The equivalent Eurozone PMIs (S&P) were also disappointing. Manufacturing fell to 49.6 (est. 51.0, prior 52.1), services to 50.6 (est. 52.0, prior 53.0), and composite to 49.4 (est. 51.0, prior 52.0). German PMIs were notably weak.
Interest rates
US 2yr treasury yields fell from 3.14% to 2.97%, while the 10yr yield fell from 2.90% to 2.75%. Markets currently price the Fed funds rate to be 75bp higher at the next meeting on 27 July, and 180bp higher by year end.
Australian 3yr government bond yields (futures) fell from 3.25% to 3.10%, while the 10yr yield fell from 3.48% to 3.33%. Markets currently price the RBA cash rate to be 55bp higher at the next meeting in August, and 210bp higher by year end.
Credit spreads were mixed with Main closing 3bp tighter at 105 despite the soft PMIs in Europe to be ~20bp inside its wides of mid-July, and while CDX was 2bp wider at 86, it remains close to its lows for the month. US cash spreads were flat to a couple wider and primary markets saw no activity on the mix of weaker sentiment and a Summer Friday. With corporate reporting ongoing, the large banks out of the picture (mostly, C & GS didn’t print last week) and the Fed to disrupt mid-week, expectations for supply are fairly low for the week ahead.
Commodities
Crude markets weakened Friday as concerns about recessions in the US and Europe rose while Covid lockdowns in China stunted demand. The Sep WTI contract fell $1.65 Friday to $94.70 while the Sep Brent contract fell 66c to $103.20. The return of Libyan crude was a key factor behind the weakness in crude markets late last week. However, news from Russia added to concerns about supply. A call between the Saudi Crown Prince Mohammed bin Salman and Russian President Vladimir Putin Thursday “emphasized that a further coordination within OPEC+ is important” and while the Nord Stream pipeline returned after planned maintenance last week, flow of gas to Europe was running at about 40% of capacity. The UK August NBP contract closed up 55% last week, at a 4-month high. The US August Henry Hub contract also rose 18% on the week as the heatwave in the US and rising European demand drove prices higher.
Metals rose last week on signs that the recent aggressive corrections were spurring demand. Copper rose 0.9% Friday to $7,389 while aluminium rose 1.6% to $2,459 and nickel jumped 4% to $22,350. Aluminium rose 5% on the week as rising power prices added to the wave of production cuts across Europe. Romania’s Alro Property Group last week said it will suspend aluminium production in August due to the surge in power prices. Norsk Hydro Chief Financial Officer Pal Kildemo said in an interview on Bloomberg Television that the surge in power prices had already knocked about 900,000 tons of smelting capacity offline in Europe and North America over the past two years and that there’s a risk that another 1 million tons of capacity will be curtailed.
Finally note that iron ore markets stabilised into the end of last week as China announced rafts of policy designed to stabilise housing markets. The Sep SGX contract is up $4.75 at $104 while the 62% Mysteel index rose $4.25 to $100.35. However, late last week Baowu Steel warned of ‘crisis conditions’ due to the “complex macro economy” and severe Covid situation in China presenting “great challenges” for the steel industry. Steel prices in China slumped last week with spot rebar down 4.7% on the week to a fresh 19 month low while hot rolled steel prices fell 8%. The focus on mortgage defaults in China was a key driver with analysts at Deutsche Bank putting the size of mortgages affected so far by the boycotts at 1.8trn-2trn yuan ($270bn-300bn), or 4-5% of the stock of mortgage lending in China.
Day ahead
Concerns around energy security and recession will be highlighted in the July IFO Germany business climate survey (market f/c: 90.5).
US: Both the June Chicago Fed activity index and July Dallas Fed index should continue to indicate a weakening of business conditions in the US (Dallas Fed market f/c: -22.0).
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