The new year has started with some market volatility as geo-political tensions in the Middle East have increased. That said, the point-to-point market movements since our last daily report on 20 December are unremarkable. Major currencies are mostly within 0.5% of those pre-Xmas levels, global equities are up just over 1% and, perhaps more notably, NZ and US bond rates are lower (15bps and 10bps respectively).
The key events over the last couple of weeks, which we’ll summarise briefly, are the escalation in US-Iran tensions, the devastating Australian bushfires and some important US economic data.
US-Iran tensions escalated late December after various missile attacks in Iraq and Syria, but reached a heightened level following the US assassination of Qassem Soleimani, a key Iranian military commander. Iran retaliated mid last week by attacking two Iraqi bases that house US forces, but Iran’s foreign minister said that its response was “proportionate” (an attack more symbolic in nature and not intended to kill) and that it did not want to escalate to full military conflict with the US. The US also did not seem keen on going to war and President Trump noted that “Iran appears to be standing down”. Thus, the situation has de-escalated significantly and Brent crude is trading around USD65 per barrel, down 1-2% from its pre-Xmas level, after spiking as high as US71 last week.
The Australian bushfires have been a daily focus, with widespread devastation seen to have some economic impact, perhaps in the order of slicing 0.3 percentage points off GDP initially, before the rebuilding phase kicks in. Alongside some continuation of underwhelming economic data (such as the second largest monthly fall in Australian job ads in December since the GFC and down 18.8% y/y), the market remains alert to the chance of the RBA cutting its cash rate again early next month, where expectations between an on-hold decision and a 25bps cut remain evenly poised. These factors have weighed on the AUD, which has been the weakest performer of the majors, year-to-date. NZDAUD reached a 5-month high last week just under 0.97 before closing the week at 0.9615.
In key economic data, the US ISM manufacturing index defied expectations of a modest recovery and at 47.2 fell to its lowest level since the GFC. That said, recession looks confined to the manufacturing sector, with the non-manufacturing ISM rising to 55.0. Friday’s employment data release saw non-farm payrolls slightly below expectations in December, but this followed a very strong November figure. The key takeout from the release was weak wage inflation, taking average hourly earnings down to 2.9% y/y, a 17-month low, adding to expectations that while the Fed is likely to keep policy steady for some time, there is a good chance of another rate cut later in the year.
The NZD closed the week at 0.6635. Through to the end of 2019, the NZD was on a tear, fuelled by the prevailing rise in risk appetite and exacerbated by the almost-complete closing of speculative short-NZD positions during a period of illiquid market conditions. Latest CTFC data show net short speculative positioning of just 1.5k contracts, well down from the October peak of 42k and early December levels of 27k. A peak in the NZD of 0.6756 was reached in the early hours of 1 January and the currency has since trended lower, making the NZD the second-worst currency after the AUD so far this year. Looking through the up/down period, the NZD is up slightly (0.5%) since our last pre-Xmas daily report.
Not surprisingly, during periods of heightened geo-political tensions NZD/JPY has been volatile. The cross reached a 7-month high late December above 73.5, and traded as low as 70.15 last week before ending the week at 72.6.
The USD has been the strongest of the majors this year, but that simply reflects a modest recovery after the more than 2% fall seen during December and with half of that fall coming in the last few days of 2019.
In the bond market, US Treasuries have been whip sawed by events in the Middle East, with the 10-year rate trading as low as 1.70% when Iran was firing missiles at US bases in Iraq and now back up to 1.82%. Over the holiday period, the 1.95% level has been the mark of resistance. In the NZ rates market, 1.80% has represented the peak level for the 10-year swap rate, and it has trended lower so far this year, closing last week at 1.64%. The NZ 10-year government rate ended last year at 1.65%, a 5-month high, before trending lower to close last week at 1.48%. Low levels of liquidity have likely exacerbated the significant moves in NZ-US spreads over the holiday period.
The economic calendar in the day ahead looks quiet but in the week ahead we’ll be watching the NZ QSBO (tomorrow) and a number of US economic releases, including the CPI and retail sales, while China’s latest monthly data dump is slated for Friday. The US-China phase-1 trade deal is set to be signed mid-week (15th). US-Iran tensions will need to be closely monitored, while House Speaker Nancy Pelosi has said she will send the articles of impeachment against President Trump to the Senate this week.