Global equities and industrial commodities continue to tumble on rising global growth concerns, with heavy losses seen across all the major equity indices overnight. The CNY has continued its recent sharp downtrend while the NZD and AUD have fallen more than 1%, with both hitting fresh lows for the year. US Treasury rates have fallen back amidst the risk-off backdrop, although the 10-year rate continues to trade above 3%.
There hasn’t been much fresh news over the past 24 hours but that hasn’t prevented another wave of risk aversion, with big falls seen across equity markets. The S&P500 is down around 2.4%, now almost 17% off its highs set at the start of the year, so nearing bear market territory (defined as a 20% fall from the peak). The NASDAQ is down almost 3.5%, extending its cumulative losses from its peak last year to 28%, while, in Europe, the EuroStoxx 600 index closed almost 3% lower, nearing bear market territory itself. Speculative corners of the market have been pummelled, with Cathie Wood’s ARK Innovation ETF falling 9% and Bitcoin down more than 10% and threatening to break below $30,000. Defensive sectors, such as Consumer Staples, are outperforming.
The signals coming from asset markets – equities, commodities, and currencies – suggest the market is growing increasingly pessimistic around the outlook for global growth amidst expectations for aggressive central bank tightening, the war in Ukraine and the ongoing lockdowns in China. Goldman Sachs said its ‘best case’ for equities, predicated on no recession, was a period of low returns, but the risks were skewed to the downside, even if recession could be avoided. Bear markets in the S&P500 are usually, although not always, associated with US recessions.
Oil and commodity prices are down sharply overnight, with copper (-1.9%) hitting a six-month low on demand fears, zinc and aluminium down more than 3%, and nickel slumping 6.3%. The weakness in prices is notable considering inventory levels are historically tight across multiple commodity markets. Compounding the downside pressure on oil prices, Bloomberg reported that the EU has softened its planned sanctions on the Russian oil industry and has dropped plans to prevent ships from the region transporting Russian oil to other markets. Opposition from Hungary and Slovakia is currently holding up the EU’s plans for a phased Russian oil embargo.
The only economic data of note so far this week has been Chinese trade data which showed a softening trend in both exports and imports, albeit not as weak as the market had expected. Chinese export growth moderated to 3.9% y/y, potentially signalling signs softening global demand for Chinese consumer goods.
Contrary to speculation, Putin made no major announcement at a speech commemorating Victory Day overnight. There was no formal declaration of war, as some, including the UK Defence Secretary, had speculated, however neither did Putin refer to the Ukraine war as a ‘special military operation’, which has been the official label so far.
The market has pared back expectations for Fed tightening in the face of sustained equity market weakness and growing global growth concerns. A 50bps hike next month is still fully priced, but there are now around 185bps of hikes priced by the end of the year, down from around 200bps on Friday. The US 2-year rate has fallen around 14bps overnight, to around 2.59%. Rate hike expectations have been similarly pared back in the UK and Europe.
Fed rhetoric is showing no signs of softening despite the pronounced weakness in risk assets, with officials expressing their desire to quickly get to (at least) ‘neutral’ amidst uncomfortably high inflation. Atlanta Fed President Bostic said he saw two-to-three 50bps hikes in his baseline scenario while he thought a 75bps move was a low probability.
The US 10-year rate hit a fresh cycle high of 3.20% overnight, but it has since reversed sharply as equity losses have mounted and oil prices have slumped. The US 10-year rate is 8bps lower on the day, at 3.05%, with market-implied inflation expectations falling to a two-month low. Importantly, long-term real yields continue to push higher, tightening monetary conditions and pressuring risk assets. The US 10-year real yield has nudged up to 0.27%, on track for its highest close since mid-2019.
CNY weakness has continued apace, with USD/CNY decisively breaking above 6.70, up some 1% on the day. It closed at its highest level since March 2020, at around 6.73. The sharp depreciation came even as the PBOC set the daily CNY fix at a stronger than expected level, usually a signal that the authorities are uncomfortable with the pace of decline.
Commodity currencies remain under significant downward pressure amidst the weakness in commodities and the CNY and growing fears around the global growth outlook. The NZD has made fresh lows over the past 24 hours, trading down to around 0.6325 overnight, its lowest level since June 2020, while the AUD has fallen through 70 cents, also hitting its lowest level since mid-2020. Both the NZD and AUD are down more than 1% since the end of last week.
Of the majors, the EUR and JPY have held up relatively well for the second session running, despite broad-based USD strength against most currencies. USD/JPY briefly hit a fresh 20-year high of 131.35, but it has since reversed lower as Treasury yields have fallen away, now hovering just above 130. The EUR is essentially unchanged on the day too, trading just above 1.0550.
Fonterra yesterday lowered its 2021/22 milk price forecast, citing, amongst other things, the impact of lockdowns in China and the Ukraine war which are dampening demand. The mid-point of its forecast range has been lowered from $9.60 to $9.30, which would still be a record payment for farmers, and we have shifted down our forecast to the same level. Fonterra is due to make its first forecast for the new (2022/23) season by the end of May. Our current milk price forecast for that season, once it is complete, is $8.90.
Despite the big move higher in offshore rates on Friday night, NZ rates were impressively resilient yesterday, for a change. The 2-year swap rate was slightly lower on the day, at 3.88%, while the 10-year rate was only 2bps higher, significantly outperforming (i.e. rates increasing by less than) the US and Australian markets during our time zone. The market still prices a peak in the cash rate of above 4% next year and a high chance of 50bps increases at the coming three meetings. We should expect a sharp fall in NZ rates when trading opens this morning given the turnaround in bond markets overnight. Australian bond futures are down 4-8bps in yield overnight.
There are more Fed officials on the speaking circuit tonight including New York Fed President Williams and Fed Governor Waller.