Risk appetite has begun the new week on a sour note, with weaker global equity markets, lower global rates and USD strength continuing. Many currencies have printed fresh multi-year or multi-decade lows against the strong USD. The NZD dipped its toe below 0.61 overnight.
There hasn’t been much news to kick off the week but in a big week ahead, market nerves are fraying, seemingly concerned about the prospect of yet another lift in annual US CPI inflation, edging towards 9% when data are released Wednesday night, and the beginning of the US earnings season, which is bound to throw up some potholes and weaker forward-looking commentary. Bad news out of China over the weekend hasn’t helped sentiment.
China’s COVID case numbers have been increasing over the past week, with more than 2300 locally transmitted cases across the country over the past seven days. This includes Shanghai, where the case count of 69 for Sunday was the highest since late May and the first case of the more contagious BA.5 omicron variant was found. This triggered more mass testing and localised restrictions. Flare-ups have also been evident in other regions. Macau has shutdown for a week after a further lift in case numbers. Adding to weaker risk appetite, the Chinese government fined some of the country’s largest internet companies for failing to make proper antitrust declarations, a jolt for those believing that the government was pushing back on its earlier technology company crackdown.
Dataflow has been light, but China credit growth was much higher than expected, with aggregate financing of CNY5170 in June, one of the highest monthly totals seen over the past five years, evidence of some easing in credit conditions and fiscal support by the government. However, whether this translates into economic growth is another matter, given a much weaker credit multiplier these days and rolling COVID-related restrictions.
The S&P500 has been in negative territory since the open and is currently down about 1%. The Euro Stoxx 600 index closed down 0.5%. The risk off backdrop has seen a bid for safe-haven assets, with global rates lower, unwinding some of the chunky lift on Friday night after the strong US payrolls data. The US Treasuries curve shows a flattening bias, with the 2-year rate down 4bps to 3.07% and the 10-year rate down 9bps, to be back just below 3%, taking the 2s10s curve deeper into negative territory. European 10-year rates are down in the order of 7-10bps.
In Fed-speak, Kansas City Fed President George, who dissented against last month’s super-sized 75bps hike in favour of 50bps, said that “communicating the path for interest rates is likely far more consequential than the speed with which we get there…moving interest rates too fast raises the prospect of oversteering”, a nod to the increased chance of recession that a rapid rise in rates might bring. St Louis Fed President Bullard presented an opposing view, saying that the US economy is healthy and shows little sign of an imminent recession, and can withstand higher interest rates. Like others on the committee, he supported another 75bps hike later this month.
The flight to the safety of the USD has been evident in currency markets, with dollar indices up in the order of 0.9% for the day and most majors trading at fresh multi-year or multi-decade lows. The AUD has been the worst performer, down 1.7% from last week’s close to 0.6740 and trading down at a 2-year low of 0.6715. The NZD is down 1.1% to 0.6120 and took a peek just below 0.61 overnight, a fresh 2-year low. NZD/AUD shows a steady lift to 0.9080. GBP also fell to a 2-year low of 1.1867 and currently trades about 1.19.
EUR and JPY have traded at their weakest levels in 20 years and 24 years respectively, with the now well-acknowledged factors remaining in play. In the case of EUR, fears of the energy crisis going from bad to worst hangs over the region as well as belief that the ECB is unlikely to match the Fed’s rapid tightening cycle. The Nordstream 1 gas pipeline between Russia and Germany was shut down for its scheduled maintenance and there are fears that it won’t be re-opened on 21 July when the maintenance period ends. As we noted yesterday, power rationing in Germany is already a feature of the energy market and a prolonged shutdown in the gas supply would be an economic tragedy.
EUR has traded down 1.2% to 1.0053 and this could be the week that parity is broken, the question being how far below it goes and for how long. As noted in our weekly currency update yesterday, NZD/USD and EUR/USD have been high correlated over recent months and in fact since 2018. A weaker view on EUR naturally leads to a weaker view on the NZD and there remains a good chance of the NZD trading below 0.60 sometime this quarter.
In the case of the yen, some in the market are seeing the increased majority of the LDP party in the weekend’s upper house election as a quasi-referendum on the country’s ultra-easy monetary policy. Thus, downside pressure on the yen has continued and USD/JPY has traded as high as 137.75.
The domestic rates market played catch-up to Friday night‘s global move higher in rates along with some spread widening after some outperformance during last week. Swaps and NZGB yields rose 7-10bps across the curves. Expect to see some retracement of that move, with the Australian 10-year bond future down about 8bps in yield terms since the NZ close. Local trading will remain closely tied to global markets, ahead of Wednesday’s RBNZ MPR, where a 50bps hike is universally expected and a “no-surprise” sort of statement is expected.
The economic data is light over the next 24 hours with only second-tier releases.
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