Newsflow has been lacking ahead of a busy week, but downbeat sentiment on China continues to weigh on the NZD and AUD, both trading at fresh lows for the year alongside the weak yen. Equity markets have started the week on a positive note, while the US 10-year Treasury rate traded at a fresh high of the year overnight.
On a slow news day, after back-to-back weekly falls, the S&P500 has begun the week on a positive note and currently shows a modest rise. The Euro Stoxx 600 index showed a small 0.2% lift.
In the bond market the US 10-year Treasury yield has been mostly range bound, apart from a run up to a new high for the year of 4.21% from the US open before rates smartly fell again and it currently trades at 4.18%, up 3bps for the day. Some curve flattening is evident, with the 2-year rate up 7bps to 4.96%.
Data compiled by Bloomberg shows the largest weekly outflow from the biggest Treasury ETF fund (TLT) since March 2020, with an exodus of more than $1.8b last week. So rather than higher yields attracting investors, one might say that higher yields have been caused by diminishing interest to participate in the market for whatever reason –whether it be fears that rates need to go higher because inflation will remain sticky, fear of the impact of the BoJ’s recent relaxation of its yield curve control policy, the step up in future Treasury supply, or the recent Fitch downgrade of the US sovereign rating putting some focus on the poor US fiscal metrics.
Sentiment on China remains pessimistic, with investors worried about snowballing risks from failed property developers and stress in the shadow banking system. Failing property Country Garden Holdings has been in the press over the past week or so and its bonds now trade below 10 cents in the dollar. Zhongzhi Enterprise Group is the latest name to hit the wires – a large “secretive” financial conglomerate that manages USD138b of assets with tentacles in wide ranging industries and which is now missing payments on its high yield investment products. China’s banking regulator set up a taskforce to gauge outstanding debt and risks at the company, according to a report by Bloomberg.
Hong Kong’s Hang Seng and China’s CSI 300 benchmark equity indices fell further, with both now in negative territory for the year, compared to all other major market indices being positive for the year.
Against a backdrop of poor sentiment on China and a weaker yuan, the NZD, AUD and JPY all hit fresh year-to-date lows against the USD overnight, with a mini-USD rally that proved short-lived. The NZD was weak during local trading hours but a number of attempts to recover back up through 0.5990 failed overnight. The currency traded at a fresh low of 0.5944 as USD/CNH was heading up through 7.29, before both the yuan and NZD recovered. The NZD currently trades near 0.5970, marginally higher from the NZ close. The AUD traded down to 0.6454 and has recovered to 0.6480. NZD/AUD has been tightly bound just north of 0.92.
USD/JPY trades back above 145, a key level which met some resistance at the end of June, but traders seem keen to test the tolerance of the BoJ and MoF for further weakness. Trading is thin due to summer holidays so some heavy verbal intervention might be the first order of business before getting the bazooka out.
EUR and GBP showed similar dips overnight, given USD strength was the driving force but, like the NZD, net moves have been small, so NZD crosses are well contained.
The domestic rates market showed higher yields, playing catch-up to offshore moves on Friday night, with little trading activity going on. Steeper curves were evident and NZGBs were up 4-7bps across most of the curve and swaps were up 3-6bps. The 10-year NZGB closed 6bps higher at 4.89%, its highest close since 2011.
The market ignored the NZ performance of services index, which fell to an 18-month low of 47.8, putting it further into contractionary territory after the previous month’s downwardly revised 49.6. When combined with the very weak PMI, the data paint a picture of recession-like economic conditions extending into the second half of this year.
The calendar in the day ahead is full. Domestically, REINZ housing market data should convey a message of further price stability and activity picking up further from rock-bottom levels.
Globally, another 0.7% q/q lift in Japan GDP, as expected by the consensus, would put it in the realms of being one of the strongest developed countries and we wonder whether the BoJ gets the memo. There is an outside chance of a cut to China’s 1-yr lending rate, although most surveyed think it will come later in the year. Monthly China activity indicators are likely to remain soft, but market expectations have already been beaten down after a poor run of data. In Australia, the wage price index is an important input into future RBA decisions, expected to be 0.9% q/q.
Tonight sees the release of important labour market data in the UK, Canadian CPI data and US retail sales, all of which have the potential to move the market.
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