Bonds and equities have been hit as investor appetite for both soured; UK 30-year rate rises to its highest level since 1998. Global rates moderately higher and US and European equities lower, down more than 1%

Bonds and equities have been hit as investor appetite for both soured.  Global rates are modestly higher across the board and US and European equities are lower, down more than 1%. The USD is broadly stronger, and GBP has underperformed, falling more than 1%.  The NZD has fallen to 0.5860 while NZD/GBP is stronger.

Price action was off to a bad start from the European open, with rates jumping higher and headlines that UK 30-year gilt yields had risen to their highest level since 1998 alongside a slump in GBP.  The combination of higher rates and a weaker currency is not good, with focus on the next UK Budget and investors losing confidence in the direction of UK fiscal policy. The 30-year yield rose to as high as 5.72%, before closing the session up 5bps to 5.69%. The 10-year rate also rose 5bps, to 4.80%.  For reference, the 30-year rate got as high as 5.66% during the 2022 Liz Truss sell-off, although the speed of selling pressure in that episode was more worrisome when yields surged more than 60bps over a couple of trading sessions.

Higher UK rates spilled over into the rest of Europe.  France, of course, faces its own pressures due to political instability and worries about the size of the fiscal deficit, while a long-planned reform of the Dutch pension system, which transitions to a new system from 1-January, is causing some anxiety in that market. The respected ECB Governor Schnabel’s call for steady interest rates, saying policy may be mildly accommodative, and inflation risks were tilted to the upside didn’t help European bond market sentiment either. European 10-year rates rose 4-5bps for the day.

Coming back from a long weekend, US investors were in no mood to support the bond market, seeing red across European markets, a surge in forthcoming corporate debt sales and wondering whether bond supply will need to pick up down the track if tariffs are eventually deemed illegal by the Supreme Court. The US 30-year rate made a run up towards 5%, before retreating after not quite getting there. Yields are up 4-5bps across the curve with a slight steepening bias.  The 10-year rate currently trades at 4.28%.

The backdrop of higher bond yields and strategists highlighting that September is seasonally the worst month of the year for equities, made for a cautious start for September trading in US equity markets. The S&P500 fell as much as 1.5% before attracting some dip-buyers and the loss has faded to just over 1%.

In economic news, the US ISM manufacturing index rose from 48.0 to 48.7, slightly less than the 49.0 expected.  The report was mixed, as new orders rose to 51.4, its highest reading since January, while employment remained subdued, barely rising to 43.8. Prices paid fell to 63.7, its lowest level since February, possibly indicating that the impact of tariffs on raw materials has faded, although that doesn’t mean the same applies for consumers.

Euro area CPI inflation ticked up to 2.1% y/y in August while the core measure was steady at 2.3%, both at the higher end of consensus. The data reaffirmed market expectations that the ECB will pause the easing cycle, and it could well be finished.  ECB policy makers have recently conveyed that message, adding to the chorus that policy is now on hold.

In currency markets, there was early pressure on GBP and losses were sustained, with the currency down more than 1% to 1.3375.  The USD showed that it hasn’t lost its safe-haven credentials, rising against all the key majors and dollar indices showing gains of 0.6%.

The NZD fell to an overnight low just below 0.5840 and currently trades at 0.5860. The NZD is slightly weaker against AUD and EUR, down to 0.8995 and 0.5035 respectively, while higher global bond yields have seen yen underperformance, and NZD/JPY is slightly higher 87.0.  The largest cross movement has been a lift in NZD/GBP to 0.4380.

Gold prices rose to a fresh record high, with the spot price up to USD3530 per troy ounce.  Oil prices are also higher, with Brent crude up 1½% to a USD69 handle. Dairy prices fell at the overnight GDT auction, with the price index down 4.3%. Dairy prices often fall at this time of year as the NZ milking season cranks up.

In the domestic rates market, there was upside pressure from the open. Swap rates rose 2-4bps while NZGBs rose 1-5bps, with curves steepening.  The 10-year NZGB closed up 5bps to 4.42%.  Overnight, Australian bond futures have shown less movement than seen in US and European markets, with the 10-year yield up only about 2bps.

NZ’s terms of trade data were much stronger than expected, rising 4.1% q/q in Q2 to a record high. That also meant a stronger than expected contraction in net goods exports, with export volumes falling 3.7% q/q and import volumes rising 4.8%.

On the calendar today, the consensus sees Australian Q2 GDP rising by 0.5% q/q, resulting in annual growth of 1.6% y/y. Tonight sees the release of the JOLTS labour market report in the US and the Fed’s Beige Book, which provides timely anecdotal commentary on the state of the US economy.