Market participants remain alert to the risk of intervention to support the yen, which has increased the cost of protection. European stocks advanced, with the Euro Stoxx reaching an all-time high. FX and rates markets saw only modest moves

It was a quiet end to the trading week for global asset markets with US cash equity and bond markets closed for a public holiday. S&P futures were up about 0.5% compared with the previous close. Major indices in Europe advanced with the euro Stoxx closing at a record high. Currency and rates markets were subdued in the absence of economic data or other catalysts. Brent crude prices were steady near US$72 per barrel.

Traffic through the Strait of Hormuz has rebounded as confidence builds in the US-Iran 60-day ceasefire. Tracking data indicates transits rose from one or two a day during most of the conflict to eight. Volumes remain well below prewar levels, but the increase suggests shipowners are using the calmer window to move stranded vessels and capture elevated freight rates.

Crude output surged last month as Persian Gulf members restored exports through the strait. Production rose by 2.34 million barrels a day to 18.75 million, led by Kuwait, Saudi Arabia and Iran. The supply rebound is creating pockets of surplus and raising the risk of renewed competition for customers.

The cash treasury market was closed and 2-and 10-futures prices indicated modest changes. The implied yield on 10-year notes from the futures increased by about 1bp to 4.49%. German yields were 3bp higher across the curve.

Currency markets were subdued, with only small net changes across G10 currencies relative to the local close. NZD/USD edged up towards 0.5725 in early European trading, its highest level in about two weeks, before retracing but still ending the week above 0.5700. The NZD was broadly stable on the key crosses.

USD/JPY fell to 160.50 before rebounding to near unchanged, as market participants remained alert to potential intervention amid speculation that Japanese authorities may become less predictable in their approach. One-week dollar-yen risk reversals have become more negative, reaching their lowest level since January and suggesting greater demand for protection against large downside moves in USD/JPY.

The European Central Bank should remain alert to inflation risks and keep its policy options open, according to Governing Council member Joachim Nagel. Nagel said conditions remain “very volatile” and that the ECB would approach its current challenge in a “very pragmatic” way. Market pricing implies the ECB will leave rates unchanged at its 23 July meeting, while assigning roughly a 50% probability to a 25bp hike in September.

NZ consumer confidence rose in June as lower fuel prices eased pressure on household disposable incomes. The ANZ index increased to 91.3, from 86.5 in May and 90.3 in April. However, the seasonally adjusted gain was smaller, and the level remains weak, suggesting little near-term lift in retail spending.

There was limited movement for NZ rates in the local session on Friday. 2-year swaps dipped 1bp to 3.38% with a marginal lift further out the curve. 10-year closed up 1bp at 4.11%.

There is no domestic or regional data in the day ahead. The US Services ISM likely remained in expansionary territory in June, though it is expected to soften after jumping to 54.5 in May. The NZ week ahead is headlined by Wednesday’s RBNZ meeting, with the manufacturing PMI released a day earlier than usual due to Friday’s public holiday. The international calendar is quiet, with FOMC minutes from Kevin Warsh’s first meeting as chair due, alongside China CPI and PPI data.

Stuart Ritson is the senior Interest Rates Strategist at BNZ Markets.