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Risk sentiment improves as markets gain confidence in a Euro solution

Risk sentiment improves as markets gain confidence in a Euro solution

By Mike Burrrowes and Kymberly Martin

NZD

The NZD was the top performing currency, after the AUD, over the past 24-hours. It gained 1.8% relative to the USD. The NZD/USD currently trades around 0.7980.

The NZD has now shown a sharp ‘V’-shaped recovery from its early October lows below 0.7500, as global risk sentiment has improved. Despite some delay, Slovakia confirmed it has reached an agreement to ratify the extension to the EFSF. Broadly, the market appears buoyed by prospects that EU leaders will announce some decisive action on the European debt crisis by early next month. Europe also received a rare positive data surprise overnight in the form of Eurozone industrial production.

In this backdrop of improved risk sentiment the NZD has risen steadily against a broadly weaker USD, from 0.7850 last evening to 0.7980 currently. The EUR was also strong overnight, but the NZD/EUR still managed to eke out gains. It rose from 0.5720 to 0.5780 this morning.

Trading in the NZD/AUD has been quite choppy over the past 24-hours. As Australian yields have surged, the NZ-AU 3-year swap spread has become less supportive to the NZD, moving from -95bps to -109bps. The NZD/AUD traded to 0.7870 last evening, before easing off overnight to around 0.7830.

The NZD has made steady headway relative to the comparatively lackluster GBP. The NZD/GBP moved up from 0.5000 to 0.5070.

In the day ahead, global risk sentiment will likely be the key driver of the NZD, although we receive three NZ data releases today: the NZ PMI which we expect to remain above 50, in expansion territory; the food price index; and the ANZ consumer confidence index.

Majors

As the market continues on its “happy” streak, the USD underperformed along with the “safe haven” JPY. “Risk sensitive” AUD and NZD were the strongest performers.

Overnight, global risk appetite continued to improve. Equities gained 2.4% on the Euro Stoxx 50 and the S&P500 is currently up 1.8%. Global commodity prices have held onto recent gains and are now up 6% over the week (CRB index). Our risk appetite index (scale 0-100%) has moved up to 32%.

A positive data surprise also came in the form of Eurozone industrial production data for August. It rose 1.2%m/m (-0.8% expected) to be up 5.3% y/y. The EUR/USD moved up firmly from 1.3650 to 1.3820.

By contrast, Alcoa’s (an aluminium producer) launch of the US Q3 earnings season was a little disappointing. The company stated that European aluminium users had “dramatically” cut orders. They said they saw slowing growth in H2 from North America, Europe and Brazil. Despite these comments, from a company that is a barometer of global growth, risk sentiment was not dented. In this backdrop and given EUR strength, the USD index declined from 77.60 to 76.90 overnight.

The AUD was the strongest performing currency over the past 24-hours, rising over 2.0% relative to the USD. Yesterday the Westpac survey showed Australian consumer sentiment inched higher (96.9 to 97.2) albeit at low levels. The currency was also underpinned by the continued rise in Australian yields (see below) and general improvement in risk sentiment. The AUD/USD broke above parity to trade around 1.020 currently.

The GBP was also dragged up on the coat-tails of the EUR overnight, despite UK labour market data that was slightly weaker-than-expected. It showed the Aug unemployment rate ticked up to 8.1% form 7.9%. The GBP/USD moved up from 1.5600 to 1.5750.

Today we get Australian employment data, German CPI and UK and US trade balance releases.

Fixed Interest Markets

It was another relatively quiet day in NZ fixed interest markets. Yields inched a little higher with a curve steepening bias.

In bond markets the yield on 21s rose as high as 4.56% intraday before falling in the afternoon to close up just 3bps, at 4.53%. The yield on 13s ticked a little lower to 2.89%. The DMO announced its auction for today with 125m of 13s, 50m of 21s and 50m of 23s on offer.

Swap yields closed almost unchanged at the short-end. The 2-year yield, at 3.13%, continues to bob around above recent lows. Yields managed to creep a little higher at the long-end with 10-year yields closing at 4.58%. The 2s-10s curve has steepened to 145bps, up from lows of around 127bps three weeks ago. Swap bond spreads remain just above zero. We expect them to remain in positive territory, before increasing over the medium-term.

Yesterday, Australian yields continued their sharp move higher. 3-year swap yields moved another 13bps higher to 4.46% having been at 4.05% just over a week ago. As global risk sentiment has improved, Australian yields have surged, although markets still price around 130bps of rate cuts from the RBA in the coming year. The NZ-AU 3-year swap spread widened from -95bps to -109bps yesterday.

Overnight, as equity markets continued their rally, US 10-year yields soared from 2.13% to 2.26% their highest level since late August. An auction of 10-year Treasuries attracted weaker demand than of late, at 2.86x bid-to-cover ratio. The auction drew a yield of 2.27%, suggesting demand for “safe haven” bonds is fading as the market takes a breather from risk aversion. German 10-year bond yields also moved up steadily from 2.06% to 2.18%.

The key NZ data release today will be the PMI (manufacturing index) that we expect to remain above 50. i.e. in expansion territory. NZ yields should feel upward pressure at the open, given the strong rise in offshore yields overnight, and solid equity market performances.

See our interactive swap rates charts here and bond rate charts here.

Mike Burrowes and Kymberly Martin are part of the BNZ research team. 

All its research is available here.

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6 Comments

 

I’ve a strange habit of watching the Wheat market, It tells a lot about the speculative nature of commodities and a warning to us all that we live in dangerous times.

  The Wheat price shot through the roof after Bernake poured money into the system to avert collapse or Armageddon or however your imagination views the end time, the farmers response as I expected was to increase production but the weather conspired against growers for a few years, or until now.

 If you look at this graph then you will see the wheat price for the past year

 

http://finviz.com/futures_charts.ashx?t=ZW

 

 Now the warning starts, two days ago Russia announced that its restricting exports so as to keep more reserves

>>>> 

 

Grain prices spiked after Russia revived plans for grain export duties amid fears that its surging pace of shipments would deplete inventories.

Viktor Zubkov, the Russian deputy prime minister who in June voiced proposals for a levy, said on Tuesday that the government was considering reviving the plan to prevent its grain stocks falling below 15m-16m tonnes.

Chicago corn for December locked up the exchange maximum of $0.40 a bushel at $6.45 a bushel.

>> 

 also this rumour

>>>> 

China is rumoured to have bought at least six-to-eight cargoes of American soybeans, with markets also echoing to talk that a key US government report published on Wednesday will reveal tighter numbers on domestic crop supplies than investors have priced on.

>>>> 

 The price rose %8.1 in one day.

 

This morning we have some ore news this time on the other side of the ledger

>>> 

 

Wheat prices fall as world stocks hit 10-year high

Wheat prices slumped 6% after the US lifted by 7.8m tonnes its estimate for world supplies of the grain, boosted by forecasts of larger domestic stocks and the best harvest in Kazakhstan for 30 years.

 

 

"Producers across the globe have really responded well to higher prices," Sal Gilbertie, president of Teucrium Trading, told Agrimoney.com.

"There would seem to be adequate supplies of wheat."

 

Indeed, with the grain's stocks-to-use ratio - a measure of the availability of supplies and therefore of price potential – increasing to a lax 30%, meaning the world has almost four months of consumption in reserve, the data was viewed a negative for prices.

>>>>>

the effect on farmers income becomes apparent

 

>>>>> 

The US has slashed $6bn from expectations for farmers' income from major crops, citing stronger competition in export markets, which looks set to ease the squeeze in world supplies.

>>>>> 

 

 

Where is the competition coming from, who would have thought these guy’s

 

>>> 

 

 

"This report highlights the increased wheat export competition as a result of the aggressiveness of the Black Sea region," Benson Quinn Commodities said.

>>>> 

 

If ever there was a warning sign that we live in a dangerous speculative bubble the behaviour of the Wheat market this week must be confirmation and is flashing a warning sign to us all, its going to hit across all agriculture commodities including beef and milk products and as the new world start producing, at substantially lowers costs of production compared to old world producers like us,its could get ugly fast, beef is back %20 in two weeks. We could be the last ones to recover and I don’t expect us to return to what we had before, which was mostly caused by banks issuing credit above the growth of the economy creating artificial wealth.

 While I’ve been writing Cotton is in free fall

>>> 

Cotton prices tumbled back below 100 cents a pound after US officials lifted expectations for the world harvest, in data which may have "put the writing on the wall" for ideas of tight supplies.

Rabobank analysts, terming Wednesday's figures "strongly bearish", said that "for cotton prices to remain elevated, support must come from user buying or concerns that a steep correction lower would result in much lower planted area in the spring planting season".

>>> 

 Well if farmers don’t plant Cotton they will plant something else, land wont stay empty, get ready for Agriculture commodities to bounce along the bottom for a while.

 >>>

'Demand minimum'

At Teucrium Trading, an issuer of exchange traded products, president Sal Gilbertie, termed Wednesday's estimates "conservative" on corn use.

 

Indeed, demand data "could not be reduced much more", without an issue such as global economic meltdown or a collapse in energy prices to change radically consumption dynamics.

"At this level, demand is inelastic."

 

>>>> 

interesting time ahead

 

 

 

 

 

 

 

 

 

 

 

Interesting stuff Andrew.

This is one of the most ineresting stories I ever read.

http://www.aei.org/issue/25991

Basically its how oil and grain prices killed the USSR. Fascinating.

That is a great read, I was in the eastern block after the wall came down. He hasn't mentioned the transport system but the people all talked about the food rotting in railway yards all over the soviet block, in some years they believed up to %40 of Potatoes rotted on wagons lost at a railwaysiding somewhere as the delivery infrastructure had collapsed, a friend thought that it was much higher for all perishable foods. All i can say is that the stores were empty of food, people followed me in to see what I would buy but the shelves were emptyed as soon as food arrived. I have photo somewhere of a cobine broken down in a field, the crop has been harvested up to where it broke down, a year later it was still there with weeds all around and 100's of acres of wheat rotted on the ground. There was fantastic land unused all around the black sea, looks like its now producing, John Deere were investing heavily in the area.

 Now we get to the middle East where their population growth has way exceeded the ability to feed their people without importing large amounts of grain, the food they do grow is hugely dependent on energy.

http://faculty.nps.edu/relooney/00_New_1009.pdf

 

http://www.nytimes.com/2007/01/18/news/18iht-oxan.0118.4250941.html

 

 Thanks for a very thoughtful article, need to think about it some more.

Yes, the Stratfor guys seemed to think the North Africa stuff was to do with population going up past the point where there was an oil surplus to buy food with.

As I understand it Eygpt used to have an oil surplus but now it uses all its oil production. It now has something like 48 million people and produces food enough for 23. Something like that, I'm a bit vague with the exact numbers but extremely scary stuff.

 

A good read on it here Roger.then.go down to  Summary Comments regarding  research  and some serious sign posting in where they would like it to go...http://www.egyptianagriculture.com/summary_egyptian_agriculture.html Currently importing about 40% give or take.

 

The fly in the ointment is the Ethanol industry inthe States and Brazil, if demand for oil falls and prices drop then the ethanol industry could deliver us some very uncomfortable surpluses.

(Reuters) - Almost a third of the U.S. corn crop will be used in five years to produce fuel ethanol, possibly raising animal feed costs for farmers and meat prices for consumers, a new government report warned on Monday.

http://www.reuters.com/article/2007/06/11/us-usa-ethanol-corn-idUSN11492...

 

 remember from my article above

Chicago corn for December locked up the exchange maximum of $0.40 a bushel at $6.45 a bushel.

 

This year, but Im not sure we are talkingb the same thing, need to go look at an ethanol plant.

>>>

About 27 percent of this year's corn crop will be used to make ethanol, according to the Agriculture Department. Corn prices are projected to average between $3 and $3.40 a bushel, making up an estimated 74 percent of the cost of producing ethanol, the GAO said.

 

 Thats one hell of a lot of corn

http://www.nass.usda.gov/Charts_and_Maps/Field_Crops/cornprod.asp

 Here are the acres

http://www.epa.gov/agriculture/ag101/cropmajor.html

 

  If the milk price falls then the USA will start a cow culling program and beef prices will fall off a cliff, my concern is that like the old USSR our govermnet is dependent on a few Ag commodities, in a very risky time and has also got engaged in a significant borrowing program, if our commodities collapase wont out GDP contract and won't out debt be out of control, with rising interest rates  asset sales will be forced upon us.

 It would be a great debate to have, I dont pretent to know whats coming, im just seeing what looks like a spinning top slowing down eratic movement and some serious wobbling before falling over. I think we could do a lot better than we are, simply by axing a lot of wasted  government spending.