The beginning of the third quarter has got off to a rough start, with falling risk appetite seeing weaker equity markets and the NZD and AUD diving to fresh lows. Despite the negative risk tone, global bond yields remain steady.
Yesterday we reported the bad headlines over the weekend and suggested that it didn’t look like a good start to the week for risk assets. Political uncertainty in Germany and escalating tensions on global trade, centred around President Trump’s policies and possible retaliatory action, dominated the headlines. During the local trading session, Asian equity markets fell and futures for European and US markets declined. Overnight, the euro-area’s Stoxx 600 declined by 0.8%. The S&P 500 was down 0.6% when I woke up but now close to flat as I sign off.
On German politics, Merkel is currently meeting the Bavarian coalition leader of the CSU party Seehofer. We await an announcement, with the result being no change to the status quo, allowing Merkel to govern, or a break-up that could see Merkel run a minority government or call fresh elections.
There have been no major developments on the global trade front. It still all looks pretty ugly, with Trump expected to impose the promised extra tariffs on $50b of China imports at the end of the week and China likely to follow with retaliatory action. Meanwhile, the EU is preparing its moves against Trump’s threats to put tariffs on the auto sector. The late turnaround in the S&P500 might reflect some more positive comments by Trump to reporters this morning, saying he’s close to making a “fair” trade deal with the EU. He also said that he isn’t planning anything on WTO membership for now but may do if the organisation isn’t fair to the US – a response to a weekend report that the US was looking to ignore WTO trade rules, effectively withdrawing.
The NZD held up surprisingly held during the local trading session when everything was pointing to a decline in risk appetite, hanging in around the 0.6770 mark, but after the close it has been all downhill and the currency made a fresh 2-year low overnight of 0.6690. The currency currently sits 1% lower for the day near 0.6700. The only remaining support level close by is the May 2016 low near 0.6675 and a break of that would open up the threat of moving sub-0.65.
The NZD has been in good company, with AUD falling by a similar amount, currently down 1.1% to 0.7320. NZD/AUD is thus fairly steady around 0.9150. Both Antipodean currencies have been hit the hardest of the majors, given their strong link to China, the centre of Trump’s trade deficit obsession. CNY is also proving to be weak, as investors contemplate the possible weak global trade environment and softer Chinese economy. USD/CNY is up 0.7% to 6.6680, an eight-month high, with CNY weakness over recent days more a reflection of market forces than any PBoC encouragement regarding the daily CNY fix.
In global economic news, China’s PMI manufacturing data, both the official and Caixin versions, were marginally softer than expected, final manufacturing PMI data for the euro area was revised down a touch and Japan’s Tankan large manufacturer’s index was a touch weaker than expected – small misses but not helping market sentiment. By contrast the US manufacturing PMI was much stronger than expected, but largely driven by one component, slower supplier deliveries, a sign of further capacity constraints and therefore inflationary pressure in the economy. This news might be behind US Treasury yields not falling in the risk-off environment. The 2-year rate is up 2bps to 2.54% while the 10-year rate is flat at 2.86% after being as low as 2.82% last night. Comments in the survey showed that respondents are “overwhelmingly concerned about how tariff related activity is and will continue to affect their business”.
The USD has been the strongest of the majors, with the various USD indices up in the order of 0.4-0.6%. EUR is back flirting with 1.16 and GBP down to 1.3120. The safe-haven yen has held up better at 110.90. The NZD is down 0.4-0.5% against EUR and GBP to 0.5775 and 0.5105, and down 0.8% on NZD/JPY to 74.3.
Today, the NZIER’s quarterly survey of business opinion will provide more information on the state of the economy, likely to show further slippage in activity indicators and rising inflationary pressure, an awkward mix as the RBNZ decides the appropriate course of monetary policy. The RBA’s meeting should be a non-event although the market will be interested if any concerns are raised about the global trade and economic outlook, which could easily be interpreted on the dovish side. The GDT dairy auction tonight is expected to show some modest slippage in USD pricing.
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