13th August 2019 -

Good morning


• Holidays in Singapore, Japan and elsewhere in Asia contributed to a quiet start to the week, with AUD trading tight ranges around 0.6780 and the ASX 200 closing almost flat. This was at least a rejection of Wall Street’s negative lead into the weekend. Dalian iron ore futures slid about -5% then rallied back to nearer -1% late Sydney.

• Risk sentiment has picked up where it left off on Friday - or rather fallen down further - with a confluence of factors responsible, for once none of them directly attributable to President Trump’s Twitter feed.

• The closure of Hong Kong airport after thousands of demonstrators thronged the arrival and departure halls, a mini collapse in the Argentine peso after incumbent President Mauricio Macro lost a pre-election primary by 15.5 percentage points to the populist opposition party, and China July credit data showing the broad Aggregative Financing numbers more than halving versus June and so aggravating concerns that China is not going to fully offset the hit to its export sector from the trade dispute, have all contributed to the risk-off tone.

• US equities have closed with losses of between 1.2% (NASDAQ) and 1.5% (DJIA). All 12 S&P500 sub-sectors are in the red led by financials (-1.9%) with the latest fall in yields and further flattening of the yield curve adding to concerns about banks’ net interest margins. The energy and materials sectors, -1.5% and 1.6% respectively, have fared next worse, symptomatic of deepening concerns over prospects for the global economy, even though oil and most hard commodity prices are actually little changed since the end of last week.

• The sharp rise in risk that Argentine’s reformist (and austerity minded) President Macri will be ousted by the populist opposition that included former left-leaning President Cristina Fernandez, has seen the Argentine peso fall as much as 38% before recouping about half of the losses. Its 100-year US dollar bond traded almost 25% lower at a cash price of 57 cents in the dollar, implying a high chance of default (which the sovereign CDS market puts at around 75%). Incidentally, if you’d bought Austria’s 100 year bond at the end of 2018 (now yielding just over 1%) you would currently be sitting on a YTD return of 66%. So if you are wondering why folks continue to buy bonds with negative yields for reasons other than safety, here’s your answer.


• US 2yr treasury yields fell from 1.63% to 1.58%, the 10yr yield from 1.73% to 1.64%. Markets are pricing 32bp of easing at the 19 September Fed meeting, and a terminal rate of 1.02% (Fed funds rate currently 2.13%).

• Australian 3yr government bond yields fell from 0.66% to 0.63%, the 10yr yield from 98% to 0.91%. Markets are pricing 12bp of easing at the 3 September RBA meeting, and a terminal rate of 0.37% (RBA cash rate currently at 1.0%).

• Market pricing for RBNZ is for 6bp of easing on 25 September, with a terminal rate of 0.64%.

• Credit markets also diverged with Europe seeing IG a bp wider but cash spreads a touch firmer on the session as primary markets again remained closed for FIG and corporate issuers. The US, conversely saw IG out 2.5bp, cash spreads under pressure again as sentiment waned, but an active primary session that included 9 issuers looking to sell of USD11bn in bonds with Daimler (USD4bn across 4 tranches) leading the way in volume terms.

• Finally bond market sees the 10-year US Treasury yield down 10bps to 1.645%, a new post-September 2016 closing low. The 2-year is down 6bps. In Europe, Germany’s 10 year Bund loses another 1.5bps to close at a new record low of -50bps, while Italy 10-year BTP clawed back 10bps or so of its recent yield back up after avoiding a rating downgrade from Fitch on Friday night.


• Crude markets were mixed with WTI up $0.43 at $54.78 and Brent down $0.24 at $58.29. Comments late last week from an unnamed Saudi official suggesting the kingdom would keep exports below 7mb in September, plus the analyst call for Saudi Aramco which noted that capital spending had been curbed by 12% in the past year helped sentiment. Developments in Argentina and Hong Kong had the opposite effect. Trafigura confirmed it was beginning Cactus II oil pipe shipments from the Permian Basin to the Gulf, adding further weight to the Brent-WTI spread which narrowed again to $3.75, the narrowest level for that spread back to Q1 2018.

• In metals, the focus remained on the potential bringing forward of Indonesian export bans. After an Indonesian minister confirmed the country will expedite the ban Monday, another minister said he was not aware of plans driving swings of circa $1,000 for nickel, though it managed to close 1% higher.

• Iron ore continued its sell off with SGX again trading below $84 while Dalian iron ore also saw its lowest close back to March/ April. Traders will be watching FAI/ IP data closely tomorrow, but the week loans/ credit data added to the market concern.


• AUD is the weakest G10 currency overnight, down 0.5% after flat-lining during the holiday-thinned APAC session yesterday. AUD fell from 0.6790 towards 0.6745 in the London morning.

• EUR bounced off 1.1162 to 1.1215, up slightly on the day. Italy is stepping closer to a vote of confidence in Conte as PM that may see the end of the current fragile 5 Star/League coalition. This may result in another coalition being formed, a caretaker technocrat government being appointed or flash elections. The last option is what Salvini wants, but he may be thwarted given the need for a budget to be passed in September. The rebound in the EUR and sharp rally in Italian government bonds (10 year yield -11bp to 1.70%) indicates an expectation that a technocratic government is more likely.

• USDJPY has fared best, USD/JPY extending losses during our time zone to be -0.37% to ¥105.29.

• CHF has fared similarly, +0.35% despite evidence from weekly SNB sight deposit data that that the central bank is back intervening to limit the extent of CHF appreciation.

• GBP meanwhile has recouped a bit of last week’s post-negative GDP weakness, on reports that remain-supporting MPs are drawing up plans to take control of the legislative agenda on the 9th of September, the week after parliament returns from recess, in an attempt to constrain Boris Johnson’s government from going ahead with a no-deal Brexit.

Coming Up

• RBA Assistant Governor Christopher Kent speaks at 8:00 AEST on: The Usual Transmission – Monetary Policy and Financial Conditions

• NAB’s July Business Survey is at 11:30. In June, Business Conditions rose from 1 to 3 and Business Confidence fell to 2 from 7, the latter reversing the bounce in the May survey that immediately followed the 20th May federal election.

• Offshore, in Europe we get the German ZEW survey of financial analysts (se falling on both the Current Situation and Expectations measures) UK labour market data, where the unemployment rate in the 3 months to June held at the cycle low of 3.8%

• The US has the NFIB survey (small business optimism) and CPI. One point of interest in the latter is whether it shows up any impact from the lift in tariffs from 10% to 25% announced in May but which only really started to take effect in July when Chinese imports hit US shores. Consensus for the core (ex food and energy) measure is 0.2% on the month versus 0.3% in June, for an unchanged 2.1% yr/yr outcome.

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