Risk sentiment has soured as global recession fears grip the market. US and European equity markets are weaker, global rates are lower, many commodity prices have tumbled more than 5%, and the USD has surged over 1%. The NZD and AUD fell to fresh 2-year lows overnight, while the EUR and GBP have performed even worse, the former down to a 20-year low.
After a long weekend, US market participants have returned in a bad mood with the “recession trade” taking hold in driving risk assets weaker. Things turned to custard from the European open on no specific news, indeed newsflow has been relatively light. If anything, prior to that, the mood had been chirpier, following media speculation that sometime this week Biden would rollback tariffs on some Chine imports.
The Euro Stoxx 600 index fell by 2.1% and the S&P500 was down as much as 2.2% in early morning trade, before staging a notable recovery, the index now down less than ½%. The Nasdaq index has gone against the grain and is currently up over 1%.
Oil prices have plunged about 10%, with Brent crude trading down to USD101 per barrel and WTI crude down to USD97.50 on heightened global recession fears. On the 24-hour news cycle, Citigroup’s “crude could fall to $65 this year” is getting more attention than JP Morgan’s “crude could rise to $380” call. US average gasoline prices have fallen for 21 consecutive days, for a cumulative fall of 4.3% which will provide some instant relief to headline CPI inflation for June and July figures.
Other commodity prices have also tumbled including more than 5% falls for soybeans, corn and copper, the latter down to a 19-month low. Many other base metals also fell, but not as much.
Going against the grain, European gas prices surged to a four-month high as oil workers in Norway launched a strike due to a dispute over wages. Three gas fields were shut and there are plans to shut more down. The strike has reduced Norway’s gas exports by only 1% so far, but the Norwegian Oil and Gas Association said that this could rise to 56% by the weekend, which would hit exports to the UK as well as the EU. The strike was a reminder of the vulnerability of European energy supply at a time when Russia has throttled gas supplies. We see the lack of energy supply as a major headwind for the euro area through the rest of the year and particularly as winter approaches later in the year.
The energy crisis centred in Europe has seen a more bearish tone develop there than elsewhere, evident in currency markets with European currencies hit the hardest. EUR is down 1.5% on the day to 1.0260, trading at its lowest level in nearly 20 years and with calls for a move to parity getting louder. GBP hasn’t fared much better, down 1.4% to 1.1950, with the macro backdrop more the issue than the ugly political backdrop. The UK government remained in disarray, with two senior ministers resigning from the cabinet, Chancellor Sunak and health secretary Javid, and media speculating that Boris Johnson’s days as PMs are numbered. NZD/EUR has returned to a 0.60 handle, while NZD/GBP is up through 0.5150.
The NZD hit a fresh 2-year low of 0.6125 and currently trades around 0.6160. With the big falls in oil and hard commodities, the AUD has fallen by more, down to a 2½-year low of 0.6762 and now 0.6790. NZD/AUD is up modestly to 0.9070. The latest GDT dairy auction, held during a turbulent time in markets, saw a 4.1% fall in the price index, the seventh fall of the past eight auctions.
The RBA didn’t surprise the market, with a well-anticipated 50bps hike taking the cash rate to 1.35% and with the key outlook statement the same as last month, the Bank keeping its options open in terms of the pace of further tightening based on incoming data and the Board “committed to doing what is necessary to ensure that inflation in Australian returns to target over time”.
The USD DXY index is up 1.3% to a fresh 20-year high of 106.5, amidst the hit to the European currencies and the currency seeing safe-haven flows. The yen has also been well supported against a backdrop of lower global rates, with USD/JPY steady at 135.70. NZD/JPY has fallen to 83.5.
German 10-year rates continue their run of moving more than 10bps each day, this time to the downside, falling 16bps to 1.17%. US Treasuries show some curve flattening, with longer rates falling by more than short rates, and with higher rates seen during NZ trading hours reversing significantly during the overnight session. The 2s10s curve is back to being inverted, although only just. From Friday’s close, the 2-year rate is down 2bps to 2.82% and the 10-year rate is down 7bps to 2.81%, the latter having traded as high as 2.98% during the NZ afternoon and as low as 2.78% early this morning.
In yesterday’ s economic news, the Caixin China PMI services index, a survey which has a higher weighting to smaller firms, bounced back strongly in June, with the 54.5 reading close to the official PMI non-manufacturing index and well above expectations. However, the bounce-back reflected the easing of COVID restrictions and the flare-up of COVID over the weekend in some parts of the country with new lockdowns, means one should remain very cautious on China’s growth outlook, with lockdowns a likely recurring theme through the rest of the year under the strict zero-COVID policy.
NZ’s quarterly survey of business opinion showed a poor set of confidence and other activity indicators and heightened inflationary pressures – consistent with the monthly ANZ survey and with the stagflation theme that has been evident for some time now. We also read into the survey that the outlook is so bad that the heat will be taken out of inflation in due course, and potentially quite a lot. This should probably make the market careful about extrapolating OCR increases too much, and too far, into the future.
The domestic rates market remained at the whim of global forces, seeing much higher rates across the NZGB and swaps curves, with rates up in the order of 7-10bps. That already feels like old news, with the Australian 10-year bond future down some 20bps in yield terms since the NZ close, about 5bps of that reflecting the RBA statement not as hawkish as some feared and the rest reflecting the overnight global rates move.
The key economic release tonight is the ISM services index, where the consensus is picking a nearly 2-point fall to 54.0 to a two-year low but, given the run of negative surprises, a larger drop would seem the greater risk. The FOMC minutes of the June meeting in which the Fed did a super-sized hike of 75bps shouldn’t convey much new, given the plethora of speakers since that meeting.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.