Global equity markets fell on Friday contributing to the largest weekly pullback since the US regional banking crisis began in March amid concerns about the growth outlook. Advance PMIs for June suggest that the Eurozone economy has slowed sharply

Global equity markets fell on Friday contributing to the largest weekly pullback since the US regional banking crisis began in March amid concerns about the growth outlook. The S&P lost 0.8% resulting in a weekly pullback of nearly 2%. Surveys of purchasing managers (PMIs) pointed towards slowing activity particularly in Europe. The US Dollar made broad based gains amid the weaker risk sentiment while bond yields fell. Rising geopolitical risks and uncertainty created by the armed uprising in Russia may also undermine investor sentiment.

Advance PMIs for June suggest that the Eurozone economy has slowed sharply with the service sector PMI dropping more than expected and the manufacturing PMI falling further into contractionary territory. The decline was led by France though Germany’s manufacturing sector also played a role The composite index fell to a five-month low of 50.3, down from 52.8 in May which was weaker than expected and challenged hopes of an economic rebound after two quarters of mild contraction. In the US, the manufacturing PMI fell more than expected into contractionary territory and sits just above the lows from December of last year.  US services PMI was in line with expectations at 54.1.

UK retail sales volumes rose 0.3% after a 0.5% gain in April which contributed to a further upward revision to the pricing for terminal rates. Expectations had already moved sharply higher following the inflation data and 50bps hike by the Bank of England (BOE). The market is pricing a peak policy rate close to 6.15%, which is 35bps higher than the start of last week. The ~120bps of tightening expected by December is the largest amongst developed market central banks.

2-year US Treasury yields moved above 4.8% on Friday night, which is the highest level since March, before falling to 4.70%, aligned with moves in Bunds following the weak PMI data before closing at 4.74%. 10-year Treasuries traced out a similar wide range to close at 3.73%.  2-year Bund yields fell 10bps to 3.09% while 10-year yields dropped 14bps to 2.35%. In the UK, 2-year gilts traded in a wide range before closing up 10bps at 5.17% which is a new high for the cycle while 10-year yields fell 4bps to 4.31%.

The US Dollar was stronger against G10 currencies amid concerns about global growth with the Australian Dollar and Norwegian Krone the largest movers. EUR/USD fell as much as 1% to 1.0845 following the PMI data before paring some of the losses. USD/JPY extended the uptrend reaching the highest level since November last year. Japanese core inflation, released Friday, increased at an annual rate of 4.3 per cent which is the fastest pace since June 1981 and raises further questions about the sustainability of the Bank of Japan’s ultra easy policy. Current USD/JPY levels are likely to prompt increasing verbal intervention by Japanese authorities. Previous weakening toward 146 against the US Dollar triggered the first intervention to support the currency since 1998.

Reflecting the stronger US Dollar, NZD/USD fell to a low near 0.6120 overnight Friday before recovering to close at 0.6140. NZD/AUD continued to push higher towards 0.9200 and having made steady gains through the last week which leaves the cross almost 1.5% higher from the recent lows.

NZ fixed income yields moved higher in the local session on Friday in line with moves in offshore markets. Australian 3 and 10-year futures dropped 7bps in yield terms on Friday night pointing towards lower NZ yields on the open. There is no NZ economic data today with the ANZ business survey for June released on Thursday likely to get the most attention.