Investor risk aversion weighed on growth sensitive assets at end of last week amid concern about escalating hostilities. The S&P fell -1.5%, while US Treasuries and the US dollar rallied. The NZD was amongst the weakest developed market currencies

Risk aversion gripped global assets markets into the end of last week amid rising geopolitical tensions. There were growing concerns that Iran could launch a retaliatory attack on Israel following the air strike on the Iranian consulate in Syria. Over the weekend, Iran’s military seized an Israeli-linked container ship, and launched drones and missiles towards Israel, in a significant escalation of hostilities. These developments will weigh on investor rise appetite as Israel calibrates a response.

The S&P fell 1.5% on Friday, its largest one-day fall since January. The weakness was broad-based across sectors though financials were the worst performing following mixed earnings from some of the largest US banks. Treasury yields fell and safe haven currencies including the US dollar outperformed. Brent crude prices climbed above US$92 per barrel, for the first time since October, but ended unchanged near US$90.

University of Michigan consumer sentiment dipped to 77.9 in April, from 79.4, despite the equities reaching new highs. Sentiment was likely depressed by rising gas prices. The expectations component was only modestly lower from March and remains consistent with robust growth in consumer spending. The closely watched 5-10 inflation expectations increased to 3.0% from 2.8%. This is below the top of the recent range but relatively high given the retracement in actual inflation.

The latest Fed speakers continued to play down the prospect of near-term rate cuts. Boston Fed President Collins said there is no urgency to cut interest rates, given elevated inflation and the resilience of the labour market. These comments were reiterated by San Francisco Fed President Daly who said the Fed still has a lot of work to do before it can be confident inflation is on the right track.

Global bond markets rallied with the rise in risk aversion. 10-year German bund yields fell 10bps to 2.36% while 10-year treasury yields were down 7bps to 4.52%. The treasury curve adjustment was largely a parallel shift with 2-year yields, which briefly topped 5% last week, falling 6bps to 4.90%.

In currency markets, the US dollar extended the recent uptrend, with the dollar index up a further 0.7% to the highest levels since November. The combination of loose US fiscal policy, now tighter monetary policy and rising geopolitical risk is supporting the dollar. The yen and Swiss franc outperformed within G10 given their defensive characteristics. Separately, Japanese policy makers continue to express discomfort with yen weakness. Finance Minister Suzuki said officials are watching FX moves with a sense of urgency and ‘would not rule out any steps against any excessive moves.’

The NZD and AUD were among the weaker G10 currencies, both falling close to 1% against the US dollar. NZD/USD declined to a fresh 2024 low down towards 0.5935. The NZD was weaker on all the major cross rates except for the AUD which oscillated in a range around 0.9180.

NZ fixed interest moved higher in yield during the local session on Friday. 10-year government bonds ended 6bps higher, at 4.87%, reflecting the moves in offshore markets, and outperformed relative to swaps. The market wasn’t impacted by the softer than expected selected price indicators or further evidence of sluggish consumer spending from electronic card transactions. After the latest inflation partials, we have revised our Q1 CPI forecast down to 0.6% for the quarter and 3.9% for the annual rate.

The NZ services PMI is released today. The Peoples Bank of China is unanimously expected to leave its MLF rate unchanged at 2.5%. US retail sales and the Empire Manufacturing Index data are released overnight.

[chart;daily exchange rates]