Risk appetite fell on Friday, US data trumping continued decent company earnings. US equities began the decline during the European afternoon, and accelerated to -2.9% after a steep plunge in the US consumer sentiment survey to the lowest level in a year. Following the previous day's disappointments in the NY and Philadelphia manufacturing surveys, investors bailed. The VIX barometer of risk aversion rose slightly. Commodities also retreated, the CRB index 0.8% lower, as was oil, copper's 2.8% fall looking ominous. US 2yr treasury yields fell 2bp to 0.58%, a fresh record low, while 10yr yields fell 7bp to 2.92%, flattening the yield curve.
The US dollar index made a fresh 2-month low around 82 before the European afternoon saw a rebound on safe-haven buying. EUR did the reverse, peaking at 1.3008 around Europe, and falling to 1.2916. The yen outperformed all the majors, USD/JPY falling from around 87.30 to 86.27 and settling slightly higher. Carry and commodity currencies suffered most, the CAD falling from 1.04 to 1.0584 against the USD.
AUD fell from the Sydney close of 87.23 to 86.27 before recovering to 86.60. A general election data of 21 August was set after the close.
NZD suffered most, continuing the domestic session slump after a subdued inflation report, falling from 0.7200 to 0.7096. AUD/NZD rose to 1.2273, settling around 1.2220.
USCPI falls 0.1% in Jun. This reflected a 2.9% fall in energy prices and flat food prices, which offset the 0.2% core rate. Before rounding the core rate was 0.159%, so it was not such an upside surprise, despite higher auto and apparel prices and some renewed strength in the medical care component. The annual CPI slowed from 2.0% yr to 1.1% and the annual core rate was steady at 0.9% yr.
US May capital inflows in May. TIC data showed net long term flows of $35bn but total net flows of just $18bn, somewhat lower than we might have expected given that May supposedly saw safehaven flows into dollars as the European sovereign crisis intensified.
US consumer sentiment plunges 9.5 pts to 66.5 in the preliminary July report. This is a fall of a similar magnitude to declines in sentiment recorded after 9/11, Hurricane Katrina and the collapse of Lehman Bros. Expectations and current conditions shared the fall evenly. It adds to the weight of evidence pointing to deteriorating business and household confidence in mid 2010, consistent with our view that the US economy will record slower growth as the year progresses.
Japanese tertiary activity index declined by 0.9% in May; April's increase was revised up to 2.4%, previously 2.1%. This leaves the index 1.1% higher than a year ago. In May, the decline was relatively broad based with all but the IT and transport sectors declining in the month.
Euroland trade deficit EUR3bn in May. This was the first deficit since February last year, and reflected a 4.2% increase in imports (including a substantial oil component), which offset a 1.6% exports gain.
Canadian leading index up 1.0% in June, the fifth consecutive rise of 1% or more, pointing to still solid growth prospects heading into 2011.
AUD/USD and NZD/USD outlook next 24 hours: AUD looks weak, and should gravitate towards minor support around 0.8600. NZD's 2 cent plunge on Friday suggests it may pause around 0.7100 for a while before continuing to 0.7000.
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