Thursday July 10, 2014 - 20:10:26 GMT
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Australia & NZ Morning Thoughts
Australia & NZ Morning Thoughts
Westpac Global Strategy Group
There was a flight to safe-havens
during the London morning, mostly unwound during the NY session. The spark appeared
to be news a Portuguese banking group defaulted on debt. Portugal's
stockmarket (PSI) closed down 3.7%, the Eurostoxx 50 closed 1.6% lower, and
the S&P500 is currently down 0.4%. Global investors bought US and German
government bonds, and pushed the US dollar higher.
5:52AM, 11 Jul 2014
Global market sentiment: There was a flight to
safe-havens during the London morning, mostly unwound during the NY session.
The spark appeared to be news a Portuguese banking group defaulted on debt.
Portugal’s stockmarket (PSI) closed down 3.7%, the Eurostoxx 50 closed 1.6%
lower, and the S&P500 is currently down 0.4%. Global investors bought US
and German government bonds, and pushed the US dollar higher.
Interest rates: US 10yr treasury yields
initially fell from 2.55% to 2.49% (one-month low) following the Portuguese
news but later recovered to 2.54%. German 10yr yields fell from 1.21% to 1.17%
- a 14-month low.
government bond future yields extended yesterday’s post-jobs data breakdown,
from 2.62% to 2.56% - a one-year low. The 10yr yield fell from 3.48% to 3.42% -
also a one-year low.
Currencies: The US dollar index
rose. EUR fell from 1.3650 to 1.3590. USD/JPY initially fell from 101.50 to
101.07 but recovered to 101.37, the safe-haven yen outperforming all major
currencies. AUD initially extended its slide to 0.9361 but has partly recovered
to 0.9395 (current level). NZD initially fell from 0.8830 to 0.8794 but bounced
back to 0.8824 in NY. AUD/NZD found a base at 1.0623 (four-month low) during
the London morning and then stabilised around 1.0650.
US initial jobless claims fell
11k to 304k in the first week of July, apparently unaffected by the July 4
holiday or summer auto plant shutdowns for retooling that usually render the
seasonally adjusted figures useless for a few weeks around this time each year.
That matches the previous low of 304k in late May; even lower numbers in early
April and mid May were distorted by various factors including the late Easter
this year. Prior to that, it’s September 2007 that we last saw claims this low.
American firms are laying off workers at pretty much the lowest pace this
century so far (they dipped to 282k in early 2006 for a few weeks).
US wholesale inventories rose
0.5% in May, with durables such as autos seeing ongoing inventory building
but non-durable stocks, especially for groceries, being run down. With April
revised down a tick to a 1.0% rise, the Q2 stocks rebound from Q1’s drag on GDP
growth looks increasingly to be only partial, but next week’s May business
inventories report including retail stocks will enable us to fine-tune our
Canadian new house prices slowed
to a 1.5% yr gain in May, the midpoint of the past year’s 1.3-1.8% yr range of outcomes.
Weak French data. Industrial production
fell 1.7% in May for a 3.7% yr pace of contraction. German IP also fell 1.7%,
reported 7/7, but was expanding on an annual basis, 1.3% yr. That’s lack of
French competitiveness showing through. Also the French CPI dipped from 0.8% to
0.6% in June (EU harmonised measure), possibly enough to see the eurozone
CPI revised down to 0.4% yr from the 0.5% yr flash estimate.
Bank of England on hold and no
statement issued. On the UK data front, 53% (net balance) of surveyors
reported higher house prices in June, down from 56% in May and 58% in March
which was the highest in 12 years, according to RICS. A 0.6% rise in exports
was swamped by a 1.7% rise in imports to deliver the widest trade deficit in
four months, at £9.2bn in May.
Event risk today: It’s a lightweight day
for data events. NZ food price and REINZ housing data are minor for markets, as
is the home loans data in Australia. The US calendar is bare apart from a
fiscal update. Worthy of note are Fed speeches by Lockhart and Evans.
AUD/USD 1 day: A bearish outside-down
day pattern signals a revisit of 0.9360 during the day ahead.
AUD/USD 1-3 month: The RBA is expected to
remain on hold until August 2015, but markets will start pricing in the
tightening cycle by late 2014 which should eventually boost AUD above 0.9460.
NZD/USD 1 day: Looking indecisive
near the multi-year high. 0.8795 needs to hold for the bullish trend to remain
NZD/USD 1-3 month: Interest rate carry
will benefit the NZD against most major currencies over the next few months.
NZD/USD targets the post-float high of 0.8843.
AUD/NZD 1 day: Yesterday’s breakdown
signals further weakness towards 1.0540 during the days ahead.
AUD/NZD 1-3 month: It’s back in the old
1.0550-1.0900 range, with a slight negative medium term bias. At some point the
market will start pricing in RBA tightening and a significant rally will ensue,
but that’s a story for late this year.
AU swap yields 1 day: In response to
movement in Australian bond futures overnight the 2yr should open around 2.73%
while the 10yr should open around 3.85%.
AU swap yields 1-3 month: The 2yr has broken
below the key 2.80% and now targets 2.60% - the August low. The 10yr is looking
vulnerable to pushing lower towards 3.70%. By late 2014, though, we would
expect markets to start pricing in RBA tightening.
NZ swap yields 1 day: In response to
overnight changes in US and Australian bond yields the 2yr should open down 1bp
at 4.22%, as should the 10yr at 4.92%.
NZ swap yields 1-3 month: The upward trend in NZ
interest rates remains intact, mainly due to NZ’s strong fundamentals and RBNZ
tightening cycle which is now around 40% complete. The 2yr targets beyond 4.30%
during the next few months. The 10yr should rise above 5.20% late in the year
on the RBNZ, assuming US yields do not fall again. The curve should flatten
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