Analysts at Westpac explained that Asian markets' unease over US-China trade tensions extended to Europe where bonds rallied and equities were patchy but US stocks rose modestly in light trade.
Key Quotes:
"AUD/USD softened slightly to 0.7390. Oil prices were choppy on Iran and Saudi headlines while sterling was the weakest G10 currency on deepening Brexit concern."
Currencies and macro themes
"Punitive trade measures remained in the headlines Monday. Chinese state media warned the Trump administration that trade ‘extortion’ would not work, President Trump signed an order to implement financial and trade sanctions on Iran and Saudi Arabia froze new trade deals with Canada in response to Canada’s criticism of the arrests of women’s rights activists.
But many major markets traded quietly with the data calendar light. Emerging markets were less calm, notably Turkey: the lira sank almost 5% against the US dollar to another record low.
German manufacturing orders fell -4.0% in June (vs -0.5% expected), taking the annual rate down to -0.8%, the first negative reading since July 2016. EUR/USD ignored this but later fell from 1.1570 to 1.1530 (lowest since 28 June) before recovering. GBP/USD fell about -0.5% to 1.2940, printing lows since September 2017 as local media focused on the growing risk of a ‘no deal’ Brexit next year.
USD/JPY rose slightly to 111.40 as risk sentiment improved in NY trade. AUD/USD drifted down from 0.7405 to 0.7374 before rebounding to 0.7390. NZD fell from 0.6755 to 0.6725 before consolidating. AUD/NZD extended a multi-day rally from 1.0960 to 1.0979 – the highest since 16 June. USD/CAD squeezed to 1.3040 on the Canada-Saudi spat then slid back to 1.3000 as oil prices rallied."
Interest rates
"European bond markets rallied across the board. US 10yr treasury yields extended the previous day’s decline, from 2.96% to 2.94%, while 2yr yields ranged sideways between 2.64% and 2.66%. Fed fund futures yields continued to price almost two more full hikes in 2018. St. Louis Fed president Bullard said he disagreed with the notion that the length of this economic expansion (the second longest on record) signalled a recession was inevitable. He said growth was slightly below where it should be, suggesting further gains."
Event risk
"Australia’s data calendar is light this week, leaving the focus on a very busy week for the RBA. Today at 2:30pm Syd/12:30pm Sing/HK we see the statement following the monthly Board meeting. With markets pricing 0% chance of a move in the cash rate until 2019, the attention is once again on the wording of the statement, including whether there is guidance on what to expect from Friday’s quarterly Statement on Monetary Policy. Today’s statement seems unlikely to include anything dramatic enough to have a lasting impact on AUD."
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