Markets Today: Low

Core global yields have made new record lows amid an increase in risk aversion following news that a number of UK asset managers led by Standard Life were suspending redemptions on their property funds.

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Core global yields have made new record lows amid an increase in risk aversion following news that a number of UK asset managers led by Standard Life were suspending redemptions on their property funds. Italian banks have also remained a cause of concern given the magnitude of their bad loans and as a result the fall in equities has been led by financial shares followed closely by materials and energy sectors given the souring global growth outlook. The Pound had another sharp fall while the Yen and USD have outperformed.

Fears of financial contagion have triggered a demand for safety dragging core global yields to new historical lows. 10y US Treasury yields dropped to 1.365% in the overnight sessions and at 1375% they have closed the New York session below 1.40% for the first time on record. In a similar pattern 10y benchmark bond yields from Germany, the UK, Switzerland and France have also made fresh historical lows.

Early in the session, a softer than expected (52.3 vs 52.8 exp) UK services PMI did little to improve the mood, particularly given the outlook on the survey (lowest since Dec 12) and the fact that 89% of the responses were received before the referendum outcome was known. Also not helping sentiment, the BoE stability report noted that “there will be a period of uncertainty and adjustment following the result of the referendum”. The report also highlighted risks facing the UK current account and commercial real estate. BoE Governor Carney attempted to ease concerns by cutting capital requirements for UK lenders and stressing that this was not a repeat of the 2007/08 GFC.

Although GBP had a small reaction to Carney’s comments, the overnight slide in the Pounds was fairly uninterrupted. Relative to other G10 currencies, GBP is the worst performer, down 1.91% and now a move sub 1.30 appears to be just a matter of time. Unsurprisingly, given its preeminent safe haven attributes, JPY is the only G10 currency that has outperformed the USD. Meanwhile as commodity prices were also under pressure the AUD and NZD also lost some ground, down 0.98% and 1.11% respectively.

Yesterday the RBA left the cash rate unchanged at 1.75%, but the statement left us with the impression that the Bank may be more open to the idea of another rate cut over the near term. The Bank remains data dependent making next CPI print very important. Our economist judge that an inflation number sub 0.4%q/q would probably be enough to get the Bank over the line for a cut in August.

The GTD auction saw a small drop in dairy prices, but as a soft number was largely expected there was little reaction by the NZD. The GDT Price Index fell 0.4% and whole milk powder prices fell 1.6%, to an average price of US$2,062.

In other news, the FBI has recommended not to charge Hilary Clinton over her use of private emails while at the same time acknowledging  Clinton and her staff were “extremely careless in their handling of very sensitive, highly classified information.” In the UK, Theresa May was comfortably won the first round for the Conservative leader contest (Leadsom was second and Gove was third). The three remaining contenders are due to face a second MPs’ vote on Thursday, followed by a final round next Tuesday to carve the field down to two. These two candidates will seek votes from the entire conservative membership with the outcome expected 9 September.

Coming Up

We have no Australian data releases on the schedule today. RBA Guy Debelle is speaking this evening (17:30, AEST), but given the topic of discussion is on FX Code of Conduct, we don’t think his comments will be market moving.

As for offshore markets all the highlights come courtesy of the US. As a warming act we have Fed Tarullo speaking on regulation and monetary policy (23:00 AEST), then right at the stroke of midnight we get the ISM non-manufacturing survey followed by the June FOMC minutes at 4:00 am on Thursday.

Ahead of US payrolls on Friday, the ISM non-manufacturing survey will be important. Market expectations are for a June headline print of 53.3 vs 52.9 prev .After the strong ISM manufacturing number there has been some market chat of upside risk to the non-manufacturing print, we would caution however that the correlation between the two ISM indices is not that strong. That said, the employment non-manufacturing component will be just as important. In May the sharp fall in the employment sub index preluded the outrageously soft May payrolls number (38k vs 160 exp) and with the focus back on the US this week, strong data prints could have a material impact on Fed rate hike expectations and the USD.

The June FOMC minutes will no doubt grab some of the headlines, but given that the unanimous decision to leave rates on hold, the dovish tone of the statement and the fact that the meeting preceded the UK referendum; it is hard to envisage that we will learn much more from the Minutes.

Overnight

On global stock markets, the S&P 500 was -0.68%. Bond markets saw US 10-years -6.91bp to 1.38%. In commodities, Brent crude oil -3.66% to $48.21, gold+1.0% to $1,359, iron ore +2.9% to $55.93. AUD is at 0.7462 and the range since yesterday 5pm Sydney time is 0.75 to 0.7543.

Good luck.

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