Today’s podcast:

https://soundcloud.com/user-291029717/faangs-bitten-bonds-hit-by-boj

Overview: Powerless (Say what you want)

• BoJ uncertainty pushes core global yields higher
• USD softer across the board on no news
• AUD unchanged and SEK the outperformer
• Tech lead further declines in US equities

Like Nelly Furtado’s hit Powerless (Say what you want), the rates markets has come under pressure over the past 24hrs with speculation over the BoJ policy decision today pushing core global yields higher. The USD is weaker across the board, the AUD has been a bystander and SEK the outperformer. US equities are weaker, led by further declines in the tech sector, as investors rotate out of this sector following some high-profile earnings misses

Currencies

The USD has been the worst performing of the majors for no particular reason, with a steady grind lower since the European open. AUD is little changed currently trading at 0.7406 unable to materially benefit from a softer US. Meanwhile SEK is at the top of the leader board, up over 1% to 8.77, boosted by Sweden’s Q2 GDP of 1.0% q/q that smashed expectations of a 0.5%.

Against a soft USD, the yen has made little progress and USD/JPY sits close to 111, with some nervousness ahead of this afternoon’s BoJ policy announcement.  The last week or so has seen reports that the BoJ may either review its yield curve control policy or tweak its operation, with the idea to improve the longevity of the stimulus programme and reduce the harm it causes to the profitability of commercial banks.   It seems that the BoJ would be happier to see long term rates increase but it doesn’t want to see a concurrent appreciation of the yen.  It’s a difficult balancing act and the central bank will need to get its messaging right.

Bonds

Fears of higher JGB yields means fears of weaker Japanese demand for foreign bonds and this has seen global rates increase recently.  Those moves extended overnight, with UK’s 10-year rate up 6bps to 1.34% and Germany’s 10 year rate up 4bps to 0.44%.  That backdrop has seen US 10-year Treasuries nudge up 2bps to currently 2.975%, after reaching a fresh July high of 2.99% overnight.  A slightly steeper curve is evident, with the 2-year rate flat.

Equities

The negative lead from Asia which saw the Shanghai Composite closed down at 0.16% extended into the European and US sessions with all major indices showing negative returns for the start of the week. The NASDAQ has once again led the decline as investors rotate out of IT shares following a string of disappointing earnings results. The NYSE FANG index is now down over 9% through the past three trading sessions.

Commodities

It thas been a contrasting night for commodities, oil prices are up between 1% to 2 % driven by news that a key Canadian facility won’t return to full production as quickly as expected, adding to global supply concerns. Iron ore, gold and metals are little changed, but steam coal is the big loser, down 3.67%

Economics/Politics

US Commerce Secretary Ross indicated that trade negotiations with Mexico under its new President were proceeding rapidly and were close to completion. This follows US Trade Rep Lighthizer’s comments last week indicating some hope that NAFTA talks are in the “finishing stages”.  It remains to be seen whether a bilateral deal with Mexico will be agreed before negotiating separately with Canada.

• EC: Economic Confidence, Jul: 112.0 vs. 112.1
• GE: CPI EU harmonised (y/y%), Jul: 2.1 vs. 2.1 exp.
• US: Pending home sales (m/m%), Jun: 0.1 vs. 0.9

Coming up

• Apart from NZ’s business survey and the BoJ meeting, the other notable event today will be the release of China PMI data. And it’s a full economic calendar tonight, with the key releases being euro area CPI data and the US employment cost index

Market prices

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets