It was a more “normal” overnight trading session, following the big risk-off move on Monday night.

China’s equity market stabilised, following the 7% fall on Monday.  I use the word “market” fairly loosely, as in China’s context it was the government trying to control share prices, rather than private sector investors having much influence.  Traders pointed to government funds being active in the market on Tuesday to prop up share prices, while the sharemarket regulator said that it may extend a lock-up period for investors holding more than 5 per cent of a listed stock that was due to expire on Friday.  Investors need to be alert to these sorts of shenanigans.

Other Asian markets didn’t have the benefit of the government propping up share prices, so they were generally lower, following the previous weak US and European sessions.  The Nikkei index was down 0.4%, the Hang Seng was down 0.7% while the ASX-200 was down 1.6%.

Overnight, European equity markets were in modest positive territory on their own accord, although one must view the 0.3% gain for Germany’s DAX as pretty disappointing following the 4.3% decline on Monday.  The S&P500 oscillated within a modest range and is up 0.2% as I write.

The key economic news overnight was a weaker CPI reading in the euro area.  The core CPI rose by 0.9% y/y in December, undershooting market expectations by 0.1%.  EUR/USD was already weakening ahead of the release and the weak CPI reading added to its downfall.  EUR/USD reached its lowest level in a month of 1.0711, and currently trades down 0.8% at 1.0740.

The US Fed’s Williams was on the telly, saying that he thought about 3-5 rate increases was about right for the US economy this year.  Note that this is currently more than the 2 rate hikes currently priced by the market.  He gave the impression of not wanting to lock the Fed into a predictable pattern, saying that it wasn’t necessary to move rates only at FOMC meetings with press conferences.

The Yen remained well supported in the more volatile and uncertain market environment and was the best performing of the majors.  USD/JPY trades down 0.4% at close to 119.0.

The NZD/USD continued its bad start for the year, falling another 0.8% to around 0.67, trading as low as 0.6677.  The latest GDT dairy auction showed an average price decline of 1.6%, with whole milk powder down 4.4%.   This was more or less in line with BNZ expectations of up to a 3% decline in the overall price index.

The AUD has also started the year off on a weak note, not helped by weaker commodity prices.  The LME index, representing a basket of 6 primary metals fell by 2.2% on the first day of trading this year, while iron ore prices were down by 2.8% yesterday.  Some heightened Middle East tension appeared to have only a passing upward impact on oil prices earlier this year.  Overnight, Brent crude is down 1.8% to 36.60, while WTI crude is down 1.8% to 36.10.  AUD/USD is down 0.5% to 0.7150.

AUD/NZD has oscillated around the 1.06-1.07 mark over the past three weeks and it remains in that range.

The CAD remains out of favour in the weak oil price environment.  USD/CAD broke through the 1.40 mark, making the Canadian dollar the weakest since 2003.

Despite the increased market volatility in equity markets and currencies, the US Treasuries market is comparatively sedate, with the 10-year remaining in a trading range.  The 10-year rate is flat at 2.24%, and ranged between 2.22% to 2.26%.

The dearth of Australian and NZ economic data continues today.  There will be a number of US releases overnight, including ADP employment, the ISM non-manufacturing index, and durable goods orders.  The FOMC releases the minutes of the December meeting at 8am NZ time tomorrow.  This incorporates the first Fed tightening in nearly a decade, so it will be closely analysed, particularly with a view to understanding the forces that will drive the path of further tightening from here.

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