Main Themes: Sentiment continued to be fragile. US President Trump said that he wasn’t ready to make a deal with China, although he expected one could be reached in the future. Meanwhile, a dispute between Italy and the EU over Italy’s budget negatively impacted Europe. Shares and bond yields were lower. The US dollar lifted, but the A$ was little changed.
Share markets: Concerns over Italy’s budget weighed on shares in Europe. In the US, the major indices had a positive start, but finished in the red as worries about a protracted trade war lingered. The S&P500 ended 0.8% lower.
Interest Rates: Weaker risk appetite sent down US yields. US 10-year yields fell to their lowest since September 2017, reflecting the impact of recent trade tensions, and also some weaker momentum in the US economy. Overnight, 10-year yields fell 5 basis points to 2.27%.
Budget concerns in Italy, saw Italian 10-year bond yields edge up 1 basis point higher to 2.68%, following a 12 basis point jump in the previous day.
Foreign Exchange: The US dollar index edged higher, continuing to be supported by the risk averse environment and ongoing trade worries. Sterling slipped to its lowest since late 2018 against the USD as the ruling Conservative party prepares for a replacement for May as Prime Minister. Most candidates are preparing for a cleaner break from the EU, raising the stakes of a no-deal Brexit. The Australian dollar trended sideways in spite of the lift in the US dollar and trade concerns. Resilient commodity prices are likely giving the currency support. It is currently trading at 69.2 US cents this morning.
Commodities: US oil prices jumped, after flooding in the Midwest constrained supplies from the main US storage hub from Cushing. Gold prices fell, moving inversely with the US dollar.
Australia: There was no major economic data released yesterday locally.
Europe: German consumer confidence weakened to its lowest in two years falling from 10.2 in May to 10.1 in its June reading according to the Gfk survey. The languishing manufacturing sector appears to be impacting on households.
In Italy, Deputy Prime Minister Matteo Salvini and leader of the right-wing League said that the European Commission could impose a €3 billion fine on Italy for breaking EU rules on debt levels and structural deficit. Salvini also called on the European Central Bank (ECB) to be able to purchase government debt, in order to halt “speculation”. He also said that the focus should be on cutting unemployment, not capping budget deficits. The comments follow a victory in the European parliamentary elections.
German Chancellor Merkel has said that EU leaders would settle on an EU Comission President by June.
United States: Consumer confidence according to the Conference Board lifted from 129.2 in April to 134.1 in May. The lift is despite recent turbulence in the share market as a result of re-escalating tensions over trade, and recent weakness in economic activity. The strength in the labour market is likely keeping consumers upbeat.
The Dallas Fed manufacturing index bucked the trend of stronger regional PMIs, pulling back to -5.3 in May from 2 in April.
Today’s key data and events:
NZ Business Confidence May prev -37.5 (11am)
NZ RBNZ Financial Stability Report (11am)
US Richmond Fed Mfg Index May exp 6 prev 3 (12am)
Times are AEST. All data forecasts are m/m or q/q and seasonally adjusted unless otherwise specified. Forecasts for Australian data are our forecasts and for other countries they are consensus forecasts.
Janu Chan, Senior Economist