MNI EUROPEAN MARKETS ANALYSIS: Asia Pac Equities Down Sharply, But Yen Crosses Stabilize

US TSYS: Tsys Futures Volumes Surge Ahead Of NFP Later

• Treasury futures edged higher during the morning session and volumes surged, SOFR options have also seen a surge in volumes which start late during the US session as headlines of sirens through Israel were sounding.
• Tsys futures are now trading off the early morning highs, with TUU4 +01⅛ at 103-02 vs 103-04 highs, while TYU4 is + 02+ at 112-26 vs 113 highs.
• Cash treasury curve is slightly steeper today, following moves made during the US session, yields are currently 1-2bps lower with the 10Y yields -1bps at 3.966% after overnight hitting a low of 3.94%.
• Fed funds futures are pricing in 86bps of cuts into year-end from 72.5bps of cuts on Wednesday.
• Nonfarm payrolls are expected to moderate further in July after the slight beat in June was more than offset by large negative revisions to the prior two months. See MNI NFP preview (here)

JGBS: Cash Curve Bull-Flattener Ahead Of US Payrolls

JGB futures remain sharply stronger but are off session highs, +64 compared to settlement levels.

• The local calendar has been light today with only Monetary Base data released.
• This morning’s BoJ Rinban operations saw mixed results, with negative spreads but slightly higher offer cover ratios. In line with the QT taper announcement at Wednesday’s BoJ Policy Decision, sizes were reduced by Y25-50bn than previous operations for the buckets beyond the 1 year.
• Cash US tsys are currently ~1bp richer ahead of US Payrolls data later today, having been as much as 2-3bps richer earlier in the session.
• Nonfarm payrolls are expected to moderate further in July after the slight beat in June was more than offset by large negative revisions to the prior two months. (See MNI US Payrolls Preview here)
• The cash JGB curve has maintained its bull-flattening, with yields 3-8bps lower. The benchmark 10-year yield is 6.2bps lower at 0.979% versus the cycle high of 1.108%.
• The swaps are dealing mixed, with rates 2-3bps lower apart from the 20-30-year zone which is flat. Swap spreads are wider.
• Next week, the local calendar will see the BoJ Minutes of the June Meeting alongside Jibun Bank Composite & Services PMIs on Monday.

STIR: Australia and Canada Lead The Charge Softer In The $-Bloc Over Past Week

STIR markets within the $-bloc have softened dramatically over the past week, with Australia and Canada outperforming. This shift follows a milestone week marked by a dovish tilt from Fed Chair Powell, weaker-than-expected US ISM data, and softer-than-expected Q2 core CPI data in Australia. All of this is happening ahead of the US Non-Farm Payrolls data release later today.

• The Canadian market has benefited from dovish sentiment surrounding the Bank of Canada’s consecutive 25bp rate cuts to 4.5% in late July. Governor Macklem noted, “With the target in sight and more excess supply in the economy, the downside risks are taking on increased weight in our monetary policy deliberations.”
• Year-end official rate expectations have softened by 29bps in Australia, 28bps in Canada, 24bps in the US, and 13bps in New Zealand.
• The December 2024 expectations and the cumulative easing across the $-bloc are as follows: 4.51%, -83bps (FOMC); 3.85%, -90bps (BoC); 4.12%, -21bps (RBA); and 4.70%, -80bps (RBNZ).

Figure 1: $-Bloc STIR (%)

Source: MNI – Market News / Bloomberg

AUSSIE BONDS: Richer, Some Profit Taking Ahead Of US Payrolls, RBA Policy Decision Next Tuesday

ACGBs (YM +6.0 & XM +4.0) sit richer but at/near Sydney session lows. Ranges have been relatively narrow, but this comes after solid gains following Wednesday’s lower-than-expected Q2 core CPI data. ACGB benchmarks are 19-24bps richer than pre-CPI levels.

• After an extension of yesterday’s strong gains for cash US tsys early in today’s Asia-Pacific session, local investors opted to lock in some gains ahead of the US payrolls data release later today. Cash US tsys are currently ~1bp richer, having been as much as 2-3bps richer earlier in the session.
• Cash ACGBs are 4-5bps richer with the AU-US 10-year yield differential at +8bps.
• Swap rates are 4-6bps lower, with EFPs slightly tighter.
• The bills strip has bull-flattened, with pricing +1 to +9.
• RBA-dated OIS pricing is flat to 9bps softer across meetings, with 2025 leading. A cumulative 20bps of easing is priced by year-end.
• NSW TCorp priced an A$1.75bn increase of the 4.75% 20 February 2037 benchmark bond.
• The local calendar will see Judo Bank Composite & Services PMI data on Monday, ahead of the RBA Policy Decision, the Statement on Monetary Policy and RBA Governor Bullock’s Media Conference on Tuesday.
• Next week, the AOFM plans to sell A$800mn of the 2.75% 21 June 2035 bond on Wednesday and A$700mn of the 4.75% 21 April 2027 bond on Friday.

NZGBS: Richer Going Into US Payrolls Data

NZGBs closed 3bps richer but in the middle of today’s range. After an extension of yesterday’s strong gains for cash US tsys early in today’s Asia-Pacific session, local investors opted to lock in some gains ahead of the US payrolls data release later today. Cash US tsys are currently ~1bp richer, having been as much as 2-3bps richer earlier in the session.

• Nonfarm payrolls are expected to moderate further in July after the slight beat in June was more than offset by large negative revisions to the prior two months. Hurricane Beryl is likely to have negative impacts on payrolls and hours worked but some upside for AHE growth. (See MNI US Payrolls Preview: Hurricane Beryl To Add A Layer Of Confusion – here)
• The NZ-US 10-year yield differential is 5bps wider at +27bps, with the NZ-AU 10-year differential 2bps tighter at +19bps.
• Swap rates closed 2-5bps lower, with the 2s10s curve steeper.
• RBNZ dated OIS pricing is 2-8bps softer across meetings, with mid-2025 leading. The market gives a 25bp cut in August a 64% probability. A cumulative 80bps of easing is priced by year-end.
• Next week, the local calendar will see ANZ Commodity Price on Monday, ahead of the Q2 Employment Report on Wednesday.

FOREX: USD Off A Touch Despite Equity Falls, Yen Crosses Stabilize

The USD has tracked modestly softer through Friday trade, the BBDXY index off a touch, last near 1257.5.

• Early trends were skewed towards risk off, with JPY and CHF rallying against the likes of AUD and NZD. This reflected sharply lower US equity futures and regional market softness, as tech earnings and US growth slowdown fears hit sentiment.
• However, after both AUD/JPY and NZD/JPY made fresh lows we saw some stability emerge. Both crosses are heavily oversold per technicals, but the market may also be mindful of US payrolls later.
• USD/JPY got to lows of 148.88 before rebounding towards 149.80. We last tracked near 149.40/45, closed to unchanged for the session. There were a number of comments from Japan officials, with FinMin Suzuki stating the authorities are most concerned about the weaker yen boosting imported inflation. The country can also not declare victory over deflation yet.
• AUD/USD has ticked higher, last near 0.6515 (earlier lows were at 0.6487). NZD/USD has lagged somewhat last around 0.5950. Market pricing for an August RBNZ cut sits at 64% (25bps easing). The AUD/NZD is up marginally from recent lows, tracking at 1.0940/45.
• Outside of sharp equity falls and weaker US futures, we have had modest softness in US yields.
• In the commodity space, metals are slightly firmer, but still close to recent lows. Oil is up from Thursday lows but still tracking lower for the week. Gold remains supported.
• Looking ahead, the main focus will be the US NFP report. We also have some BoE speak.

JPY: Yen Underperforms On Crosses Despite Equity Weakness, NZD/JPY RSI Very Oversold Technically

Today's risk off has been much more evident in the equity space relative to FX trends. USD/JPY has been supported so far on dips. We were last 149.60/65, around 0.20% stronger in USD terms. Earlier lows were at 148.88.

• On a AUD and NZD cross basis yen is around flat to a touch weaker. AUD/JPY was last 97.40/45, up from earlier lows of 96.61. The RSI (14) is at 16, so quite low by historical standards.
• For NZD/JPY we are near 89.05, also up from earlier lows (88.37). The RSI (14) is more stretched to the downside for this pair, near 12. This is also very stretched by historical standards, see the chart below.
• Such oversold conditions may be aiding consolidation in these pairs, even amidst sharp equity losses.
• All the major Asia Pac markets are deeply in the red. Tech headwinds amid earnings concerns and US slowdown fears are driving sentiment in this space.
• Still, AUD/JPY and NZD/JPY crosses are not low in spot terms relative to history. If a global economic slowdown is unfolding it would be difficult to argue we have seen a trough in these pairs.

Fig 1: NZD/JPY RSI (14), Quite Oversold By Historical Standards

Source: MNI - Market News/Bloomberg

EQUITIES: Recession Trade Picks Up

• The GS US Cyclicals vs Defensives Index saw its largest 1-day percentage change since the covid sell-off from March 2020, with the prior largest move during the peak of the 2009 recession, see chart.

Chart: Long Cyclicals Short Defensives

ASIA STOCKS: Asian Equities Plunge On Weak Tech Earnings, Soft US Data & BoJ Hike

Asian markets are experiencing significant declines with the sell-off starting after weak US data and tech earnings. Japanese equities are down sharply as the BoJ's unexpected interest rate hike and stronger yen impact exporters. The HSI has fallen due to tech and real estate stock losses, while Chinese markets are weighed down by economic concerns and weak corporate earnings. Additionally, US economic data from overnight including rising jobless claims and shrinking manufacturing activity, has triggered fears of a hard landing, further dampening investor sentiment across the region the recession trade of selling cyclicals vs buying defensives saw it's largest one-day change since the peak of the covid sell-off.

• Japanese equities have plunged the most since march 2020. Financials sold-off on the back of Daiwa (-21%) missing profit targets, semiconductor stocks have underperformed even the 7.13% sell-off made by the Philadelphia SE Semiconductor Index overnight.
• China and Hong Kong markets are also lower today, although Chinese equities are holding up much better than global peers. In Hong Kong the HSI is 2% lower as tech and real estate stocks suffered losses. Meanwhile, Macau casino stocks dropped by up to 4.2% following revenue growth in July that missed expectations, reflecting ongoing concerns about a crackdown on the gaming industry. In mainland China, the CSI 300 is 0.66% lower, while the Shanghai Composite is down 0.45%.
• Taiwan & South Korea equities have plunged due to the high exposure to tech stocks, Taiex is down 3.68% after TSMC fell 4.90%. The KOSPI is down 3.30% with the likes of SK Hynix, down 9% and Samsung down 3.60%.
• Australian equities have dropped 2.30% today, with the Big Four Banks the worst performing. New Zealand equities have largely escaped the global sell-off with gains in health care stocks somewhat offsetting weakness in other sectors, the NZX 50 is 0.60% lower.
• In the EM space Singapore's Straits Times down is 1.20% lower, Malaysia's KLCI is 0.80% lower, the Philippines PSEi is 1.14% lower, Indonesian JCI is 0.16%.

OIL: Oil Steady During Asia Friday Session, Tracking Lower For The Week

• Oil paired back earlier gains in the week as US economic data showed concerns as to the pace of the slowdown in the US economy were enough to offset concerns as to supply given rising Middle East Tensions.
• Reports stated that President Biden reiterated support for Israel in the face of escalating tensions in the Middle East region, promising ‘New Defensive US Military Deployments’ per BBG.
• WTI fell to $76.24 post the US data release on Thursday. We sit slightly higher at $76.90, in the Friday's Asian afternoon session. Brent moved marginally higher during Asian trading to $80.11.
• Both benchmarks are tracking lower for the week. More so Brent, off close to 1.3%
• OPEC advised overnight that they do not intend to change output targets, targeting adding approximately 500,000 barrels a day to production over the fourth quarter. This should offset supply concerns should Middle East tensions worsen.
• With US and Asian data softening and Middle East tensions rising, oil will have dual forces driving its outcome in the coming days.
• For the week ahead, Saudi Arabia’s official selling prices for September, will be released Monday.

GOLD: Steady Ahead Of US Employment Report

Gold is 0.3% higher in today’s Asia-Pac session, after closing steady at $2446.26 on Thursday.

• Surprisingly, bullion looked past weaker-than-expected ISM manufacturing and jobless claims data, which sent US bond yields and US equities sharply lower.
• Initial jobless claims were notably higher coming in at 249k vs 236k, while continuing claims were 1877k vs 1855k. ISM Mfg was 46.8 vs 48.58, the lowest since November 23, while the largest miss was employment which came in at 43.4 vs 49.2 est. This was the lowest level since the pandemic.
• The markets read the reports as more evidence of a slumping economy, with the downdraft in the ISM employment component as a harbinger of an "unwelcome" decline in employment that Chair Powell said would be a condition for a rate cut.
• Lower rates are typically positive for gold, which doesn’t pay interest.
• US OIS pricing softened a touch with the market fully pricing in one 25bps cut for September and a cumulative 82bps of cuts into year-end.
• The market’s focus now turns to the US Employment Report for July, which is to be released later today.
• According to MNI’s technicals team, this week’s gains are constructive. A continuation higher would expose $2483.7, the Jul 17 high. On the downside, initial support is $2,401.3, the 20-day EMA.

ASIA FX: MYR & THB Standouts In The Past Week, TWD A Laggard

USD/Asia pairs are trading mixed in the first part of Friday dealings. Tech equity sensitive plays like KRW and TWD are weakest performers, with equity weakness evident for bourses in these countries. Earnings headwinds in the space/US slowdown fears are weighing on sentiment. Trends are more positive elsewhere, with MYR and THB the best performers. CNH is also higher. This is largely reflected in the returns for the past week as well.

• USD/CNH has tracked lower, last near 7.2340, around 0.25% stronger in CNH terms. We had a higher USD/CNY fixing earlier and USD/JPY dips have been supported, but the yuan has still outperformed. Local equities are tracking lower, albeit down much more modestly compared to the tech sensitive plays in the region. Recent lows in the pair are near 7.2100.
• Spot USD/KRW pushed higher in early dealings, getting to 1377.15, but we sit back lower now, last near 1372, still 0.20% weaker in won terms. Onshore equities are 3.4% weaker, weighed by broader tech losses. We remain comfortably off multi week highs for the pair above 1390.
• USD/TWD is higher, last near 32.85, which is very close to recent cycle highs. The currency has been the worst performer in EM Asia FX the past week, with flat spot returns. Concerns around global growth and implications for the tech backdrop may leave the market to fade USD/TWD upticks.
• MYR continues to outperform. Raised Fed easing prospects, coupled with the large onshore pension fund shelving plans for offshore investments, have been clear positives this past week. Global growth concerns are not weighing at this stage. USD/MYR last tracks near 4.54, up a further 0.65% today, capping ringgit gains for the week at 2.5%. Next downside target is just under 4.5100.
• THB is up just over 1.6% for the week, with broader USD trends/Fed expectations helping, along with the firmer gold price. USD/THB was last near 35.50, around 0.30% stronger for the session so far today.
• USD/IDR is around 16250 in recent dealings. This leaves us off recent highs, but only modestly higher for the week, with the rupiah lagging the likes of MYR and THB. Comments from the FinMin around the growth outlook (5-5.2% expected this year) and that the focus will remain on IDR stability crossed. They haven't shifted sentiment. The FinMin also noted that capital flows into broader EM and Indonesia are likely to remain limited. The BI added that capital flows have been affected by higher short term rates.

Fig 1: Asia FX Spot Returns - Past Week

Source: MNI - Market News/Bloomberg

CHINA RATES: Strong Bond Rally This Past Week As 10yr Yields Fall

• The bond market continued to rally into the close of the week, topping off a very strong week for the market.
• Bond yields were lower across the curve, taking lead from global moves in bonds given expectations for a September cut by the FED.
• Bond yields were 0.5bp – 1bp lower on the day.

Today’s moves

2yr 1.495% (-0.5bp) 5yr 1.809% (-1bp) 10yr 2.110% (-1bp) 30yr 2.336% (-0.5bp)

• The key observation for the strong week in bonds was the move lower in the 10 year.
• Previous indications had been that authorities had preferred to see the 10 year 2.20% or higher, to reflect a stronger outlook for the economy.
• Given recent unexpected policy rate cuts, it is likely that the 2.20% target level is no longer an objective.
• Moves for the week have been lower across the curve, though not to the same extent seen in US Treasuries.

Moves lower in the week most active in intermediate and longer dated maturities as investors come to grips with a lower trajectory for growth.

2yr (-0.5bp) 5yr (-6bp) 10yr (-7bp) 30yr (-7bp)

• Key data next week:
• Caixin PMI composite and services: 05/08
• Trade data: 08/08
• CPI / PPI: 09/08
• New Yuan Loans / Aggregate Financing 09-15 /08

INDIA BONDS: JPMorgan To Monitor Indian Bond Liquidity, RBI Next Week

• Earlier in the week, Indian authorities announced investment restrictions on certain India Government Bond maturities for foreign investors.
• Having been admitted to the JPMorgan EMBI Index in June, this came as shock to markets.
• Whilst bond markets haven't initially reacted to the news, authorities came out days later suggesting the announcement was 'aimed at boosting liquidity in shorter dated securities.'
• India's inclusion into the most widely followed EM benchmark came after 10 years of negotiation, much of which focused on foreign investor access.
• JPMorgan has today signaled that it would 'closely monitor liquidity' of longer dated securities to assess the effectiveness of maintaining them in the benchmark.
• India has a significant allocation in the JPMorgan EMBI Index.
• Elsewhere in the bond space, a subdued end to the week for the Indian bond market as yields trended sideways on Friday, ahead of the RBI decision next week.
• India’s movement in yields on the week were muted relative to global moves lower following the FED.
2yr 6.82% unch 5yr 6.83% (-1bp) 10yr 6.917% (-3bp) 30yr 7.09% unch.

SOUTH KOREA BONDS: BOK Likely On Hold In August, But Local Yields Follow Tsys Lower

• June IP Close To Expectations, But Positive Revisions Boost Y/Y. Korean I/P came in 0.5% for the m/m in June.
• Details show the continued theme of a surge in semiconductor exports may be starting to tail off.
• CPI came in ahead of expectations at 2.6%, giving further reason for the Bank of Korea to hold off on any policy movements.
• Korean bonds took their lead from global moves over the week though. Being highly correlated to the treasury market, moves in yield lower disregarded the better-than-expected data.
• Moves on the week were significant across the curve.

2yr 3.048% (-6bp) 5yr 2.946% (-9bp) 10yr 2.9844% (-12bp) 30yr 2.895% (-9bp)

INDONESIA RATES: Lower Yields, As BI May Have Scope To Cut In H2

• The Indonesia economy is showing signs of moderating which potentially creates policy flexibility for the Central Bank at their next meeting.
• The S&P Global Manufacturing PMI slipped into decline for July unexpectedly.
• Indonesian CPI also moderated to 2.13% (versus 2.51% prior).
• The Indonesia Finance Minister guided markets that expectations for growth remain in the 5-5.2% range.
• Coupled with a global move lower in developed market yields, Friday saw local yields down 1-5bps across the curve.
• Moves from the week were significant as investors speculate that the Central Bank now has the flexibility to cut in the second half of the year.

Weekly Moves

2yr 6.4% (-10bp) 5yr 6.64% (-9bp) 10yr 6.8% (-14bp) 30yr 6.96% (-10bp)