MNI EUROPEAN MARKETS ANALYSIS: Attack On Shipping Threat To Global Disinflation

US TSYS: Remain Within Tuesday Ranges Ahead Of ISM and Fed Minutes

US Tsy futures have drifted lower this afternoon but remain within recent ranges. TYH4 last tracked at 112-07+, -02. This is at session lows but highs at 112-12 point to a tight range through the first part of Wednesday trade. Volumes rest at just over 42k.

• We have had no cash US Tsy trading today with Japan markets still closed as part of new year celebrations. Trading will resume in London.
• Tsy bears will focus on Tuesday lows at 1112-04.
• Looking ahead we have Fed’s Barkin speaking on the economic outlook and the December 13 meeting minutes are published. December US ISM data and November JOLTS job openings are also released.

GLOBAL: Attacks On Shipping Threat To Global Disinflation

Supply chains and shipping costs are back in focus given rising tensions in the Red Sea, a vital shipping route between Asia/Middle East to Europe through the Suez Canal. 12% of global shipping goes through the canal. Increased risks in the area have meant that half of the Red Sea’s container traffic is finding alternative routes and also some tankers, but longer journeys will add to costs and delivery times. Shipping and insurance rates have already risen adding to global inflation risks.

• Currently the geopolitical tensions in the Red Sea, including an Iranian warship being sent to the area, have had little impact on oil prices given excess supply concerns. The route is very important for oil and gas though and a deterioration in the situation could boost energy prices.
• The Baltic Freight Index, which measures the cost of shipping dry bulk goods over 20 routes for four sizes of ships, rose sharply in December and is now up 65.8% y/y. It shrank in annual terms from April 2022 to September 2023. Higher shipping costs are likely to add to global inflation pressures at a time when it hasn’t yet returned to target in many countries.

• The significant diversion of shipping to other longer routes is also likely to add to supply-chain pressures. The Federal Reserve of New York’s global supply chain pressure index had already moved into positive territory in November for the first time since January and is likely to rise further given the issues in the Red Sea and drought impacting volumes through the Panama Canal.

Source: MNI - Market News/Refinitiv

AUSSIE BONDS: Yields Firm On Global Spill Over

Aussie bond futures have tracked tight ranges. XM sits off by -5, while YM is down by -7, with the latter seeing slightly more downside as the session progressed. This looks to be largely following the weakening in core yields through Tuesday's session.

• On the domestic front, there has been little domestic news flow, with PM Albanese stating that the upcoming May budget will consider further cost of living relief for households. This came after internal RBA documents showing such pressures weighed on growth through the second half of 2023 (BBG).
• In the cash ACGB space, yields are 4.5-6bps higher, sitting near session highs. Slightly larger yield gains have been seen at the front end.
• The local data calendar is quiet until tomorrow's PMI revisions for Dec, but these prints are unlikely to move market sentiment. Next week delivers retail sales for Nov and CPI for Dec (Wednesday), which will be of greater focus for local markets.

NZGBS: Local Yields Play Catch Up As Onshore Markets Return

New Zealand government yields continued to track higher for much of the session, as local markets played catch up after being shut for yesterday's session. The 10yr yield has climbed 12bps to sit back at 4.44%, close to late 2023 levels. Similar rises in yield terms have been seen across other parts of the curve, except for the 2yr, +5bps.

• This looks to be largely reflective of catch up following a weaker start to core bond markets since the start of the year. US easing odds for March have been trimmed modestly versus levels from mid last week.
• There has been little news flow out of NZ, with house price data for Dec due later in London hours. The data calendar is empty for the rest of the week,
• In the swap space, the 2yr yield sits close to 4.60%, against recent lows near 4.50%.

EQUITIES: Tech Leading Region Lower, Some Pockets Of Strength In China Gaming Sector

Regional equities have mostly tracked lower, following the negative lead from US markets in Tuesday trade. Losses have been prominent among tech sensitive plays, as core yields have found a base since the start of the year. US equity futures haven't exhibited a strong trend, with the main indices sitting modestly lower. Eminis were last near 4784 (-0.06%), while Nasdaq futures sit -0.12% lower.

• The Kospi is off 2% following yesterday's highest close since mid 2022. The Taiex is also down sharply, off 1.75% at this stage. The higher more in US real yields and some paring of early 2024 US rate cut expectations has taken gloss of the tech space in recent sessions.
• Hong Kong markets are also down, led by the tech sector. The HSI sits -1.22% weaker at the break. The tech sub index is off by nearly 2.4%.
• In China, the CSI 300 sits 0.51% down at the break. There have been some pockets of strength in the gaming space. This follows reports of a regulator who oversees the sector being removed in China. Tencent and NetEase curbed earlier weakness in Hong Kong, but this hasn't improved aggregate index performance.
• Another property developer reportedly hasn't fulfilled payments which were due for a dollar bond at the end of last year (per BBG).
• In SEA, losses are generally more modest, with most bourses off by less than 0.50% at this stage.

FOREX: USD Off Tuesday Highs, But Tight Ranges Prevail Ahead Of Data/FOMC Mins

The USD has drifted lower as the session has progressed, but the USD index is only fractionally below Tuesday closing levels. The BBDXY last tracked near 1221, off by 0.05%.

• We saw some early strength in the index as US Tsy futures saw a modest dip in early trade but there was no follow through. Highs for the BBDXY came in 1222.12.
• USD/JPY sits near 141.90 in recent trade, unable to break above Tuesday highs in early trade (near 142.20). Current levels are little changed for the session.
• AUD/USD has drifted a little higher, last near 0.6770, but this is only marginally firmer for the session. NZD/USD has fared slightly better, up 0.25%, to 0.6265/70, finding some support around the 0.6250 region.
• Other cross asset moves have been modest. Regional equities are lower, led by the tech space, following US moves in Tuesday trade. US equity futures sit down a touch.
• Looking ahead, Spanish and German unemployment data will cross on later, along with Swiss manufacturing PMI. A busy data docket in the US will be highlighted by ISM Manufacturing figures and November JOLTS data. The minutes of the Federal Reserve’s December meeting will also be released.

OIL: Crude Little Changed Ahead of Fed Minutes & ISM

After sliding around 1.5% on Tuesday, oil prices are little changed during APAC trading and have been range trading. Weak risk appetite and continued excess supply worries are outweighing persistent risks to shipping in the Red Sea. The USD index is down slightly after rising sharply yesterday.

• WTI is moderately lower at $70.35/bbl after a high of $70.70 earlier. Brent has been trading sideways for much of the session and is currently around $75.86.
• Given the market’s focus on supply, US inventory data is released by the API today and the EIA on Thursday.
• On the demand front, China has front-loaded the allocation of oil import quotas for 2024. The market will monitor trade data closely to see if the move boosts demand from refiners.
• There have been further reports today of missiles being fired in the southern part of the Red Sea but no damage has been related.
• Later the Fed’s Barkin speaks on the economic outlook and the December 13 meeting minutes are published. December US ISM data and November JOLTS job openings are also released. These events could all potentially be important in shaping the Fed outlook but the focus of the week is likely to be Friday’s December payroll data.

GOLD: Bullion Trading Higher, This Week’s US Data Will Be Important

Gold prices are up 0.3% during APAC trading today to around $2064.85/oz after falling 0.2% on Tuesday. They are close to their intraday high of $2065.60. Bullion is off its late December record high as markets reduce Fed rate cut expectations and data this week will be important for the outlook. The USD index is down slightly after rising sharply yesterday.

• Gold continues to move well above support at $2034.60, the 20-day EMA.
• Later the Fed’s Barkin speaks on the economic outlook and the December 13 meeting minutes are published. December US ISM data and November JOLTS job openings are also released. These events could all potentially be important for bullion as they may shape the Fed outlook but the focus of the week is likely to be Friday’s December payroll data.

INDONESIA: February Elections Likely To Result In Little Change

Indonesia’s presidential election will be held on February 14 and since no single candidate is likely to get a majority a run-off is likely on June 26. Popular incumbent Widodo (Jokowi) is not allowed to run for a third time but who he endorses of the three candidates will be important given his high popularity rating. Currently Prabowo Subianto, the defence minister, is ahead in the polls.

• Prabowo has 43.7% support in the latest poll from CSIS taken between 13 and 18 December, well ahead of the other two candidates. He is standing for Gerindra, the third largest party in parliament, and even though this is not Jokowi’s party his eldest son Gibran received an age dispensation to run as Prabowo’s VP, which is being seen as support from Jokowi. Prabowo lost to Jokowi in the 2014 and 2019 elections but if he wins in 2024 there is likely to be little change.
• Ganjar is the candidate for the PDI-P, the largest party and Jokowi’s. He’s now in last place with 19.4% support in the CSIS poll, as his support has steadily declined since the end of October when the candidates became official. He has chosen a VP candidate from the large Muslim organisation Nahdlatul Ulama.
• Ganjar and Prabowo have both said that they will continue existing policies to develop Indonesia’s nickel sector and expand infrastructure including a new capital city on Borneo.
• The third candidate Anies from the Nasdem Party is a former Governor of Jakarta and is second in the CSIS poll at 26.1%. He also has a VP candidate from Nahdlatul Ulama.
• Elections for the House of Representatives, the Senate and local legislative councils will be held the same day.

ASIA FX: USD/Asia Pairs Away From Earlier Highs

USD/Asia pairs are higher for the most part, but sit away from session highs in latest dealings. Equity weakness has been evident for most bourses throughout the region, as global core yields have firmed in the first part of 2024 trade. The USD hasn't been able to extend gains against the majors though, which has likely helped stabilize Asia FX sentiment to a degree. Tomorrow, we have South Korean FX reserves and the China Caixin services PMI on tap.

• USD/CNH tried to test above 7.1600 not long after the CNY fixing, which rose compared to Tuesday's outcome (in USD/CNY terms). Local and HK equities have also struggled even with some pockets of strength in the gaming sector. Still, there was little follow to earlier USD/CNH gains, with the pair last near 7.1485, little changed for the session.
• 1 month USD/KRW sits sub NY closing levels, the pair last at 1305/06, around 0.25% firmer in won terms for the session so far. This comes despite a 2% sell off in the Kospi, which is reflective of tech equity weakness in major markets from Tuesday. Resistance in the 1310/20 region, which capped gains in the pair through most of Dec may be evident.
• USD/SGD probed higher in early dealings but found resistance near 1.3280. Note the 20-day EMA comes in 1.3294. The pair was last at 1.3260, little changed for the session. The data calendar has Dec PMI (headline and for the electronics sector) later in the UK session today. Tomorrow sees the S&P PMI measure print. The S&P measure is quite strong, last 55.8, while the other metrics are closer to the 50.0 level. Then on Friday Nov retail sales data prints.
• USD/PHP sits off earlier session highs, the pair last at 55.72, still 0.10% weaker in PHP terms versus Tuesday closing levels. Earlier highs in the pair were at 55.81, amid catch up to broad based USD gains. The simple 200-day MA comes in near 55.80, so that be acting as a resistance point. The next major data focus point will be Friday's CPI print for Dec. The market looks for a 3.9% y/y outcome, versus 4.1% prior. This would put us back into the 2-4% BSP inflation target range. Late last year the BSP pit a forecast range of 3.6-4.4% for the Dec print.
• USD/IDR was above 15500 in early trade but now sits back at 15485 in latest dealings. This is only marginally weaker versus yesterday's closing levels in IDR terms. Focus today will be on local and USD debt auctions, particularly with global yields stabilizing somewhat in early 2024 dealings.