MNI EUROPEAN MARKETS ANALYSIS: Surprise PBoC Rate Cut Weighs On Yuan & Local Yields

US Tsys: Futures Steady, Curve Flattens As Market Rethinks "Trump Trade"

• Treasury futures initially sold off a touch after China lowered the LPR, although we have since recovered that move to trade little changed today. TUU4 trades - 00⅛ at 102-15, while TYU4 is + 02+ at 110-29, ranges have been tight today, while volumes have been below average.
• The treasury curve has flattened, reversing some of the curve steepening that has occurred as a part of the "Trump Trade", although it should be noted that betting markets have not really swung back in favor of the democrats. This morning the 2y is -0.7bps at 4.504%, while the 10yr is trading -1.6bps at 4.223%
• Projected rate cut pricing into year end look steady to mixed vs. late Thursday levels (*) -- Sep gains while Nov and Dec decline: July'24 at -4.5% w/ cumulative at -1.1bp at 5.318%, Sep'24 cumulative -25.9bp (-25.2bp), Nov'24 cumulative -40.6bp (-41.1bp), Dec'24 -62.9bp (-64.6bp)
• looking ahead today we have Chicago Fed Nat Activity Index, the Fed is in a policy blackout until August 1.

US POLITICS: Biden Drops Out, Democrat Odds Firm But Still Well Behind The Republicans

As news breaks of President Biden Dropping out of the 2024 Presidential race, VP Kamala Harris is the favorite to win the democrat party nomination.

• Betting markets have Kamala at 82% chance of leading, with the only other potential nominee gaining ground being Hilary Clinton who is now an 8% chance, up from 3% last week.
• Donald Trump is still the likely next President according to PredictIt, at 61% chance although this is down from a high of 67% early last week, while Kamala Harris is now at a 38% chance of being the next President
• The Republicans still hold a strong lead at 61%, although the Democrats are now a 44% chance, the highest they have been since July 12th.

JGBS: Subdued Session, Futures Fail To Hold Early Gains, BoJ Rinban Operations Tomorrow

JGB futures have slipped back into negative territory, -6 compared to the settlement levels, after failing to hold strength sparked by gains in cash US tsys following news that President Biden would not contest the November election.

• Early strength may also have received support from the surprise monetary easing by the PBoC. The PBoC announced a 10bp cut to the 7-day reverse repo rate, along with lower 1yr and 5yr LPRs.
• Today, the local calendar will see Tokyo Condominiums for Sale data shortly alongside an Enhanced Liquidity Auction covering OTR 1-5-year JGBs later.
• Cash JGBs are flat (2-3-year) to 3bps cheaper (40-year). The benchmark 10-year yield is 0.9bp lower at 1.053% versus the cycle high of 1.108%.
• The swaps curve has twist-steepened, pivoting at the 20-year, with rates 1.3bps lower to 2.2bps higher. Swap spreads are tighter.
• Tomorrow, the local calendar will see Machine Tool Orders data alongside BoJ Rinban Operations covering 1-10-year JGBs.

AUSSIE BONDS: Holding Weaker, AU-CA 10Y Diff. Widest Since December

ACGBs (YM -2.0 & XM -3.5) sit weaker but off Sydney session cheaps. The local calendar was news flow light today.

• Nevertheless, ACGBs largely looked through potentially constructive developments abroad, namely richer cash US tsys following President Biden’s announcement that he would not contest the November election and the surprise monetary easing by the PBoC.
• At 94bps, the AU-CA cash 10-year yield differential sits at its highest level since last December. (See link)
• (MNI) The Reserve Bank of Australia wants to make greater use of real-time metrics and would benefit greatly from more immediate services-sector data in future as it works to more accurately gauge the state of the economy and inform its monetary-policy decisions, a former RBA economist told MNI. (See link)
• Cash ACGBs are 2-3bps cheaper, with the AU-US 10-year yield differential at +10bps
• Swap rates are 2-4bps higher.
• The bill strip pricing is -2 to -3.
• RBA-dated OIS pricing is 1-3bps firmer for 2025 meetings. Terminal rate expectations sit at 4.44%.
• ICYMI, the AOFM announced on Friday that a new Dec-35 bond is planned to be issued via syndication this week (subject to market conditions).
• This week, the local calendar is empty apart from Preliminary Judo Bank PMIs on Wednesday.

AUSSIE BONDS: AU-CA 10-Year Yield Differential At Fair Value At Highest Level Since December

The BoC is widely expected to cut its policy rate by another 25bps to 4.50% at this week’s meeting, with the markets pricing over 95% chance of a cut, up from less than 50% two weeks ago.

• From a cross-market perspective, the AU-CA 3-month swap rate 1-year forward (1Y3M) spread is currently at its highest level since December 2022. This spread sits within the upper half of the -50bps to +100bps range observed over the past two years. The 1Y3M differential serves as a proxy for the expected relative policy path over the next 12 months.
• A simple regression of the AU-CA cash 10-year yield differential, which is currently at its highest level since last December, against the AU-CA 1Y3M spread over the past 12 months suggests that the 10-year yield differential is currently at its fair value of +94bps.

Figure 1: AU-CA Cash 10-Year Yield Diff. (%) vs. AU-CA 1Y3M Swap Diff. (%)

Source: MNI – Market News / Bloomberg

AUSTRALIAN POLITICS: Hung Parliament Still Looks Most Likely Outcome In 2025

Polls have been consistently suggesting that if an election was held at the time of the survey there would be a hung parliament with Labor in minority government. The July Newspoll from The Australian is consistent with this view. The prospect of losing its lower house majority plus rate cuts appearing to be some way off or rates possibly rising further, make an early election look less likely. The government has to hold a vote before mid-May 2025.

• Newspoll reports a 2pp increase in the opposition Coalition’s primary support to 38% with the incumbent Labor party up 1pp to 33%. The Greens are stable on 13%. This results in a two-party preferred split of 51:49 in favour of the government.
• In the event of a minority Labor government, the Coalition is unlikely to provide support. The other options would be to govern with support of Teal independents, assuming enough hold onto their seats, or with the Greens. The latter would be highly likely to require a policy shift to the left.
• While voters still have PM Albanese as the preferred PM, the gap narrowed 1pp. When looking at leaders, 35% didn’t know who they would want to lead the Labor party and 39% the Coalition. Australians do not seem convinced by the political leadership.

NZGBS: Closed Cheaper, NZ_US10Y Diff Wider, Light Local Calendar Again Tomorrow

NZGBs closed with benchmarks near session cheaps, yields 2-4bps higher.

• The NZ-US 10-year yield differential widened by 3bps, reversing some of the narrowing that followed the RBNZ’s policy announcement on July 10. This recent narrowing had brought the NZ-US differential to its tightest level since late 2022.
• Outside of the previously outlined Trade balance data, there hasn't been much in the way of domestic drivers to flag.
• NZGBs largely looked through potentially constructive developments abroad, namely richer cash US tsys following President Biden’s announcement that he would not contest the November election and the surprise monetary easing by the PBoC. The PBoC announced a 10bp cut to the 7-day reverse repo rate, along with lower 1yr and 5yr LPRs.
• Swap rates closed 1-2bps higher, with implied swap spreads tighter.
• RBNZ dated OIS pricing closed slightly mixed across meetings, with 2024 meetings little changed and 2025 meetings 2bps softer to 3bps firmer. A cumulative 68bps of easing is priced by year-end.
• Tomorrow, the local calendar is empty.
• On Thursday, the NZ Treasury plans to sell NZ$300mn of the 3.0% Apr-29 bond and NZ$200mn of the 4.50% May-35 bond.

NEW ZEALAND DATA: Weak Shipments To China Weigh On Export Growth

The June non-seasonally adjusted merchandise trade surplus widened to $699mn from a downwardly-revised $54mn with the YTD deficit narrowing to $9.4bn from $10.2bn. Exports outperformed imports again but turned down to -0.1% y/y while imports sank 13% y/y aiding continued improvement in the trade position. Imports of consumer goods were at their lowest level since February 2022 in line with the weak domestic economy and outlook, but the rate of contraction has stabilised.

• Exports to China and Australia continue to contract while there is a strong trend to the US, Europe and Japan. China is NZ’s most important export destination worth almost 27% of the total in 2023 and over 5% of GDP. The US is gradually becoming more important though with the export share rising 2pp to 12% in 2023 and up 0.9pp to 12.9% in H1 2024.

Source: MNI - Market News/Refinitiv

• Consumer goods imports fell 9% y/y in June with the 3-month average improving to -2.5% y/y. On the capex side, plant & machinery imports were also weak down 12.8% y/y, but transport equipment rose 30.9% y/y.

Source: MNI - Market News/Refinitiv

• The seasonally adjusted goods trade deficit narrowed in June to $334mn from $981mn but Q2 saw a widening to $2.2bn from $1.5bn in Q1. Depending on the other components, this result may weigh on the balance of payments improvement. The current account deficit only improved 0.1pp to 6.8% of GDP in Q1 but is down from a peak of 8.8% in Q4 2022, but further progress is needed. Q2 is released on September 18.

FOREX: USD Weakness Limited As Biden Exits Race, NZD Tests Sub 0.6000, Multi Month Lows

The USD was soft in early trade, as late US Sunday news saw President Biden drop out of the Presidential race. This saw some early pressure on the Trump reflation theme, as election odds for the Republicans have moved away from cycle highs seen through last week. Still, the USD has recovered most of these losses.

• The BBDXY USD index got to 1253.37 in the first part of trade, before rebounding to 1256. We sit slightly lower in latest dealings. EUR sits marginally higher against the USD, but remains comfortably within recent ranges. USD/JPY is around 157.50, little changed for the session.
• Both US Tsy and equity futures opened higher, but sit away from best levels now. Cash Tsy yields sit slightly lower, more so at the back end, the 10yr back to the low 4.22% region (off 1.6bps).
• AUD and NZD have both fallen around 0.20%, underperforming the major moves. Weaker yuan levels post a surprise revere repo and loan prime rate cuts has weighed and likely driven some negative spill over. Broader China sentiment still remains cautious around the growth outlook, with incremental policy changes not seen as dramatically shifting the growth outlook.
• Regional equity markets are mostly weaker as well, led by tech sensitive plays, which has likely hurt FX risk appetite at the margins as well.
• NZD/USD is now sub 0.6000, fresh lows back to the first half of May. AUD/USD at 0.6670 is back towards early July levels.
• The data calendar is very light through Monday offshore markets.

ASIA STOCKS: HK Equities Out-Perform, China Lowers LPRs 0.10%

Chinese and Hong Kong equities are mixed today, with Hong Kong equities playing catch-up after underperforming on Friday. The PBoC cut interest rates this morning in order to boost sentiment, however onshore markets have largely ignored this. It was largely suspected that Friday out-performance from onshore markets was tied to the China National team stepping in to support the market, with those moves being erased today. Investors have growing concerns around a lack of any major support announced for the struggling property sector out of the Third Plenum last week.

• Hong Kong equities are mostly higher today, with the exception of property indices which are trading slightly lower (Mainland, -0.37%, HS Property, unchanged), while the HSTech Index is trading 1.67% higher and the HSI is up 0.86%.
• China onshore markets have erased most of Friday's gains, with the CSI 300 down 0.85%, small-cap indices are faring better with the CSI 1000 up 0.10% and the CSI 2000 up 0.45%
• China has pledged to accelerate a housing model emphasizing renting and affordable homes following a record property slump, with plans to support local government efforts to upgrade housing and ease property ownership restrictions. While it was reported by BBG that China Fortune Land Development is attempting to resolve its debt by working with a buyer to purchase bonds at deeply discounted prices and then canceling them. The company has been negotiating private contracts with bondholders and a third party, offering 10 yuan for every 100 yuan of bond principal, the companies USD bonds were last trading at between 2-4c on the dollar.
• Trump has expressed support for Chinese automakers building factories in the US to boost the economy, in contrast to President Biden's approach of blocking cars linked to China. Trump suggested imposing tariffs up to 200% on cars made in Mexico by Chinese companies if they don't build plants in the US, while the Biden administration has scrutinized vehicles with Chinese ties and sought to exclude Chinese government-owned firms from tax credits.
• Later today with have Hong Kong CPI Composite.

ASIA PAC STOCKS: Equities Lower As Investor Dump Tech, Weigh Up Biden Dropping Out

Regional Asian equities are lower today, driven by various factors including political uncertainties, foreign investors flows and the PBoC lowering LPRs. Asian tech stocks continue to see heavy selling, especially in Taiwan this is largely tied to comments made last week by Trump and the Biden administration, while investors weigh up the implications of Joe Biden ending his re-election campaign and endorsing Kamala Harris. The VIX spiked on Friday hitting 17, levels not seen since late April.

• Japanese equities are lower today, growth stocks are the worst hit, while investors have continued selling tech stocks after the Biden administration announced potential trade restrictions on companies selling to China, investors are also looking to cut positions as we head into earnings season which kicks off on Tuesday with motor maker Nidec releasing earnings. Both the Topix and Nikkei are trading about 1% lower, while the TSE Growth 250 is down 2.50%, banking stocks are the best performing with the Topix Bank Index down just 0.70%.
• South Korean equities are continuing to be hit hard by the weakness int he semiconductor sector, with the likes of SK Hynix down 1.90%. Foreign investors continue to sell local stocks with $327m outflow on Friday, foreign investors have continued that theme today with tech stocks again being sold, although there is a bit of a rotation into financials. The Kospi is currently trading 1.20% lower, while the small-cap focus Kosdaq is down 2.45% and now trading towards the ytd lows made in Feb.
• Taiwan equities are the worst performing market today as heavy selling continues in semiconductor names with TSMC off 3%. Foreign investors sold about $5.5b in Taiwanese stocks last week and have now erased all inflows for the year. The selling pressure is largely on the back of Trump's comments on Taiwan protecting themselves from China, and dominance in the semiconductor space, plus the Biden Administrations comments on trade restrictions. The Taiex is trading down 2.50%.
• Australian equities are largely tracking global prices lower, metals and miners are the worst performing sector as global commodity prices trade lower this morning, the ASX200 is 0.70% lower. New Zealand equities are slightly higher this morning after healthcare stocks surged on the back of Arvida making a bid for Stonepeak at over a 50% premium to last traded price, pulling the sector up with it, the NZX 50 is 0.20% higher.
• In EM Asia markets are mixed, Indonesia's JCI is 0.15% higher, Philippine's PSEi is up 0.40% & India's Nifty 50 is 0.10% higher, while Singapore's Strait Times is 0.10% lower and Malaysia's Malay KLCI is 1.10% lower.

ASIA EQUITY FLOWS: Foreign Investors Continue To Sell Taiwan Stocks

• South Korea: South Korean equities saw outflows of $327m Friday, contributing to a net outflow of $625m over the past five trading days. Foreign investors have been heavy sellers of tech stocks recently, in particular semiconductor names, or any tech firm that sells a lot into China. The 5-day average outflow is $125m, significantly lower than the 20-day average inflow of $106m and the 100-day average inflow of $113m. Year-to-date, South Korea has experienced substantial inflows totaling $18.887b.
• Taiwan: Foreign investors continue to heavily sell Taiwanese equities with a significant outflow of $2.12b Friday, this marked the largest outflow since Israel carried out a military strike on Iran and the third largest outflow for the year. This has resulted in a net outflow of $5.401b over the past five trading days. The 5-day average outflow is $1080m, considerably higher than the 20-day average outflow of $482m and the 100-day average outflow of $82m. Year-to-date, Taiwan has experienced outflows totaling $3.063b.
• India: Indian equities saw inflows of $604m Thursday, contributing to a net inflow of $1.886b over the past five trading days. The 5-day average inflow is $377m, higher than the 20-day average inflow of $278m but below the 100-day average outflow of $44m. Year-to-date, India has experienced inflows totaling $3.847b.
• Indonesia: Indonesian equities recorded inflows of $5m Friday, resulting in a net inflow of $47m over the past five trading days. The 5-day average outflow is $9m, below the 20-day average inflow of $17m and the 100-day average outflow of $8m. Year-to-date, Indonesia has experienced outflows totaling $122m.
• Thailand: Thai equities saw inflows of $8m Friday, contributing to a net inflow of $49m over the past five trading days. The 5-day average inflow is $10m, better than the 20-day average outflow of $15m and the 100-day average outflow of $25m. Year-to-date, Thailand has seen significant outflows amounting to $3.291b.
• Malaysia: Malaysian equities experienced inflows of $20m Friday, contributing to a 5-day net inflow of $159m. The 5-day average inflow is $32m, higher than the 20-day average inflow of $12m and the 100-day average outflow of $2m. Year-to-date, Malaysia has experienced inflows totaling $172m.
• Philippines: Philippine equities saw inflows of $25m Friday with a 5-day net inflow of $48m. The 5-day average inflow is $10m, better than the 20-day average inflow of $3m and the 100-day average outflow of $7m. Year-to-date, the Philippines has seen outflows totaling $471m.

Table 1: EM Asia Equity Flows

OIL: Crude Higher As China Cuts Rates

After falling around 3% on Friday due to demand concerns, especially from China, and the stronger USD, oil prices are moderately higher today following the PBoC cutting rates to support the economy and President Biden standing aside from the 2024 election campaign. The USD index is off its intraday low but is still down around 0.1% today.

• Brent is up 0.6% to $83.11/bbl, close to the intraday high of $83.22, while WTI is up 0.5% to $79.04/bbl after a high of $79.13. On Friday the two benchmarks fell to lows of $82.56 and $78.59 respectively.
• The PBoC unexpectedly cut the 7-day repo rate, 1-year & 5-year LPRs by 10bp today to support the economy after Q2 GDP disappointed and the Third Plenum meeting took place.
• In an interview with MNI, an energy expert said that China’s consumption and imports of oil will slow to single digit growth in 2024 from 11.5% y/y due to increased EV usage and base effects.
• Although oil prices have risen, VP Harris is seen as less supportive of the sector and may be more likely to challenge its environmental record. She sued oil companies when she was California’s attorney general and has been more critical of fracking than Biden, according to Bloomberg.
• Wildfires in Alberta Canada continue to threaten the oil sands with around 348kbd of output at risk, according to the Alberta Energy Regulator.
• There are few events today with only the US Chicago Fed June index and May German retail sales the main releases.

GOLD: Gold Stronger As Biden Ends His Re-Election Bid

Gold is 0.3% higher in today’s Asia-Pac session, after closing 1.8% lower at $2400.83 on Friday. Bullion is currently over 3% lower than its fresh record high set last Wednesday.

• Gold gained today as markets weighed President Joe Biden’s decision to end his re-election bid, which sparked fresh questions over whether the move will help or hinder Donald Trump’s chances of returning to the White House.
• There have been reports that former President Obama and senior leader Pelosi told him privately that it was time. Biden has endorsed VP Harris, but it is not a given that she will automatically be the party’s candidate. She will still need to have the endorsement of at least 1976 delegates at August’s Democratic Convention.
• According to MNI’s technicals team, the trend condition in gold remains bullish, despite the fade off the mid-week highs and the medium-term trend still points higher. The breach of key resistance at $2,450.1, the May 20 high, opens the $2500.00 handle next. Initial support is at $2,389.5, the 20-day EMA.

ASIA FX: Rate Cuts Undermine The Yuan, USD/TWD Presses Towards 33.00

USD/Asia pairs are mostly higher in the first part of Monday trade. Early USD weakness (reflecting spill over from US Biden exiting the Presidential race) proved to be short lived. USD/CNH has mostly tracked higher, owing to surprise 7-day reverse repo and loan prime rate cuts. TWD was weaker, hitting fresh lows against the USD back to 2016. IDR also lost some ground, while SGD and MYR were close to steady.

• The China rate cuts went against the market expectation, although the broader sell-side consensus is for easier policy settings in H2, so shouldn't be that surprising. They come after last week's poor Q2/retail sales data and the Third Plenum meeting, where emphasis was on boosting the domestic demand backdrop. Still, the broader consensus that incremental policy adjustment will remain the main playbook used hasn't shifted. USD/CNH is back to 7.2950. We aren't too far off earlier July highs above 7.3100. Earlier lows came at 7.2781, as US Republican odds eased as Biden exited the White House race.
• Spot USD/KRW has been relatively steady, down slightly from end Friday levels last week, the pair near 1389 in latest dealings. The firm tone to export growth from the first 20-days July trade data has potentially helped at the margin. Local equities are weaker though, in line with broader tech softness. Official resistance to a sharp move the 1390/1400 region may also be a factor.
• Spot USD/TWD has risen 0.40% so far today, last 32.88. The next logical target is 33.00 in the pair. Note early 2016 highs came in around 33.80 for the pair. Spot TWD is 0.35% weaker so far today. The 20-day EMA sits on the downside, back at 32.58. The TWD is the weakest performer in EM Asia FX so far today. Familiar factors are in play for TWD weakness. The onshore equity market correction continues, with the Taiex off more than 2.35%, although we are away from session lows. Offshore investors sold $5.4bn of local shares last week, which was the second largest weekly outflow for 2024. Tech trade restrictions/potential US geopolitical shifts remain key concerns for local equities.
• USD/IDR has moved higher, last near 16230, leaving the pair out of its recent down trend channel from late June. We are a little over 0.20% weaker in IDR terms. Equity losses in the region (even with local market rising a touch), will be weighing on IDR. Elsewhere, USD/PHP sits a touch higher, last above 58.40. SGD and MYR are closed to unchanged, while Thailand markets are closed today.