Risk aversion resumes as US returns from holiday - Westpac

Imre Speizer, FX Strategist at Westpac, summarizes Tuesday's action, noting that risk aversion resumed as the US returned from holiday.

Market Wrap

The S&P500 is down 1.0%, oil is down over 4%, interest rates are lower and the US dollar is stronger. Contributing to the mood was Brexit-related news including UK property funds refusing redemptions and Italian banks looking vulnerable. In addition, US shadow lending had slowed, and the US data overnight was disappointing

Global market sentiment: Risk aversion resumed as the US returned from holiday. The S&P500 is down 1.0%, oil is down over 4%, interest rates are lower and the US dollar is stronger. Contributing to the mood was Brexit-related news including UK property funds refusing redemptions and Italian banks looking vulnerable. In addition, US shadow lending had slowed, and the US data overnight was disappointing.

Interest rates: US 10yr treasury yields fell to a fresh record low of 1.36%, 2yr yields down from 0.59% to 0.55%. Market pricing of the Fed slipped, still implying a 5% chance of a rate hike in September but only a 10% chance by December. FOMC member Bullard said Brexit, EU stability, and US politics could increase economic risks.

Currencies:  The US dollar index rose by around 0.5%. EUR fell from 1.1186 to 1.1066. Underperformer GBP fell from 1.3250 to 1.3000 – a fresh 31-year low. The safe-haven yen outperformed, USD/JPY falling from 102.00 to 100.45. AUD fell from 0.7528 to 0.7454. NZD fell from 0.7220 to 0.7140. AUD/NZD rose from 1.0410 to 1.0445.

Economic Wrap

The GDT dairy auction resulted in a 0.4% fall in prices overall, with a 1.6% fall in whole milk powder (vs futures predictions of +1% which were offset by the 4% fall in oil overnight and the 50% seasonal jump in WMP supply).

US durable goods orders for May were revised to -2.3% (vs -2.2% expected). That fed into May factory orders which fell 1.0% (vs -0.8% expected).

Economic Event Risks Today

US: FOMC minutes (from 15 June meeting). Discussion of updated forecasts will be of particular interest, particularly for the Fed funds rate. The balance of risks will also be key: hopes for domestic demand, versus USD strength and a soft global backdrop.

ISM non manufacturing. Continues to point to moderate growth for the service sector, the USD affecting activity