• Market wobbles. Renewed tensions in the Middle East dampen sentiment. Tech stocks slip back again. AUD still on the backfoot. AUD underperforms.
• Macro news. AU consumer confidence falls further below average. Doubts RBA may hike again. US CPI out tonight. Jump in US inflation may generate vol.
Global Trends
More wobbles and volatility across financial markets overnight. Tension and uncertainty in the Middle East remains. On the one hand, there were reports Kuwait is offering to sell oil to refiners in Asia for the first time since the conflict kicked off and that oil/gas supply via the Strait of Hormuz has picked up with vessels turning off transponders and travelling under the protection of the US Navy. On the other, the US launched “self defense” strikes against Iran after President Trump indicated Iran had downed a military helicopter. Brent crude whipped around on the headlines and looks to have settled near US$92.30/brl, a decent way from its conflict peak but still more than 50% above levels prevailing last December.
Elsewhere, US chip and tech stocks remained under pressure with the NASDAQ shedding ~1% to be nearly ~5% lower so far this month. That said, this comes after a very strong run, with the NASDAQ still up ~9.6% year-to-date or ~32% higher from where it ended 2024. Bond yields gave back ground with US rates falling ~4-5bps across the curve. In FX, the USD index tread water with EUR hovering near the lower end of its two-month range (now ~$1.1539) and USD/JPY up around cyclical highs (now ~160.37). And while the NZD consolidated towards the bottom of its multi-week range (now ~$0.5813) the AUD underperformed (now ~$0.7024).
In addition to Middle East headlines/developments, US CPI inflation (10:30pm AEST) will be center stage tonight. On the back of the jump in fuel prices and spillovers into other areas like airfares and logistics, as well as hotel/travel demand because of the World Cup US inflation is forecast to quicken with headline CPI potentially hitting its fast pace since April 2023 (mkt 4.2%pa from 3.8%pa). If realised, we think there is scope for markets to further bring forward when they think the US Fed may lift rates and/or how far it might go. This in turn could give the USD another boost. Markets are fully pricing in a US Fed rate rise by December with ~40bps of tightening factored in by next June.
Trans-Tasman Zone
Lingering uncertainty and bursts of volatility stemming from developments in the Middle East have exerted more downward pressure on the AUD. At ~$0.7024 the AUD is at levels last traded in mid-April and is ~3.5% from its early-May peak. By contrast, NZD consolidated (now ~$0.5813), albeit at the lower end of its multi-week range. The backdrop also caused the AUD to underperform on the cross-rates with falls of ~0.2-0.5% recorded against the EUR, JPY, GBP, NZD, CAD, and CNH. Major crosses like AUD/EUR (now ~0.6088), AUD/JPY (now ~112.65), and AUD/GBP (now ~0.5253) are also around respective multi-week lows, while AUD/CNH (now ~4.7615) is close to its one-year average.
Locally, the latest read on consumer confidence showed sentiment fell further below average in June with concerns about ‘current conditions’ and the outlook growing. At the same time, while business confidence improved over the month in May, it also remains at low levels, with ‘conditions’ indicating the economy is losing steam as higher interest rates, the jump in fuel costs, and heightened uncertainty constrain activity, in our view. Signs economic momentum is cooling raises doubts the RBA may need to hike rates further this cycle. Markets somewhat agree with only ~20bps of tightening now priced in by February (i.e. a ~80% chance of another rate rise).
As discussed above, we think US CPI (10:30pm AEST) could show an acceleration in inflation, which in turn may generate a further upward adjustment in US interest rate expectations that boosts the USD (and weighs on NZD and AUD). More generally, as mentioned previously, we think relative yield differentials might have peaked and could be starting to turn against the AUD. The RBA appears closer to the end than the beginning of its tightening phase, and views about other central banks like the US Fed are shifting towards rate hikes. Indeed, others could soon start to raise interest rates like the ECB this Thursday night. This, combined with the slowdown in Australian growth, challenges faced by the global/Asian economy from the Middle East conflict and prolonged disruptions to energy/supply-chains, and slight overvaluation (the AUD is ~1% above our ‘fair value’ estimate) suggest there are still more downside risks over the period ahead.
