Market Wrap: Risk sentiment recovers on Tuesday - Westpac

Imre Speizer, FX Strategist at Westpac, notes that a lull in the Brexit-inspired turmoil saw risk sentiment recover in the markets on Tuesday.

Market Wrap

Global market sentiment: A lull in the Brexit-inspired turmoil saw equities, commodities, core interest rates and risky currencies all rebound yesterday. The S&P500 is up 1.3%, while the VIX barometer of risk aversion is back to pre-Brexit levels.

Interest rates: The US 10yr treasury yield yesterday bounced off 1.43% and continued overnight to 1.48%. The 2yr also rose, from 0.61% to 0.63%. Market pricing for Fed rate hikes firmed slightly, the July meeting seen as on hold, September a 10% chance of a cut, with hikes not fully expected until early 2019.

Currencies:  The US dollar underperformed all apart from the safe-haven yen and Swiss franc. EUR rose from 1.1060 to 1.1112, but retraced in NY to 1.1035. GBP finally tired after a 19 cent fall over two days, bouncing to 1.3419 (compared to the 1.3121 low seen on Monday). USD/JPY rose from 101.80 to 102.84 amid the reduced need for safe-havens. AUD initially pushed higher to 0.7415 but then slipped back to 0.7343. NZD similarly rose to 0.7086 before falling back to 0.7021. AUD/NZD remained stable, between 1.0450 and 1.0490.

Economic Wrap

US Q1 GDP was re-estimated at 1.1% (from 0.8% previously and 1.0% expected), Within the report service consumption was much weaker than expected but offset by large rises in intellectual property investment, imports and inventories.

Case-Shiller house prices for 20 cities rose 0.45% in April (vs 0.58% expected), for an annual gain of 5.4%.

Conference Board consumer confidence index rose from 92.6 to 98.0 (vs 93.5 expected). Low fuel prices, higher house prices, have supported confidence, while the looming US election and Brexit have been headwinds.

Richmond Fed manufacturing index fell from -1 to -7 (vs +3 expected)., the weakness broad-based.

Economic Event Risks Today

US: Income and consumption data for May will be released. Incomes are growing at a solid pace. Consumption growth should moderate after April’s spike; services should remain supportive. The PCE deflator is likely to remain modest around 1% - well below target.

China:: Consumer sentiment (Westpac-MNI). May saw a 3.1% fall, consumers less convinced about economic prospects and their financial situation. The backdrop for June includes continued weakness in the industrial sector but an improvement for housing