Financial markets ignore geopolitical risks

Kia ora,

Welcome to Tuesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

I'm David Chaston and this is the international edition from Interest.co.nz.

And today we lead with news markets seemed relieved that the Iranians responded in a localised and 'measured' way to the US attack. They took this as a sign the conflict will stay regional. Even the oil price eased back. To financial markets, 'normal' doesn't look like it is being threatened.

But that is not to say 'normal' is great. And it looks like markets are stubbornly refusing to price in geopolitical risks, even when they are obviously high. If they have this collective judgement wrong, then the correction could be sharp.

Meanwhile, the S&P Global/Markit PMIs for the US report that the factory sector held at a small expansion, one underpinned by a small rise in new orders, even if new export orders fell rather notably. More notable was the sharpish rise in costs and prices. This sector is losing its international competitiveness. Their service sector is expanding but the modest pace slowed in June.

US existing home sales however brought a surprise surge in May from April to a sales rate exceeding 4 mln/year. However that is still lower than year-ago levels, and listings surged even more. Still, the average price rose to US$422,800, although to be fair that is only back to about the level it first achieved in June 2022.

The US heatwave, which we noted yesterday may affect 200 mln people there, is worrying their electricity grid operators. They anticipate a 14 year high for electricity demand in the US north east. So it will be no surprise to know that they have issued warnings about supply interruptions.

In China, Bloomberg is reporting that Beijing regulators are instructing state-owned developers to avoid defaulting on publicly issued debt. It is the latest attempt by authorities to keep a lid on their property crisis that just won't end or get properly resolved. There are about 20 SOE developers, all large, and all troubled. Clearly credit risk is still worryingly high.

In Japan, although new order growth wasn't flash, their manufacturing sector expanded on a stock-build. And that was their first expansion in over a year. Meanwhile their services expansion extended, now for more than 12 months consecutively, and that was driven by new orders. These conclusions come from the early June PMI released by S&P Global/Markit.

In India, their advance June PMIs show gains in both their factory and service sectors from already very good levels of expansion.

In Europe, the same June PMIs show new order declines have basically ended, and in Germany in particular they rose for the first time in more than three years. Cost inflation is down, and now no longer an issue. Business sentiment rose. Their factory sector is expanding while their services sector stopped contracting in June. While none of this is vigorous, if it is a turning point, it is turning in the right way for them

Meanwhile the modest expansion the S&P Global/Markit PMIs report in Australia extends this modesty to six straight months there. They haven't had a run like this since late 2022. While an expansion will be hard to notice on the ground, it is encouraging that both the factory sector and the service sector are moving in the same upward direction.

The UST 10yr yield is now at 4.33%, and down -5 bps from this time yesterday.

The price of gold will start today at US$3,381/oz, and up +US$14 from yesterday.

American oil prices are down -US$4 from yesterday at just under US$74/bbl while the international Brent price is now just over US$72.50/bbl and down a bit more.

The Kiwi dollar is still just on 59.7 USc, little-changed from yesterday. Against the Aussie we are holding at 92.5 AUc. Against the euro we are down -20 bps at 51.6 euro cents. That all means our TWI-5 starts today at under 67.7 and just marginally softer than yesterday.

The bitcoin price starts today at US$102,349 and back up 2.8% from this time yesterday. Volatility over the past 24 hours has been moderate at just under +/-2.0%. There was a general recovery yesterday across most cryptos, but they are still down sharply from a week ago.

You can get more news affecting the economy in New Zealand from interest.co.nz.

Kia ora. I'm David Chaston. And we will do this again tomorrow.