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NZD underperforms

It has been a ‘risk-on’ start to the week for global markets after President Trump’s announcement over the weekend that he would “’indefinitely suspend” tariffs on Mexico, says Nick Smyth at BNZ Markets. Equities, bond yields and the USD are all higher. The NZD has underperformed.

Global equities have continued where they left off last week, rising strongly across the board.  The S&P500 is up 0.7% overnight, building on last week’s 3.3% rise, while the NASDAQ has outperformed and is 1.4% higher.  The S&P500 is now less than 2% from the all-time high reached at the end of April.  European equities had earlier made gains of around 0.5%. 

The rise in US equities occurred despite the market paring back Fed rate cut expectations after Trump’s U-turn on Mexican tariffs.  While a July rate cut is still more than 80% priced, the market now prices ‘only’ 60bps of cuts by the end of the year (down from almost 75bps in the immediate aftermath of Friday’s disappointing non-farm payrolls release).  The prospect of a series of mid-cycle “insurance cuts” from the Fed has been a key support to the US equity market recently, against a backdrop of downside risks to growth from the trade war with China. 

There hasn’t been much fresh news on the US-China trade front.  In an interview with CNBC, Trump said that, while he expected to meet Chinese President Xi at the G20 later this month, if the meeting didn’t go ahead, he would look to increase tariffs on the remaining $300b of Chinese imports immediately.  The G20 is shaping up to be a major risk event for markets.  Meanwhile, the White House acting director of the Budget Office reportedly requested that the White House delay its recently announced restrictions on certain Chinese firms, including Huawei, by two years.  The Budget Office said it would result in a “dramatic reduction” to the number of companies that are able to supply the US government. 

Global bond yields are unsurprisingly higher overnight, given the risk-on backdrop.   The 2 year Treasury yield is 5bps higher than Friday night’s close, at 1.9%, and over 10bps higher than the post-payrolls low in yields.  The 10 year Treasury yield is also up 6bps to 2.14%. 

The reversal in Fed rate cut expectations has helped boost the USD, which has appreciated against all of the G10 currencies overnight.  The DXY index is up 0.2% overnight, reversing some of last week’s 1.2% fall.  The BBDXY – which includes a 10% weight to the Mexican peso – is little changed. 

The NZD has been the worst performing currency so far this week, down 0.8% against the USD to 0.6610, followed closely by the AUD.  The moves lower in the NZD and AUD started after the release of Chinese trade data yesterday, which revealed a much larger than expected fall in imports.  The imports data added to pre-existing concerns among market participants that the Chinese domestic economy is slowing.  Stronger Chinese export data was dismissed by the market as reflecting front-loading by exporters before higher US tariffs come into effect. 

In other currencies, the GBP fell 0.4% after much weaker than expected GDP and industrial production data, the latter the weakest reading in 17 years.  Manufacturers had stock-piled ahead of the original March 29 Brexit leave date, but that has now seemingly gone into reverse given the Brexit extension to the end of October.  The Conservative party leadership contest continues to rumble away in the background as well, with Brexiteer Boris Johnson seen as a better than even chance of becoming the new Prime Minister by betting markets. 

There was little market impact from comments by BoJ Governor Kuroda that the BoJ still had the ability to ease further if required.  Kuroda said it was possible to cut rates further into negative territory, echoing comments from ECB President Draghi last week, as well as lower the 10 year target rate of its “yield curve control” policy (currently at 0.1%).  Kuroda said he didn’t see the need for action at the moment, and the BoJ was cognisant of the side-effects of its policies, but the market is conscious that the BoJ may want to ease policy in the future to counter-act a possible strengthening in the JPY if the Fed were to cut rates.  The JPY was 0.2% weaker overnight, at 108.40, but remains close to its strongest levels of the year (excluding the “flash crash” in early January). 

There was little movement in NZ swap rates yesterday, with activity very light given the Australian market was out for Queen’s Birthday.  While there was plenty of volatility in US rates after the weak payrolls release and Trump’s U-turn on Mexican tariffs, this all occurred after the NZ market had closed last week (US rates ended up little changed, on net, from the NZ market close on Friday afternoon).  Government bond yields were 2bps to 4bps higher. 


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