Trouble in Hong Kong and Argentina adds to Chinese credit data concerns, pushing investors into a risk-averse mood and boosting safe-haven currencies

It’s been a risk-off session for markets overnight, after Hong Kong’s airport was shut down by protestors, Argentina’s currency got hammered after President Macri lost primary elections by a large margin and Chinese credit data was weaker than expected. 

Equities and government bond yields fell sharply. 

The safe-haven Japanese yen and Swiss franc have outperformed while the NZD has fallen amidst the risk-off backdrop. 

With no economic data released in the US or Europe, the market’s focus has been the continued disruption in Hong Kong.  Flights were cancelled and Hong Kong’s airport was closed yesterday amidst protests from pro-democracy supporters, raising the risk of Chinese government intervention to restore order.  Hong Kong’s Hang Seng index fell 0.45% yesterday, despite equity markets in most other Asian countries rising (China Shanghai Composite was 1.5% higher yesterday)

Risk sentiment hasn’t been helped by developments in Argentina, where current President Macri received a whopping 15.5% less votes in the weekend primaries than the opposition populist party (which includes former President Christina Fernández de Kirchner).  The national election is in October, but Macri’s poor showing points to a high chance of a change in government, in turn putting at risk the market-friendly reforms his administration has attempted to introduce in recent years.  The Argentinean peso fell as much as 30% against the USD, although it has recovered to be now down ‘only’ 16%.  Argentina’s 100 year US dollar bond traded almost 25% lower at a cash price of 57 cents in the dollar, implying a high chance of default (which the sovereign CDS market puts at around 75%).  There was subsequent weakness in other emerging market currencies, with the JP Morgan EMFX index falling 0.4% to its lowest level in almost 12 months.

Adding to the gloom, Chinese credit growth and lending data were much weaker than expected in July.  And the editor of the Global Times, thought to be well-connected to the Chinese government, tweeted that the Chinese state-owned People’s Daily will soon publish an article “vowing China can defeat any challenge and pressure of the US.”

Amidst this combination of negative news over the past 24 hours, there has been another sharp fall in global government bond yields.  The US 10 year Treasury yield fell 11bps overnight, taking it to below 1.64% and near to its recent lows.  The rally in long-dated US government bonds amidst the flight to safety had led the US 2 year 10 year curve to flatten to new lows of just 6bps.  The German 10 year bund fell 1.5bps to -0.59%, near its record low, while Australian bond futures point to a 5bp fall in Australia’s 10 year bond yield since the NZ market close yesterday.  NZ’s 10 year swap rate was 2bps higher yesterday, at 1.3%, but it will likely open lower this morning. 

US equity markets have also fallen sharply, with the S&P500 and NASDAQ both down around 1.3%.  The Financials sector (-1.9%) has led losses on the S&P500, with the fall in rates and flatter yield curve perceived as negative for bank net interest margins, while the Energy sector has also fallen sharply (-1.4%) despite a modest rise in crude oil prices. 

The yen and Swiss franc have outperformed amidst the risk-off environment, although USD/JPY has managed to hold above the 105 level for now.  A large increase in SNB’s sight deposits last week, the most in more than two years, suggests that the central bank has increased its FX intervention to slow the pace of the franc’s rise. 

The GBP has been the other currency to outperform over the past 24 hours and is 0.4% higher to 1.2080.  UK media are reporting that remain-supporting MPs are drawing up plans to take control of the legislative agenda on the 9th of September, the week after parliament returns from recess, in an attempt to constrain Boris Johnson’s government from going ahead with a no-deal Brexit. 

The NZD and AUD have underperformed amidst the weakness in equities and broader increase in risk aversion.  The NZD has fallen 0.3% to 0.6450 while the AUD is 0.5% weaker at 0.6750. 

The NZD spiked lower briefly yesterday after Bloomberg reported on NZ Treasury analysis from June that pointed to an effective lower bound on the OCR of -0.35%.  Similar to recent comments made by Governor Orr, the Treasury paper also outlined that quantitative easing (QE) carried risks that might mean it is less preferable than other unconventional policies, in the event they were ever needed.  The RBNZ and Treasury’s view seems to be somewhat at odds with the RBA; RBA Governor Lowe said on Friday that it would likely cut its cash rate to 0.5% before considering a package of QE measures, although it thought such a scenario was still a small possibility. 

Yesterday’s NZ electronic cards transactions data was very weak, with the retail component falling 0.1% in July. While the monthly data can be noisy, and ECT data has been a poor guide to retail sales over recent times, the downward momentum is likely to be a concern for the RBNZ (annual growth in the seasonally adjusted series has slipped below 2%, from nearly 5% a year ago).

There is more on the economic calendar in the day ahead, with the NAB business survey released in Australia as well as the German ZEW survey and US CPI.