Local currencies fare relatively well as the bond yield dives gather pace. ECB policy makers primed for more QE. Equities whipsawed. Brexit gets even messier. Markets see further RBNZ cuts

Global bond yields have continued to head sharply lower overnight after an ECB Governing Council member signalled a large package of stimulus measures at the central bank’s meeting next month. 

US equity markets have been whipsawed by headlines on China’s response to the latest US tariffs but, net-net, are close to flat on the day. 

Safe haven currencies have given back some of their recent outperformance overnight and the NZD and AUD have appreciated modestly, the latter boosted by a strong employment report. 

Global yields continue to set new records amidst the massive rally in government bonds.  Yesterday, the 30 year Treasury yield broke below 2% for the first time on record while, in Europe, the German 30 year bund fell 8bps overnight to an eye watering -0.28%.  Austria’s 100 year bond, issued less than 2 years ago, now trades at a cash price of 210, and a yield of just 0.6% - this bond has returned 80% this year-to-date.  NZ’s 10 year government bond yield closed yesterday at 1.01%, and it will likely break below the 1% mark this morning for the first time. 

The primary trigger for the overnight move in global rates has been comments made by ECB  policymaker and Finnish central bank Governor Rehn in an interview with the WSJ entitled “ECB Has Big Bazooka Primed for September, Top Official Says”. Rehn said he favoured the ECB restarting QE as well as cutting interest rates in September, and that it was better to overshoot than undershoot market expectations.  Rehn even refused to rule out purchases of equities, in order to boost financial conditions.  The comments sparked a huge rally in European government bonds, especially in peripheral countries that would benefit from a resumption in QE.  Italy’s 10 year bond yield fell 18bps to just 1.33% while short-dated German bunds are on the verge of breaching -1% for the first time. 

The rally in European bonds spilled over into other markets, with the 10 year Treasury yield falling as much as 11bps to 1.47%, although it has since reversed some of that move, to now trade at 1.53%.  The 10 year US Treasury yield has now fallen around 50bps in the space of just 12 trading days and it is now approaching its all-time low of 1.32%.  US economic data released overnight was actually better than expected, with retail sales proving much stronger than economist expectations in July, boosted in part by strong online sales due to Amazon’s Prime Day.  The Atlanta Fed’s GDPNow estimate for Q3 GDP was bumped up from 1.9% to 2.2% after the data.  The Philadelphia Fed and Empire manufacturing surveys were also stronger than expected, despite those surveys being undertaken after Trump’s latest tariff announcement, providing a tentative, positive sign for the nationwide ISM manufacturing survey that’s released in early September.  Of course, markets are forward looking, but the starting point for the US economy, and especially the US consumer, looks in reasonable shape. 

Equities have been whipsawed back and forth on US-China trade headlines.  A statement by the State Council Tariff Committee said China “has no choice but to take necessary measures to retaliate” to Trump’s latest tariff measures, which pushed the S&P500 down as much as 1.7% from its trading levels at the time.  Equities bounced back however after a spokesperson at China’s Ministry of Foreign Affairs said China “hopes the U.S. will meet China halfway and implement the consensus reached by the two leaders during their meeting in Osaka.”  The S&P500 is currently flat on the day while the NASDAQ is 0.3% lower.  Strong earnings by retail bellwether Walmart, which described the US consumer as in “solid health”, and the better than expected retail sales release had also provided some support to US equities. 

The USD is generally stronger over the past 24 hours, in part reflecting the dovish comments by ECB policymaker Rehn.  The 0.2% rise in the DXY, its third consecutive session of gains, is mostly a reflection of the 0.3% fall in the EUR, to just above 1.11.  The safe-haven Japanese yen and the Swiss franc have fallen slightly overnight, both by around 0.1%, reversing some of their recent strong gains. 

The GBP has outperformed, for a change, and is the top-performing currency over the past 24 hours, up 0.4% to 1.2110.  Labour leader Jeremy Corbyn invited MPs from opposition parties, including Conservative rebels, to support Labour in forming an emergency government for a “strictly time-limited” period, to avert a no deal Brexit and arrange for new elections.  Corbyn said he would bring forth a no confidence motion in Boris Johnson’s government at the “earliest opportunity when we can be confidence of success”, and if that vote were to succeed, opposition parties would have 14 days to attempt to form an alternative government.  Corbyn’s invitation has had mixed feedback, with the SNP and Plaid Cymru saying they would consider it, but the Liberal Democrats saying they did not want Corbyn himself to lead a temporary government, instead preferring pro-remain Conservative veteran MP Ken Clarke or Labour’s Harriet Haman.  The betting market odds of a no-deal Brexit this year have drifted down to 37.5%. 

The other outperformer in FX markets has been the AUD, which has been supported by a stronger than expected employment report yesterday.  There were 41,000 new jobs created in July, most of them full-time, with the unemployment rate staying at 5.2% for the fourth consecutive month courtesy of a rise in the participation rate.  Our NAB colleagues noted that while the ongoing strength in employment will be reassuring for the RBA, the data suggest that spare capacity remains in the labour market given the RBA estimates the NAIRU at 4.5%.  They also pointed out that overall underutilisation rose as underemployment ticked up 0.2ppt to 8.4%.  Nonetheless, the AUD has managed to retain most of its post-employment gains and is 0.4% higher at 0.6775. 

The NZD has lagged the AUD, unsurprisingly, but it has still outperformed most of the G10 currency bloc.  The NZD is up a modest 0.1% to 0.6445 and it has remained tightly range-bound between 0.6420 and 0.65 since the RBNZ’s surprise 50bp rate cut last week.  The NZD/AUD cross rate is trading towards is recent lows, around the 0.95 level.  The NZ Manufacturing PMI is released this morning. 

NZ rates experienced some chunky falls yesterday, in line with global moves.  The 10 year swap rate fell 9bps to 1.21%, while the 2 year swap fell 3.5bps to 0.94%.  The market now prices a better than even chance that the RBNZ will cut the OCR to 0.5% next year.