Markets read positive signals from what China is implying rather than saying. Sentiment improves. Safe haven currencies underperform, as does the NZD on weak local data

Equities and bond yields have bounced higher overnight after China indicated it wouldn’t retaliate to the latest import tariffs announced by Trump. 

Safe haven currencies have underperformed, while the CNY has appreciated and the AUD has outperformed.

The NZD fell to a fresh, post-2015 low after yesterday’s ANZ Business survey, which showed confidence and own activity indicators at their weakest levels since the GFC. 

Risk assets have been boosted overnight by more conciliatory comments from China on trade.  A Ministry of Commerce spokesperson said that “China has ample means for retaliation, but thinks the question that should be discussed now is about removing the new tariffs to prevent escalation of the trade war.”   While China announced new tariffs on around $75b worth of US imports last Friday, the comments suggest that it won’t necessarily respond to Trump’s latest tariff announcement over the weekend (where he said all $550b of Chinese imports would be subject to an additional 5% tariff).  The spokesperson added that “Escalation of the trade war won’t benefit China, nor the U.S., nor the world…the most important thing is to create the necessary conditions for continuing negotiations.”  The market will hope that China’s move will break the seemingly endless spiral of retaliation and higher tariffs on both sides.  Market sentiment towards US-China trade talks had earlier been supported by the PBOC fixing the CNY at a stronger than expected level (USD/CNY at 7.0858). 

Later, in a Fox News radio interview, Trump said that “there is a talk scheduled for today at a different level” with China, without clarifying what that meant.  While Trump has made some dubious claims in recent weeks, it suggests, at face value, that top level officials are reengaging on trade talks. 

The more positive news on trade has seen equity markets rise sharply, with the S&P500 up by 1.3% and European indices having earlier risen by 1.2% - 2%.  The S&P500 is now around 3% from its all-time high, reached in late July. 

Global bond yields have increased as well, with the 10 year Treasury yield 3bps higher on the day, and 7bps above its intraday low, at 1.51%.  The rise in US yields was given an additional boost by a very weak 7-year Treasury note auction, which was cleared 2bps higher than the prevailing secondary market yields at the time, tentatively suggesting investor demand might finally be starting to wane at these low yield levels.  The bid-to-cover ratio was 2.16, its lowest level since the 7-year bond was reintroduced in 2009.  There was no reaction to the release of Q2 US GDP, which was revised down a fraction, to a 2% annualised rate, in line with consensus expectations.  Personal consumption was revised up to 4.7% from 4.3% but this was offset by a decline in investment. 

The long-end of the US curve came under some upward pressure yesterday morning, a short while after this report went out, after US Treasury secretary Mnuchin said ultra-long (i.e. 50 and 100 year) bonds were “under very serious consideration”.  The Treasury last considered ultra-long bond issuance in 2017 but decided against it.  The Treasury will be weighing up whether there will be sustained demand for ultra-long bonds (rather than just at this moment in time, with investors scrambling for yield) and whether it will be cost-effective.  The initial market reaction to Mnuchin’s comments quickly faded suggesting investors are sceptical the Treasury will go ahead with option. 

Euro bond yields and the EUR rose briefly after some typically hawkish comments from ECB Governing Council member, and Dutch central bank Governor, Klaas Knot.  Knot acknowledged that recent data had been weak but he went on say he only expected minor revisions to the ECB’s September projections and that market expectations for policy easing were “overdone”.  Knot said cutting rates would be the appropriate policy response, if the inflation outlook called for more easing, but “I don’t think there is a case at this moment for reactivating APP [QE].” He also argued for preserving “some dry powder” with the ECB’s QE programme.  The 10 year German yield was 2.5bps higher on the day, at -0.69%, with almost all that move occurring before Knot’s comments.   The market reaction suggests that investors don’t expect resistance from hawkish Northern European central bank governors will get in the way of the ECB restarting its QE programme. 

The USD has continued its recent strong run and is up by 0.2% to 0.3%, in index terms, over the past 24 hours.  The Bloomberg DXY is poised to close at its highest level since mid-2017 while the DXY is at the top of its recent trading range. 

Safe haven currencies have underperformed against the risk-off backdrop and rise in US Treasury yields.  The Japanese yen and Swiss franc are both down by 0.5%.  The AUD has outperformed and is the second-best performing currency overnight (behind the CAD) on the more positive tone to US-China trade talks.  The offshore renminbi has strengthened around 0.3%. 

Despite the appreciation in the CNH and improvement in risk sentiment, the NZD has underperformed over the past 24 hours.  The NZD is 0.5% lower than this time yesterday and is sitting just above 0.63, its lowest level since September 2015.  Yesterday’s ANZ Business survey revealed that business confidence had fallen to its lowest level since April 2008 and Own Activity to its lowest level since April 2009.  Adjusting for seasonality, we didn’t think the readings were much worse than the previous month, but they remain at very subdued levels and consistent with sub-trend growth in NZ.  Notably, inflation expectations in the survey fell to 1.70%, from 1.81%.  The RBNZ has made it plain that it is looking at such indicators at present, and inflation expectations were cited as a factor in the 50 point rate cut early this month.  NZ swap rates fell by 1.5bps in parallel across the curve yesterday, with the market pricing close to a 25% chance of an OCR rate cut at the RBNZ’s meeting next month.