Our celebration yesterday of a new week after last week’s snooze-fest in markets has proved ill-considered as the new week has produced more of the same. While there has been a bit of life in equity markets, currencies and bond markets generally show little movement. GBP has outperformed on polling showing a small increase in the chance of a majority Conservative government.
Newsflow has generally been positive to kick off the new week. District council elections in Hong Kong showed a massive swing of support for pro-democracy candidates, who won 85% of the seats amidst a record turnout of voters. While the councils don’t have much power, the vote sent a clear message to Beijing, even if many believe that not much will change. Hong Kong’s Hang Seng index rose by 1.5%, which isn’t particularly material in light of recent movements.
Over the weekend, China said it will raise penalties on violations of intellectual property rights and this has got the market’s attention. Strengthening intellectual property rights has been one demand from the US in order to help secure a trade deal. Still, whether or not President Trump signs the bill supporting Hong Kong’s protesters, unanimously voted by the US Senate, remains a complicating factor ahead of any possible trade deal.
Economic data has been sparse. Germany’s IFO index of business sentiment showed a mild uptick, largely in line with expectations, consistent with a bottoming out of growth momentum, albeit with growth remaining weak. The data had no impact on the market.
Equity markets are stronger, with the S&P500 up 0.6% to a fresh record high, following a 1% gain in the Euro Stoxx 600 index. While some media report that the stock market rally has been driven by hopes of a trade deal, the risk-on vibe isn’t evident in bond or currency markets. US 10-year treasuries have traded a tight 1.75%-1.79% range and are currently down 1bp for the day to 1.76%.
JPY is on the soft side of the ledger, with USD/JPY up 0.3% to 108.95, but the commodity currencies didn’t get the memo about higher risk appetite and are trading on the soft side. The AUD has drifted down to 0.6770. The NZD ticked higher during local trading hours yesterday but met some resistance around 0.6425 and dipped below 0.64 early this morning. The NZD remains in “oversold” territory, moving sideways over the past few months against a backdrop of improving fundamentals, notably the strong improvement in NZ’s terms of trade. NZD’s performance has been hamstrung by the soft trajectory for emerging market currencies and a clearing of global risks is required to see a decent recovery. More confidence in the global economic outlook and/or a signed trade agreement between the US and China would be positive factors in the regard.
GBP is the only currency showing some life, up 0.4% to 1.2890. Weekend polls showed the Conservative party extending its lead over Labour, with the average of five polls suggesting a 13.4 point lead, 43% to 30%.
NZ rates were down 1-3bps across the curve yesterday in a quiet session, showing further evidence of consolidation following the post-MPS selloff.
In the day ahead, NZ retail sales for Q3 are released, which are fairly dated and shouldn’t move the dial. We see the risks weighed towards a much better outcome than the consensus 0.5% q/q estimate for inflation-adjusted sales. Fed Chair Powell will be on the wires during the NZ time zone, ahead of RBA Governor Lowe tonight. Lowe is talking about “unconventional monetary policy – some lessons from overseas”, a speech that will be closely watched, with the topic of great interest at present. Tonight also sees the release of trade, new home sales and consumer confidence data in the US.