US equities higher, chunky selloff in US treasuries. Stronger USD holds back NZD; AUD breaks 0.69. UK goes to the polls

US equities higher, chunky selloff in US treasuries. Stronger USD holds back NZD; AUD breaks 0.69. UK goes to the polls

“Getting VERY close to a BIG DEAL with China. They want it, and so do we!” That one tweet by you know who has had the biggest impact on markets this week, trumping the other key risk events. US equities rose to a fresh record high, while the US 10-year treasury yield climbed as much as 11bps to 1.90%. The impact of the tweet on currency markets has been more muted, and has actually supported the USD, with reduced tariffs seen to be positive for the economy.

After we went to press yesterday, the FOMC left policy unchanged. The dot plot showed a strong consensus view, with 13 out of 17 FOMC members seeing a steady Fed Funds rate as appropriate through to the end of next year. While the language in the statement about global uncertainties was removed, this was replaced by the outlook being monitored with regards to “global developments and muted inflation pressures”. Chair Powell reiterated that it would take a significant move up in inflation that persisted before he would support rate hikes. This dovish message supported US equities and helped nudge US rates and the USD lower.

Yawn. Market reaction to the Fed’s announcement has paled in comparison to news on the trade war, following Trump’s tweet above and a story from Dow Jones that US negotiators have offered to slash existing tariffs by as much as half on roughly $360 billion of Chinese-made goods as well as to cancel a new round of levies set to take effect Sunday, according to people briefed on the matter. The US would reimpose original tariff levels if China fails to carry off pledges, including firm commitments on agricultural purchases. CNBC confirms the sourced report and adds that China would also have the right to reimpose tariffs, making enforcement equal and easier to agree to. One sticking point is sourced reports that China remains reluctant to put its agricultural purchase promises into the language of a trade deal. As we go to press, US Trade Rep. Lightheizer has said that a trade announcement might be imminent.

Trump’s tweet came soon after the US equity market opened, with the S&P500 up as much as 1.1% to a fresh record high, but it has since lost about half of those gains. The US 10-year treasury yield rose as much as 11bps to 1.90%, but has since peeled off to 1.89%.

In currency markets CNH has been the biggest beneficiary, seeing USD/CNH down 0.8% to 6.985. The USD has also been a beneficiary, supported by higher US treasury yields but also likely reflecting the view that removing tariffs would remove a major growth headwind for the US economy. The AUD has outperformed, breaking up through 0.69, before slipping a touch. The NZD broke up through 0.66 in the aftermath of the Fed’s announcement yesterday, but has since traded a tight range oscillating around 0.6585.  Interestingly, again, the reaction to trade news in currency markets has been more muted than for bonds and equities. NZD/AUD is drifting lower, seeing it down to 0.9550.

The other key risk event overnight was the ECB policy meeting under new President Lagarde. While there was some anxiety ahead of the meeting, given the risk she might like to stamp her mark, the policy announcement and press conference were underwhelming, with little fresh insight. Having just kicked off its resumption of QE at the pace of €20b per month, policy and guidance were left unchanged and there were minimal changes to growth and inflation forecasts. The only fresh insight was that the downside risks facing the Eurozone economy were now “somewhat less pronounced”. EUR ticked up as high as 1.1150, before the trade news dominated pricing, seeing it down to 1.1110.

GBP is on the soft side as the country goes to the polls, down to 1.3110 and underperforming EUR. Polls close at 11am NZ time, after which the first exit polls will emerge. Election results will trickle in throughout the NZ afternoon and how the results fare in the marginal seats will determine how volatile GBP will trade throughout the day. JPY is also on the soft side, not surprising given the risk-on move and higher global rates.  USD/JPY is up 0.6% to 109.25 and NZD/JPY temporarily broke the 72 mark this morning, a level not seen since July.

In economic news overnight, US PPI inflation data surprised to the downside, while a spike up in US jobless claims can be put down to seasonal adjustment issues around the Thanksgiving holiday last week. Today, we’ll be interested in whether the recovery in NZ’s manufacturing PMI seen in October was sustained through November. Tonight’s key data release is US retail sales.  Apart from the UK election results, which could cause some volatility, the markets will be awaiting further news on the trade front, ahead of Sunday which is the scheduled date for a fresh round of tariffs.  Surely if negotiations are continuing, then at the very least these will be postponed?

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