Equity markets have made fresh record highs and bond yields have increased overnight as markets digest the US-China Phase-One trade agreement announced on Friday. The positive sentiment created by the trade deal overshadowed another batch of disappointing European PMIs. Currencies, including the NZD, have been quiet so far this week. The ANZ business survey is released today ahead of GDP on Thursday.
It’s been a “risk-on” session for global markets overnight as market participants digest the implications of the Phase-One US-China trade agreement announced on Friday. The S&P500 has increased 0.9% to a fresh record high, with all sectors – bar real estate – in the green. The Eurostoxx 600 index has increased 1.4% to a new record high while Nikkei futures are up 0.7%, with that index hovering near its highest levels in almost 30 years.
There haven’t been any specific developments on the trade-front so far this week to drive the market moves. China’s monthly activity data released yesterday (industrial production, retail sales, fixed asset investment) was stronger than expected, but this looks more related to the reversal of the weak holiday-affected October readings. We suspect investors have concluded that the Phase-One agreement has removed a key near-term source of uncertainty and should be, at least directionally, supportive of global growth in the coming year.
In rates markets overnight, the US 10 year Treasury bond yield has risen 6bps to 1.88% with the curve ‘bear steepening’. The US rates markets has been volatile over the past few sessions. The 10 year rate increased from 1.8% to 1.95% after Trump signalled an imminent trade agreement via Twitter on Thursday night before slumping back to 1.82% on Friday, with the market seemingly disappointed by the reduction in tariffs (the tariff rate on $120b of imports was reduced from 15% to 7.5% whereas an earlier WSJ report had suggested up to $360b of tariffs could be reduced by as much as half). The risk-on backdrop overnight has seen the 10 year rate recover to 1.88%. The market still prices around 20bps of rate cuts for the Fed by the end of next year.
The positive market sentiment created by the resolution of Phase-One trade talks has overshadowed another disappointing batch of European PMIs. The European Manufacturing PMI fell back to 45.9 (with Germany at 43.4), near its lowest level since the European crisis of 2012. Services activity continued to hold up better, with the composite index – which weights services and manufacturing – unchanged for the third month in a row, at 50.6. The composite PMI points to slow GDP growth in Europe, although the market may be looking ahead to a possible upturn in global trade and European manufacturing activity if the Phase One trade agreement can catalyse a pick-up in Chinese growth. Elsewhere, the UK PMIs were also worse than expected, although the market was content to look-through the weakness with UK data expected to improve after the resolution of Brexit and election uncertainty. On Brexit, the government plans to reintroduce its Withdrawal Agreement legislation on Friday as it starts the process to formally leave the EU by the end of January (although there is a transition period until at least the end of 2020).
In US data, the NAHB housing index moved sharply higher in November, to its highest level in 20 years. The reduction in mortgage rates over the past 12 months, as the Fed pivoted to rate cuts, and the tight labour market have contributed to a renewed upturn in the US housing market.
Currency moves have been reasonably subdued. USD/CNH has drifted back below 7.0, consistent with the market taking a more positive view of the Phase-One trade agreement, and the AUD has risen 0.2%, to just below 0.69. As expected, there was no fiscal stimulus announced by the Australian government at the Mid-Year Economic and Fiscal Outlook (MYEFO) yesterday. The risk-on market backdrop has seen the JPY underperform, with USD/JPY trading up to 109.60, near six-month highs. The USD indices are down around 0.1% and near the bottom of recent trading ranges.
The NZD has traded a very tight range so far this week (0.6588 – 0.6614) and it is currently trading at 0.66, near its highest level since the start of August. Buoyant risk appetite (our risk appetite index reached a 2-year high at the end of last week) and strong NZ commodity prices continue to provide underlying support to the NZD. Our short-term NZD fair value estimate has risen to USD0.71 although, assuming some mean reversion in risk appetite, we think 0.68 is a more realistic stretch target for the NZD over the coming months.
In domestic data, the Performance Services Index (the PSI, the services equivalent of the PMI), fell back in November, to a below-average 53.3. The fall in the PSI was led by a sharp drop in the new orders sub-index, which fell to its lowest level since September 2012. We’ll get a further update on NZ business activity when the ANZ business survey is released this afternoon. Both the headline business confidence and, more importantly, the Own Activity index reached their highest levels of 2019 last month, although both were at levels consistent with continued subdued domestic GDP growth. Q3 GDP is released on Thursday and we are in-line with consensus in looking for a 0.5% quarterly GDP growth rate.
Yesterday, NZ rates fell 2bps to 7bps, led by the long-end of the curve, reflecting global forces. Those moves should at least partially reverse today.
There is another Global Dairy auction tonight and we look for a small fall in prices. Dairy prices have had a strong run, with the GDT Price index 23.1% higher than a year ago, but there were signs of consolidation at the last auction, with the index falling 0.5%. The RBA minutes are released this afternoon as well.