Market holidays see quiet trading conditions. European equities higher and S&P futures up 1.2% as economies reopen. China tries to ease concern on new Hong Kong security law

Markets are very quiet with the UK and US on holiday. S&P futures are up over 1% and Treasury futures are little changed.  Currencies have barely moved since the new week began, seeing the NZD trade near 0.61 and the AUD near 0.6545.

Newsflow has been light with a number of countries on holiday. After weekend protests in Hong Kong following the proposed new national security law, China’s foreign ministry commissioner in Hong Kong has tried to hose down fears, with Xie Feng saying that “the legislation will not change the one country, two systems policy, Hong Kong capitalist system, high degrees of autonomy, nor will it change the legal system in Hong Kong SAR, or affect the independent judicial power, including the right of final adjudication exercised by the judiciary in Hong Kong”. Important questions around the scope of the law remain unanswered; however the comments were enough to prevent another big fall in the Hang Seng index, which clawed its way back into positive territory after early losses.

The new security law adds another dimension to US-China tensions, which have recently escalated. China condemned the weekend move by the US to add 33 Chinese entities to a trade blacklist – which restricts access to US technology and other items – with the companies added said to have ties to the military or were connected to human rights violations in Xinjiang. China’s Foreign Minister warned US politicians were pushing relations to a “new cold war”, after they condemned China’s move to impose a national security law on Hong Kong.

Renewed US-China tensions don’t seem to have perturbed the market, with S&P futures up 1.2%, following a 1.5% increase in the Euro Stoxx 600 index. Oil prices are up over 1%, seeing Brent Crude trade at USD35.50. Markets are seemingly encouraged by the reopening up of economies that will see economic activity improve after the deep slump caused by lockdowns. NZ’s run of zero or near-zero new cases of COVID19 sees further restrictions ease, with the size of gatherings allowed to increase to 100 people from Friday. Conditions will continue to be reviewed each fortnight and it is quite possible that the country moves to alert level 1 within four weeks or so. This would be a much faster easing of restrictions than forecast by most, and would see upgrades to economic forecasts, including those of the Treasury and RBNZ.

In economic news overnight, Germany’s IFO survey showed that sentiment of companies has recovered a little after plunging, reflecting the gradual easing of restrictions. The overall index was in line with expectations, while the expectations index was a little higher.

Market holidays have seen little movement in US Treasury futures, while small movements in NZ rates were evident yesterday in a quiet trading session. This week sees the first “taper” of RBNZ bond purchases (from $1.35b to $1.175b), although the $1.10b of nominal government bond purchases still exceeds new government bond issuance of $1.05b for the week. Government bond yields nudged up 1-3bps yesterday.

Bank of France Governor Villeroy de Galhau signalled that more ECB policy stimulus was on its way, saying that with inflation low there is room to innovate and act “rapidly and powerfully”. The ECB meets next week and the market expects to see further easing, alongside some updated economic scenarios. Villeroy de Galhau fired a shot against the recent decision of Germany’s constitutional court, suggesting that the constraint of the capital key was not necessary for the emergency bond buying programme and transmitting monetary policy to different members of the euro area is just as important as the policy itself.

Currency markets have been quiet with little movement. The NZD has traded a 25pip range and sits around 0.61. The AUD has traded a 30pip range and sits around 0.6545.