Tech stocks were hit on Friday after Trump announced forthcoming bans on Chinese-owned apps Tik Tok and WeChat, ratcheting up tensions with China ahead of the election. Negotiations over a US fiscal stimulus extension failed to provide a breakthrough, but Trump announced executive orders over the weekend to provide some stimulus measures. US rates and the USD were both higher on the day, assisted by a stronger-than-expected nonfarm payrolls release. The NZD pulled back to below 0.66.
US nonfarm payrolls is usually the primary focus on the first Friday of each month, but its release was overshadowed this time by renewed US-China tensions. As previously foreshadowed, Trump announced an executive order on Friday that would ban Tik Tok in the US in 45 days’ time (Microsoft is reportedly in talks to buy the global operations of Tik Tok from Chinese parent ByteDance). Unexpectedly, the executive order also singled out instant messaging app WeChat, owned by Chinese tech giant Tencent. WeChat has a small presence in the US but, in China, it is the primary means of electronic communication and used extensively for payments and advertising, including by US firms operating in China. Analysts are uncertain whether the order on WeChat would stop Apple making the app available on its phones in China, which would almost certainly hammer its sales in the country. Tencent has a big presence in the US through its gaming operations and relies heavily on US technology in its production. A broad interpretation of the executive order might imply restrictions to Tencent’s gaming business, even though the executive order is focused on WeChat.
Further ramping up tensions between the two countries, the US announced (largely symbolic) sanctions on 11 senior Chinese and Hong Kong officials, including Hong Kong Chief Executive Carrie Lam. And a US working group, made up of regulators including the Fed, recommended that overseas firms that list on US exchanges must be subject to US public audit reviews from 2022. This is potentially an issue for Chinese firms, which are prohibited by Chinese law from providing such reviews and could, in the extreme, result in the delisting of firms such as Baidu and Alibaba.
The Trump order on WeChat hit technology stocks in both China and the US. Tencent fell as much as 10%, before paring its loss on Friday to 5%. Apple’s stock price fell 2.5%, albeit from what was a record high, while the broader NASDAQ index dropped 0.9% on Friday. The market hasn’t been particularly focused on US-China tensions, but Trump’s move on WeChat potentially signals an escalation of tensions into the election. There is no suggestion at this stage that the Phase-One trade deal is in jeopardy.
Outside weakness in tech stocks, equity markets performed reasonably well on Friday. The S&P500 reversed earlier losses and closed marginally higher on the day, with 8 of 11 sectors in the green. The S&P500 gained 2.5% last week, leaving it around 1% from its all-time high.
US nonfarm payrolls was stronger than market expectations, with almost 1.8 million new jobs created in July and the unemployment rate falling by more than expected. Both the unemployment rate (at 10.2%) and underemployment rate (at 16.5% from 18% in June) remain at very high levels and higher frequency data suggest the labour market recovery has lost some momentum over the past month. Average hourly earnings remain heavily distorted by compositional shifts in the labour market (job losses have been disproportionately borne by lower paid worker to date).
The upside surprise to payrolls and more cautious market sentiment, after Trump’s announcement on WeChat, resulted in a broad-based USD appreciation. The Bloomberg USD index rebounded 0.5% from what was an almost two-year low. The move higher in the USD mirrored the rise in US real interest rates, with the 10-year yield on US inflation-protected bonds moving up to -1.06% from a record closing low of -1.09% on Thursday. USD short covering – CFTC data indicates speculative investors are heavily short the USD – may have exacerbated the move. The broader trend in the USD still looks to be lower.
The NZD and AUD underperformed Friday amidst the escalation in US-China tensions (the offshore Chinese renminbi fell 0.4%), weaker commodity prices and signs of a pick-up in risk aversion. The NZD peaked around 0.6690 during the NZ trading session but fell more than 1% in offshore trading hours, finishing the week just below 0.66. The AUD made a fresh one-year high, just above 0.7240, before falling back to 0.7157. The traditional safe-haven currencies, the JPY and Swiss franc, outperformed, with both falling around 0.3% against the USD on Friday.
Over the weekend, Trump has unilaterally announced a series of fiscal measures, following the breakdown in negotiations between Democrats and Republicans over a fiscal package. Trump said those on unemployment benefits would receive an extra $400 per week until early December, down from the previous $600 per week supplementary payment, and he would defer payroll taxes until the end of the year for those earning less than $100,000. 75% of the funding for the unemployment benefit extension is due to come from a disaster recovery fund, with states providing the remaining 25%. Normally, Congress, which is held by the Democrats, would need to approve spending decisions and Trump’s announcement may result in legal challenges.
Global rates edged higher on Friday after the payrolls release, with the US 10-year rate up 3bps to a still-very-low 0.56% and the 10-year German bund yield up 2bps to -0.51%. The US will auction a record $112b of Treasury bonds this week, which is much larger than the Fed’s current $80b per month bond buying pace.
There was little movement in the NZ rates market on Friday, with swap rates and government bond yields moving 1bps or less. Rates remain at extremely low levels ahead of the RBNZ meeting this Wednesday. Inflation-indexed bonds outperformed, with the RBNZ’s $20m buyback of 15-year inflation-indexed bonds clearing some 5bps below secondary market yields at the time, indicative of a lack of selling pressure. NZ inflation-indexed bonds have underperformed their US and Australian counterparts significantly over the past few months but are now showing signs of catching up to offshore moves.
The other notable event on Friday was Wellington Airport’s $100m corporate bond deal, the first new issue for the NZ corporate bond market since the COVID-19 crisis kicked off. Corporate bond spreads have tightened significantly since April but this has not translated into any primary market activity, prior to the Wellington Airport transaction.
The RBNZ meeting on Wednesday is the main event this week. We think the most likely outcome is that the Bank keeps its QE bond buying limit unchanged for now, at $60b. The Bank still has plenty of capacity left under the existing programme limit, having accumulated around $24b in government and LGFA bonds to date. We think the Bank is likely to defer a decision on whether to extend the programme beyond May 2021 to later in the year, when it will have better visibility on the economic outlook, after the end of the current wage subsidy scheme (the government announced a new scheme over the weekend which is much more targeted than the current one). Either way, the RBNZ is almost certain to retain an easing bias. The preliminary version of the ANZ business survey is released this afternoon. There were signs of a softening in business activity between the preliminary and the final survey readings last month.