Light newsflow, but strong broadly-based gains in equity markets. GBP outperforms as UK-EU trade talks resume; negative rates hosed down. NZD flat; generally softer on the crosses

Newsflow has been light but risk appetite has improved as the new week kicks off, with strong broadly-based gains in equity markets. The USD is struggling alongside the yen, while GBP has outperformed as a new round of UK-EU trade negotiations begin.

The S&P500 opened strongly and gains have been sustained, with the index currently up 1.8%. In a healthy sign, the economically-sensitive sectors are outperforming, with Energy, Financials, Industrials and Materials heading the leaderboard. Earlier, the Euro Stoxx 600 index closed up 2.2%, led by Financials which were battered last week. 

There are no obvious drivers for the positive move and month-end flows are being noted as a possible factor, as investors reweight into equity markets after a poor month. There have been no key economic releases over the past 24 hours, although weekend data showed China industrial profits up a strong 19.1% y/y in August, further evidence of the country leading the global economic recovery.

Yesterday, the NY Times reported that President Trump barely paid any federal income tax over the past 18 years, including just $750 in the year he won the Presidency and the same for his first year in office. Trump denied the claim as “fake news”, but it is a bad look as he tries to woo blue collar workers in rust belt States.

The bond market remains in a coma, with US 10-year Treasuries remaining in its tight range, and the yield up less than 1bp to 0.66% for the day.

GBP has outperformed, up 0.8% to 1.2850, with less pessimism on Brexit and a pullback in negative rate expectations being supporting factors. The UK and EU have begun a final round of trade negotiations, ahead of the 15 October EU leaders’ summit.  The FT ran a weekend piece on Brexit that highlighted the political posturing that has been done and that a trade deal could still be secured, even if in the “skinny” style of the Canada-EU free-trade agreement.

Bank of England Deputy Governor Ramsden hosed down the possibility of the policy rate going negative in the near term, saying that it is going to take some time to do the technical work, “there is still a lot to investigate on how it could be implemented”. This followed weekend comments by fellow MPC member Tenreyo who saw “encouraging” evidence on the impact of a negative rates policy.

USD and JPY are on the soft side, as is typical when risk appetite is higher, but overall currency movements have been small to start the week. The NZD has range-traded around 0.6550 and is barely higher from last week’s close. GBP strength sees NZD/GBP fall to 0.51.

AUD got a lift yesterday after Westpac reversed its call that the RBA would cut rates next week, after a number of media articles hosed down that possibility, with the RBA’s hand suspected in those reports. The timing of a rate cut and a boost to QE was always looking suspect in the October meeting, coming on Budget day, so November is now looking more likely for the RBA to step-up its stimulus programme. The AUD is up 0.5% since last week’s close to 0.7070. NZD/AUD has trended lower, approaching 0.9270.

The NZ rates market showed a flattening bias yesterday, with government rates down as much as 2.5bps at the long end of the curve, while near term rates were slightly higher. The RBNZ’s hand remains a key driver, as it sucks duration out of investors by buying significantly more bonds than are being issued.

The economic calendar tonight sees the release of economic confidence data for the euro area, trade and consumer confidence data for the US, while NY Fed President Williams is speaking.