Equity markets were very volatile on Friday night. News that President Trump had tested positive for COVID-19 sparked an immediate sell-off in equities, although the S&P500 subsequently pared a large portion of its losses on more encouraging noises around a US fiscal stimulus package. Most of the volatility was confined to equity markets, with little net change in currencies and rates. There have been conflicting reports on Trump’s medical condition, but the latest from his doctors is that he is improving and could be discharged as soon as tomorrow. Today, the NZ government reviews the COVID-19 alert levels, with the possibility that Auckland could join the rest of the country at level 1 from Thursday.
Shortly after the NZ market close on Friday night, President Trump confirmed he had tested positive for COVID-19. This led to a swift ‘risk-off’ move across markets, with S&P500 futures falling almost 2% in the hour that followed, while the JPY appreciated around 0.7% and the 10-year Treasury yield fell from 0.67% to 0.65%. The news injects even greater uncertainty ahead of the upcoming US election, which markets worry may be disputed, if it is close.
Betting markets now attribute a slightly greater chance of a Biden presidency, likely due to the disruption to Trump’s campaigning (his rallies have been suspended) and the renewed focus on COVID-19 as the key election topic. A Biden presidency is generally perceived to be negative for US equity markets because his policy platform includes raising the corporate tax rate, although the market reaction is far from certain.
Later in the session, Democrat leader of the House Pelosi told MSNBC that Trump’s diagnosis “changes the dynamic” in fiscal stimulus negotiations, expressing hope that it could soften Republican opposition to greater spending. Pelosi said “we’ll find our middle ground…we’ll get the job done”, sentiments which were echoed by Republican leader of the Senate McConnell who added “I think we’re closer to getting an outcome.” Trump himself chimed in from his hospital bed on Saturday, tweeting “OUR GREAT USA WANTS & NEEDS STIMULUS. WORK TOGETHER AND GET IT DONE. Thank you!” While there remain a number of areas of disagreement between the two sides, including on the overall size of the stimulus (the latest Democrat proposal is for $2.2tn compared to $1.6tn from the White House), markets took the comments as an encouraging sign. The S&P500 rose more than 1% off its intraday lows, paring its loss on the day to 0.96% (it was still 1.5% higher on the week). Likewise, the 10-year US Treasury yield rose from 0.65% to 0.7% and the JPY gave back most of its earlier gains to close only 0.2% stronger.
There were contrasting moves in other equity markets. The Russell 2000 index of US small cap stocks, which are arguably more representative of the US economy and likely to benefit more from a fiscal stimulus package, rose 0.5%. The NASDAQ closed down more than 2%, and near its lows of the day. The underperformance in tech stocks is consistent with the market putting greater weight on a Biden presidency, given the perception that big tech firms are more at risk of greater regulation and higher taxes under the Democrats.
The news on Trump and reports on a possible fiscal stimulus compromise completely overshadowed the US nonfarm payrolls release. For the record, payrolls rose by 661k in September, less than the 859k consensus, while the unemployment rate fell by more than expected, to 7.9%. A big fall in government jobs in September (over 200k) accounted almost entirely for the lower than expected job growth during the month. Setting that aside, the pace of improvement in the labour market has clearly slowed over recent months. There was little market reaction to the payrolls release.
Looking through the intraday volatility, the USD ended broadly flat, in index terms, on Friday. The USD initially benefited from a safe haven bid after Trump’s positive COVID-19 result was revealed, but this unwound over the remainder of the session as the S&P500 recovered. The NZD was largely a bystander to the volatility in other markets on Friday and traded a relatively narrow 0.6614 – 0.6655 range.
In other currencies, the GBP outperformed after news that UK PM Johnson would hold talks with EU Commission President Ursala von der Leyen over the weekend over Brexit negotiations. The GBP gained 0.3% to 1.2935, with Johnson’s direct involvement seen as signalling a greater willingness to get a deal done. After those talks, the two politicians instructed their negotiators, who meet again this week, to “work intensively” in negotiations. The two key issues in trade negotiations are fishing rights and state aid rules, although the EU is also insisting that the UK amends its recently proposed Internal Markets Bill.
In the local rates market, the curve flattened on Friday (2s10s swap curve -2bps), reversing its moves from the previous day. The RBNZ announced a modest reduction to its planned government bond buying for this week ($1.05b from $1.16b), although this is still well in excess of government bond tender issuance ($650m this week). Government bond yields fell by up to 3bps at the long-end of the curve.
The government will review the country’s COVID-19 alert levels today. With no new cases of COVID-19 in the community in over a week, there is a possibility the government lowers the alert level for Auckland to level 1 (or perhaps “1.5”), to take effect from Wednesday 11:59pm. The quarterly QSBO business survey is released this week along with a preliminary October read from the ANZ business survey.
Offshore, the focus is likely to remain on Trump’s evolving medical condition and its possible implications for the election, as well as fiscal stimulus negotiations. Fed Chair Powell is also speaking this week but the market may focus more on NY Fed President John William’s speech on the Fed’s new ‘Flexible Average Inflation Targeting’ framework. The market will scan the minutes to the Fed’s September meeting for any discussion around bond buying and the new monetary policy regime. The ISM services survey, released tonight, is the highlight in an otherwise quiet week for data.
In Australia, the RBA is expected to keep rates on hold this meeting but our NAB colleagues expect the central bank to cut rates next month and unveil an RBNZ-style quantity-based bond buying programme focused on the 5-10 year sector of the curve. The Australian Budget is on the same day and media leaks suggest the government will bring forward income tax cuts, introduce an investment tax allowance and provide more funding for infrastructure.
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