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Equities and bond yields rebound strongly on signs Trump's condition is improving, fiscal stimulus hopes. USD weakens on rising fiscal stimulus chances. NZD little moved despite improved risk appetite

Currencies
Equities and bond yields rebound strongly on signs Trump's condition is improving, fiscal stimulus hopes. USD weakens on rising fiscal stimulus chances. NZD little moved despite improved risk appetite

Equity markets and bond yields have rebounded strongly overnight on US fiscal stimulus hopes and signs that President Trump’s condition is improving.  Markets also appear to see a greater chance of a clear Biden win in the election, reducing the risk that Trump disputes the result and creates a drawn-out period of uncertainty.  The USD has weakened across the board, with the exception of the JPY, reflecting improved risk appetite.  The NZD has been little moved, despite the ‘risk-on’ tone to markets.

Equity markets have continued to recover from Friday night’s news that President Trump had tested positive for COVID-19.  The S&P500 is up around 1.2% so far this week, extending its rebound from the intraday lows on Friday night after Trump’s diagnosis was revealed.  The index is now higher than where it was before the news.  The NASDAQ is up 1.6%, having underperformed notably on Friday.

The rebound in equities can be attributed to a combination of factors.  First, Trump’s doctors have said his condition is improving, with reports that he could leave hospital as early as tomorrow.  Trump sent a barrage of mostly ‘all-caps’ tweets overnight, after several days of limited tweeting activity, suggesting that side of things is getting back to normal.  The apparent improvement in Trump’s condition implies greater certainty that the Biden-Trump presidential election will go ahead as planned.

Second, Trump’s positive COVID result is seen as increasing the chances that Biden wins by a clear margin in next month’s election.  Biden was already in the ascendency in the polls after the first debate and a Reuters-IPSOS poll undertaken after Trump tested positive showed a 10% lead for Biden, a larger margin than its recent surveys.  While Biden’s policy platform includes raising the corporate tax rate from 21% to 28%, which ordinarily would be negative for equity markets, a decisive win at the election should reduce the risk that Trump disputes the result.  Markets had become increasingly concerned about a drawn-out period of post-election uncertainty if Trump refuses to concede.

Finally, market optimism around another fiscal stimulus package has risen, after encouraging comments from senior Democrats and Republicans on Friday (as we reported in yesterday’s Daily).  Even if such a stimulus package can’t be agreed before the election, markets may see a greater probability of a so-called ‘blue wave’, where the Democrats sweep both houses of legislature and the presidency, in turn allowing the Democrats to implement their own fiscal spending plans.  The increase in US Treasury yields and steepening of the curve over the past two sessions is consistent with the market seeing a greater chance of US fiscal stimulus (because it would mean greater bond issuance and a better economic outlook).  The US 10-year Treasury yield increased 5bps overnight, to 0.75%, its highest level in more than a month, while the 5y30y yield curve steepened 4bps to 124bps, near its highest level since 2016.

The USD has weakened notably against this backdrop of improving risk appetite and a greater perceived chance of US fiscal stimulus.  The Bloomberg USD index (BBDXY) is down 0.4% so far this week, extending its losses from last week, and is once again approaching its recent, two-year lows.  A Biden presidency, especially if accompanied by a Democrat clean sweep of the House and Senate, is widely expected to be USD-negative due to his more expansionary fiscal spending plans.

European currencies have been the clear outperformers so far this week, with the Norwegian krone heading the currency leader-board (+0.9%) and the EUR rising 0.5%, to a two-week high of 1.1775.  The EUR was helped, at the margin, by an increase in the final estimates of the September Services PMIs (above their preliminary readings).  The JPY has underperformed (USD/JPY -0.4% to 105.70), reflecting the rise in both equity markets and Treasury yields.  The GBP has risen 0.3%, with the market largely overlooking comments from BoE MPC member Haskell that he stood ready to provide more stimulus, if needed, and his positive spin on negative rates, as a possible future policy tool.

The NZD has been little moved since Friday despite the broad-based USD weakness, recovery in equity markets and further appreciation in the CNH (to what is now a 15-month high).  Like Friday, the NZD has again traded a narrow range over the past 24 hours (0.6631 – 0.6654).  The NZD is trading around the lows of the day at present, just above 0.6630, while the NZD/AUD cross has slipped marginally to 0.9245.  There was no sustained reaction to the government’s announcement yesterday that Auckland would shift down to COVID-19 alert level 1 from Thursday, joining the rest of the country, with the move have been largely anticipated already.

In central bank talk, Chicago Fed President Evans told Bloomberg TV “I would be quite pleased if we could get core inflation up to 2.5% for a time”, adding that “2.5 is not even a large number.”  The market is trying to work out how the Fed plans on operationalising its new ‘flexible average inflation targeting' framework.  Further clues may come from the minutes to the Fed’s September meeting, Powell’s speech tomorrow morning and New York Fed President William’s speech on the topic later in the week.

In economic data, the US ISM services index (formerly the non-manufacturing index) rose by unexpectedly in September, with strong gains in new orders (+5.7pts to 61.5) and employment (+3.9pts to 51.8).  There wasn’t much reaction to the data.

Locally, it was a quiet day in the NZ rates market yesterday with the Australian market closed.  The swaps curve steepened up slightly (2s10s +2bps) in sympathy with the move higher in US rates on Friday night, on more positive comments around possible US fiscal stimulus.  The NZ curve should open higher, and steeper, again this morning, reflecting offshore moves.

The RBA is expected to keep rates on hold today but the market is looking for dovish signalling to set up a series of easing measures in November.  The Australian Budget is later tonight where media leaks point to bringing forward legislated income tax cuts, an investment tax allowance, more funding for infrastructure and widespread subsidies for employers taking on apprentices. Fed Chair Powell speaks tomorrow morning. 

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