US equities ramp up further. Weaker CNY post-PBoC policy change drags down NZD and AUD. Further upside pressure in NZGB yields

US equities have continued to ramp higher, led by big tech, while the US bond market is closed for the Columbus Day holiday. Currency movements have been modest, with a weaker CNY dragging down the NZD and AUD to start the week.

There has been little news on the Columbus Day holiday in the US, but the equity market is open and trading with a stronger tone. The S&P500 is currently up nearly 2% following last week’s 3.8% gain, led by big tech, with the Nasdaq index currently up by nearly 3%. The market remains unperturbed by the lack of government fiscal support, seemingly taking the view that a clean sweep by the Democrats will see a large fiscal stimulus early next year anyway, which will more than offset any concern that higher taxes might play on earnings.

On that note, the third quarter US earnings season kicks off tonight, and recent momentum has been one of analysts upgrading expectations as Q3 progressed, against the norm of downgrading earnings through the quarter. Thus, the consensus is that S&P500 earnings fell by “only” 20% y/y versus expectations of a 25% decline at the beginning of the quarter and a 32% decline in Q2. However, with recent US economic momentum fading, analysts will be on the lookout for signs of weaker earnings guidance in the period ahead.

The bond market is closed for the US holiday, but the futures market is open and signals little change in yields from Friday’s close.

Currency moves have been modest, apart from the CNY, and the NZD and AUD have seen some spillover impact. The strong run in CNY came to a grinding halt after the PBoC’s weekend decision to remove the requirement for banks to set aside 20% of cash reserves when purchasing foreign currency through CNY forwards. The policy move was a signal that the central bank was no longer concerned about an uncontrollable depreciation and likely more concerned about the inherent optimism in the currency that was driving it in one direction. The PBoC set the USD/CNY reference rate at 6.7126, or 1.0% weaker than Friday’s fix.

The NZD and AUD both opened the week on a soft note and attempts to recover late yesterday failed, seeing the currencies down 0.2% and 0.4% for the day respectively to 0.6650 and 0.7210 respectively, largely ignoring the strong rally in US equities overnight. In fact, risk appetite hasn’t been a key drive of currencies, with JPY and CHF slightly outperforming. USD/JPY is down 0.3% to 105.30.

GBP found some support, currently up 0.2% for the day to 1.3065, after UK Johnson announced restrictions that might have been perceived as less onerous than expected. He announced that English regions would be placed into a three-level system, labelling them as being on medium, high or very high alert, depending on the extent of spread of the virus, and requiring them to follow different rules. Headlines around UK-EU trade talks are expected to be the key driver of GBP this week ahead of the EU leaders’ summit on Thursday. PM Johnson was working the phones during the weekend with German and French leaders to try to break the deadlock.

There was little domestic news yesterday, although what caught our eye was the government announcing a COVID19 vaccine purchase agreement with Pfizer and BioNTech, securing 1.5m doses or enough for 750,000 people that was said could be rolled out as early as Q1 next year. This was said to be the first tranche of what could be many purchase agreements. Whether or not a vaccine will be available is one question and how that might affect the economy, tourism and the RBNZ’s promotion of going down the rabbit-hole of negative rates are other matters to consider.

NZGBs continued to trade with a heavy bias, seeing rates up 2-4bps across the curve and the 10-year rate close at 0.58%, its highest level in nearly 4-weeks. There was little move in swap rates. Mortgage rates reached a record low, with one small bank offering a market-leading 1.99% one-year fixed rate.

In the day ahead, we expect card transactions data to show a strong rebound in September, in the order of 9%. The Bloomberg calendar shows a speech by RBNZ Deputy Governor Bascand at 9am, but we are unsure of the topic and doubt it’s a market-mover. China trade data and US CPI data are the only other releases worth noting.