There were limited moves in most asset classes on Friday. US equities were flat-to-lower, but still higher on the week, while currencies and bond yields were little changed. UK PM Boris Johnson told the country to prepare for a no-deal Brexit, but the GBP was unphased, suggesting the market remains sanguine that a trade deal can be reached. The NZD was unchanged on Friday but down almost 1% on the week amidst a turn-around in the USD and spill-over from a weakening AUD, as investors position for more RBA easing. NZ’s Labour party achieved a landslide in the weekend’s election but there shouldn’t be much sustained market reaction with the result broadly in-line with pre-election predictions.
There were plenty of news stories on Friday night but without much net change in markets. The S&P500 was flat on Friday’s session, leaving it up 0.2% on the week, while the NASDAQ was down 0.4%, but still 0.8% higher on the week. Both US equity benchmarks continue to hover just below their respective all-time highs, supported by low interest rates and growing conviction that Biden will win decisively at the US election and the Democrats will implement a huge fiscal stimulus.
US retail sales were much stronger than expected in September, across both the headline (+1.9% vs. 0.8% exp.) and core (+1.5% vs. 0.5% exp.) measures, with broad-based gains across categories. Economists continue to question the durability of the rebound in retail spending in the absence of more fiscal support and, in particular, enhanced unemployment benefits. US equities made their highs for the day shortly after the US retail sales release but faded in the last hour of trading.
Negotiations between the White House and Democrats on a pre-election fiscal stimulus package continued over the weekend, with Democrat Pelosi putting a Tuesday deadline to get a deal agreed. While progress appears to have been made in the negotiations, it remains unclear whether Trump can persuade Senate Republicans to support another big stimulus package and the window to get a bill signed off before the election is diminishing.
The resurgence of COVID-19 in Europe and, to a lesser extent the US, remains on the market’s radar, but didn’t adversely affect sentiment on Friday. The weekly change in new cases has reached new highs in France, Italy and the UK, among other countries, over recent days and governments in the region are implementing new restrictions. In France, the government has put in place a night time curfew in Paris and eight other cities while Italy’s government is expected to announce new measures shortly, including ordered bars and restaurants in the Lombardy region to close at 10pm. New regional rules came into effect in the UK over the weekend, with restrictions on households mixing together and the hospitality industry. Governments have been reluctant to implement broad-based lockdowns, like those implemented earlier this year, but with the WHO warning that ICUs in some European cities will probably reach full capacity in the weeks ahead, the risk is that restrictions are tightened further.
European equity markets were broadly higher on Friday night (Eurostoxx 600 +1.3%) but down on the week, as investors factor-in a weaker growth trajectory. Likewise, European bond yields continue to grind lower, with the renewed spread of COVID-19 in the region, alongside record-low core inflation, making more stimulus from the ECB – most likely beefed-up bond buying – seem almost inevitable. The German 10-year yield fell 1bp on Friday and 10bps on the week, leaving it at its lowest level since March, at -0.62%. In contrast to the moves in Europe, US Treasury yields were slightly higher on Friday and little changed on the week (US 10-year: 0.75%). The US bond market is focused on the potential for a huge post-election fiscal stimulus, if the Democrats achieve a clean sweep.
There were only modest moves in G-10 currencies on Friday. The USD rebounded after the stronger retail sales release but still ended down slightly on the day (BBDXY: -0.2%). The USD experienced a mini-resurgence last week, rising around 0.6% in index terms, with gains against all the G-10, except for the JPY. The EUR was little changed on Friday but down 0.9% last week, with the resurgence of COVID-19 in the region (which implies a weaker growth outlook and more ECB stimulus) weighing on sentiment.
On Brexit, UK PM Boris Johnson told the country to prepare for a no-deal Brexit at the conclusion of the EU Summit. The headlines saw the GBP fall almost a cent, but it subsequently reversed most of those losses to end slightly higher on the day, at around 1.2915. The market remains sanguine that a no-deal outcome can be averted, with media highlighting Johnson’s refusal to say he would unilaterally end negotiations and signs of compromise on the European side. German Chancellor Merkel said on Friday that there was room for compromise on the thorny issue of state aid while French President Macron has hinted at some concessions on the other major issue of fishing rights. UK cabinet minister Michael Gove told the BBC over the weekend that the door was “still ajar” for further negotiations.
The AUD underperformed again on Friday with the market continuing to digest the dovish speech from RBA Governor Lowe the day prior. The AUD fell 0.2% to 0.7080, its lowest closing level in three weeks. Likewise, Australia’s 10-year bond yield extended its big fall from Thursday, declining another 4bps, to 0.72%, on Friday’s session. The market is building-in a greater chance that the RBA will enact a volume-based bond buying programme, in the 5-10 year sector of the curve, as soon as next month. The Australian 10-year bond yield is at its lowest level since April and now sits below the US for the first time since March.
The NZD was quiet on Friday, contained to a very narrow 0.6587 – 0.6619 trading range. The NZD/AUD cross continued to push higher amidst growing expectations of RBA QE and reached its highest closing level since late-July, at around 0.9330.
Labour won an outright majority in the NZ general election over the weekend in a landslide result. We suspect there won’t be a sustained reaction in the NZD today, with the market having anticipated Labour would return to power and no major economic policy changes expected.
On Friday, the RBNZ announced another reduction to its bond buying for this week, the fourth consecutive week it has reduced the purchase pace. The RBNZ is set to buy $840m of nominal government bonds this week compared to $920m last week (inflation-indexed and LGFA bond purchases were kept steady at $40m and $20m respectively). The tapering suggests the RBNZ is broadly content with the present (extremely low) level of yields, although we would expect the Bank to scale purchases back up if they moved significantly higher. The RBNZ also plans to implement its Funding for Lending Programme (FLP) later this year, which will deliver stimulus independent of QE and will perhaps reduce the need to buy bonds as aggressively. There was a modest steepening in the bond curve in response to the announcement, with yields at the very long-end of the NZGB curve ticking 1bp higher, despite Australian yields declining.
In other news, Pfizer announced on Friday that it would apply for emergency use authorisation of its experimental COVID-19 vaccine, which it is developing with BioNTech, in the third week of November, provided trials are successful. The vaccine is in the final stage of trials, covering some 38,000 people, and is seen as one of the frontrunners in the global race for a vaccine. Pfizer hopes to know whether its vaccine will be effective by the end of October. Earlier this month, the NZ government announced that it had signed up for 1.5m doses of the vaccine, enough for 750,000 New Zealanders, and it was possible some doses would be available in early 2021, subject to NZ regulatory approval.
It’s a busy week ahead. Market attention will remain primarily focused on the upcoming US election, where betting markets and prediction sites have Biden a strong favourite to win and the Democrats tipped to regain the Senate. The flash European PMIs for October will be closely watched for an early indication of how the second wave of COVID-19 in the region is affecting growth. China, which is leading the global economic recovery, releases GDP data today alongside the monthly batch of activity indicators. US earnings season continues, with Netflix (one of the so-called “FAANG” stocks) among those reporting. Domestically, the QSBO business survey for Q3, which was delayed from its original release date, and CPI are released. We look for CPI to bounce 0.9% in Q3, taking the annual rate up to 1.6%. The RBNZ remains firmly focused on the risk of inflation undershooting its target midpoint for a prolonged period.