Equity markets lower, bond yields little changed overnight. USD weakens, CNY reaches a multi-year high. NZD/AUD makes a 2½ month high as markets price-in RBA QE

US equity markets have seen modest falls overnight while bond yields are little changed.  US fiscal stimulus talks are ongoing, but markets remain sceptical of a pre-election deal.  The USD is broadly weaker, with the GBP gaining on reports the UK may amend its controversial Internal Market Bill.  The NZD has moved a bit higher against this weaker USD backdrop and the NZD/AUD cross has pushed up to an almost three-month high.

Both US and European equity indices are down modestly overnight.  S&P500 futures had opened the week higher in Asian trading yesterday, but the market has reversed course over the past few hours, leaving the S&P500 down about 0.9% on the day.  US Treasury and German bund yields are within 2bps of Friday night’s closing levels (US 10-year Treasury yield: 0.76%).

Fiscal stimulus negotiations between the White House and House Democrats are due to resume in an hour or so ahead of Nancy Pelosi’s Tuesday deadline for a pre-election deal.  A pre-election fiscal stimulus deal still looks a tall order given Republican opposition in the Senate and a narrowing window to get the bill through the legislative chambers before the election.  Even if the two sides fail to come to an agreement ahead of the election, market conviction is growing that the Democrats will be able to implement their own huge fiscal stimulus if they achieve a clean sweep at the election.  Given the rising trend in COVID-19 cases in the US and especially Europe, further fiscal stimulus is seen as crucial in buttressing global growth.

The USD is broadly weaker to start the week.  The BBDXY has fallen 0.25%, reversing around half of its gains from last week and leaving it less than 1% from its recent 2½ year lows.

The GBP and EUR have both increased about 0.5%, with the market looking for the positives in Brexit talks between the UK and EU.  Yesterday morning, Bloomberg reported that the UK was prepared to ‘water down’ its controversial Internal Market Bill, which is one of the outstanding obstacles to a trade deal, as part of negotiations.  After a phone call between negotiators overnight, described as a “constructive discussion”, the UK said there was still no basis for talks to resume.  But the resilience in the GBP suggests that investors expect the two sides to reach an agreement to avert a no-deal outcome.

In economic data, Chinese GDP undershot market expectations, rising ‘just’ 2.7% in Q3.  Despite the miss, Chinese GDP is now 3.2% higher than its pre-COVID levels and the country is leading the global economic recovery thanks to its quick suppression of COVID-19 and timely stimulus from policymakers.  Industrial production and retail sales were both stronger than expected in September, pointing to continued momentum in the Chinese domestic economy.

The CNY brushed off the weaker-than-expected GDP release, rising 0.2% to its strongest closing level in more than two years (USD/CNY at 6.6830).  The PBOC recently eased some rules on using FX forwards to sell CNY, in effect reducing the cost of shorting the CNY, but this hasn’t done much to dent the broader trend towards a stronger CNY.  Besides leading the global economic recovery, China’s relatively high interest rates (the 10-year bond yield is above 3%) and its forthcoming inclusion in the FTSE-Russell World Government Bond index (WGBI) are supportive factors for the CNY.  Chinese government bonds are scheduled to enter the WGBI, which is used as a benchmark by around $3 trillion of funds according to industry estimates, in October next year, which will likely trigger inflows into the bond market and the currency.

The weaker USD backdrop and stronger CNY has seen the NZD push a little higher to start the week, up 0.3% to 0.6625.  Labour’s landslide win at the weekend’s election caused little reaction in both the NZD and domestic rates market, with the outcome having been priced-in to a large extent already.  The NZD remains well contained within its broader 0.64 – 0.68 range for now.

The AUD continues to underperform, likely due to building expectations that the RBA will implement QE – in the 5-10 year sector of the curve – next month.  The NZD/AUD cross has ticked up to 0.9355, its highest level in 2½ months.

There was little move in the domestic rates market yesterday, with wholesale rates barely changed across the curve.  The QSBO business survey for Q3 is released this morning and will show a decent bounce back in confidence and activity indicators, if the more-timely ANZ survey is anything to go by. Yesterday’s PSI saw activity return to expansionary territory, albeit only marginally (at 50.3).  In contrast to the improvement in production (52.4) and new orders (54.9) indicators, employment remained a laggard (48.7), implying – at face value – that firms continue to shed labour.

The minutes to the RBA’s October Board meeting are released today should echo the tone of Governor Lowe’s recent dovish speech, which markets have interpreted as indicating the RBA will adopt a series of easing measures next month.  RBA Assistant Governor Kent speaks on "The Stance of Monetary Policy in a World of Numerous Tools" a short while beforehand.