Positive talk on US fiscal stimulus supports US equities and drives US 10-year rate to fresh multi-month high. NZD outperforms for no obvious reason

US equities found a bid and US 10-year rates reached a fresh multi-month high after news that a fiscal stimulus agreement was “just about there”. The NZD and AUD have recovered yesterday afternoon’s losses following talk of foreign meddling in the US elections. The NZD’s outperformance sees its higher on all the key crosses.

Familiar themes are in play, with the market focused on COVID19 trends and US fiscal stimulus talks. Newsflow on the former continues to be bad, with new daily case numbers of COVID19 reaching record highs across France, Italy, Germany, Demark and at least five other European countries, while Spain’s health minister said that the spread of the virus is out of control in certain parts of the country. New localised restrictions have been put in place in Portugal, Greece and Sweden, amongst other countries, while France extended its night-time curfew to capture two-thirds of the country’s population.

On US fiscal stimulus expectations, House Speaker Pelosi continues to adopt a positive tone when talking about negotiations with the White House – we are “just about there” – although a key stumbling block on funding for state and local government remained. She also noted the publicly expressed opposition to the quantum of stimulus by Republican Senate Leader McConnell. It seems to remain the case that agreement before the November election remains unlikely and the election outcome will ultimately determine the size and timing of any stimulus package.

US equities tracked sideways but found a bid after Pelosi’s comments, and the S&P500 is currently up 0.5%. European equities spent most of the session in negative territory, with concerns about COVID19 trends predominating. The Euro Stoxx 600 index closed down slightly. During the Asian trading session, S&P futures were giving a weak steer, falling after the US director of national intelligence accused Iran and Russia of meddling in the US elections, both obtaining databases of voters and Iranians sending threatening emails to sway Democratic-registered voters to vote for President Trump. Iran has denied the accusation.

US economic news has been positive, with US jobless claims figures for last week much better than expected at 787k, the lowest level since mid-March, with a downward revision to the previous week as well. The updated trend showed some mild improvement over recent weeks but still remaining at an uncomfortably high level. US home sales blasted ahead of expectations to reach a 14-year high, continuing the theme of the US housing market remaining a beacon of strength.

Pelosi’s positive fiscal message gave another little lift to US Treasury yields. The 10-year rate rose to 0.85%, its highest level since June, with the market having one eye on much higher US debt issuance when a stimulus package finally arrives, even if the timing of that remains uncertain. Following on from extraordinary demand for AAA-rated EU bonds we have previously noted, Italy (rated BBB) saw €90b of demand for its offering of €8b of 30-year bonds at a near record low yield of 1.76%, suggesting not only strong demand for high-quality paper but also strong demand for poorer quality bonds. 

In currency markets, the NZD leads the charge for reasons that are not obvious. We saw some afternoon weakness yesterday after that report on US election interference, but the NZD has since trended higher and is trading close to the highs of the session of 0.6689. It is higher on all the crosses, both relative to this time yesterday and since the NZ close, seeing NZD/AUD climb to a 3-month high of 0.9393, with the AUD recovering by a lesser degree, recently touching 0.7125.

The strong CNY reversed course after yesterday Caixin reported that the QDII quota will soon be bumped up by $10b, allowing more domestic funds to invest in securities overseas. USD/CNY is up 0.5% for the day to 6.685.

The USD index is slightly higher, with EUR, GBP and JPY all on the softer side. NZD crosses against JPY, GBP and EUR are all up about 0.7%-0.8% for the day.

NZGB yields showed 1-2bps falls across the curve yesterday, with strong demand evident at the government’s bond tender.  Swap spreads rose, with swap rates beyond 2 years up 1-2bps. The 2-year rate was flat at 0.02%. NZ CPI data this morning doesn’t really hold much market interest, with RBNZ policy firmly focused on the medium-term and clear signals that it wants to offer more monetary stimulus. A quarterly bounce-back in inflation – partly seasonal – shouldn’t move the needle.

This afternoon, the final Presidential Debate will screen, while the focus tonight goes on European PMI data, which is expected to come in softer across the board, given the second wave of COVID19 spreading.