The market is trading as if the US election is over and the results are in, with a clear outcome that will lead to further fiscal stimulus. US equities are charging ahead, the US 10-year rate has pushed up to a fresh four-month high and the USD is weaker across the board. The NZD is up through 0.67.
As the US heads to the polls on election day, market participants have made up their own minds about the result. This could set the scene for some volatility if expectations are not met. All the key US equity market barometers are up about 2%, including the S&P500 and small cap Russell 2000 index. Last week’s fears have given way to optimism that a clear outcome will prevail, namely a decisive victory for Biden – a big enough win to put aside fears that Trump will contest the result – and a likely Democrat clean sweep that allows a massive fiscal stimulus to be agreed and in place by early next year.
What could possibly go wrong? We could think of a number of different permutations, including a much closer result which sees at least a two-month period of post-election uncertainty and the Senate race is a very close call. A Democratic clean sweep, while creating a near-term sugar rush for the economy, isn’t necessarily positive for the medium-term outlook. Some sort of gridlock, which would occur if Republicans retained the Senate, might well see less juice for the economy in the short term, but ultimately be more positive for the economy. Giving one-side of the political spectrum carte-blanche to do whatever it wants isn’t necessarily a good thing.
Election results will start rolling in from the afternoon, NZ time, but it might well be days – or longer – before we know the ultimate result.
The only other news of note overnight is the halting of the listing of Ant Group in China and Hong Kong, which was set to be the world’s biggest IPO. At the last minute, Chinese regulators have decided on new capital requirements, which will change the “economics” of the business for this fintech firm, with some claiming political interference. On a normal trading day, this might have been taken notice by US investors, but enthusiasm about the US election has been the predominant force.
Expectations of much greater US fiscal stimulus ahead, entailing the issuance of an extraordinary amount of debt has put upward pressure on US rates. The 10-year rate peaked at 0.896%, a fresh four-month high. Likely restraining the move is expectations that the hand of the Fed would be in play if rates rise too much, with higher debt issuance likely to see an extension of the QE programme to keep rates in check. On that note, the FOMC’s next policy statement and Chair Powell’s press conference, due Friday morning NZ time, will be interesting following the US election result.
The USD is weaker across the board, with the BBDXY index down 0.6%. The AUD has led the charge, up 1.7% since this time yesterday to 0.7160 and most of that occurring overnight. The RBA’s fresh stimulus package announced yesterday afternoon barely caused a ripple in the currency market, with the move well-telegraphed in recent weeks. The key policy rates were cut by 15bps to 0.1% and the bond buying programme for the 5-10 year part of the curve was set at $100b for the next six months, with indications that much more could be done if required. This quantum and guidance were welcomed by the bond market, with 10-year bond futures rallying 4bps, but that has since been overwhelmed by bigger global forces.
The RBA’s policy move was said to contribute “to a lower exchange rate than otherwise”, so it is somewhat ironic that the currency is so much higher in less than 24 hours – signalling the lack of power central banks have in controlling exchange rates when they are just doing what other central banks are doing. Reiterating rates guidance, a negative cash rate is not a rabbit hole that the RBA wants to go down, with Governor Lowe saying “While a negative rate might lead to a helpful depreciation of the Australian dollar, it could impair the supply of credit to the economy and lead some people to save more, rather than spend more”. Wise words, indeed.
The increased risk appetite backdrop has seen the NZD blast up through the 0.67 mark, touching a high of 0.6718 and, like the S&P500, back to where it traded a week ago. Despite the RBA easing, the NZD has underperformed the AUD, seeing the cross down to 0.9355. We have been arguing ad nauseum recently that this cross has looked rich and any RBA easing would pale in comparison to the RBNZ. Fair value is well south of 0.90 just based on recent commodity prices trends, let alone the fact that the RBNZ’s money printing machine is in fifth gear, while the RBA’s has just moved into second.
The NZD is higher on all the other key crosses. Amongst the other majors, JPY is at the weaker end, understandably so given the boost to risk appetite. CAD looks particularly weak against the backdrop of a stronger NZD and AUD and with oil prices making decent gains of around 2-3%. GBP has edged out EUR as EU-UK trade talks continue.
The domestic rates market saw lower yields, supported by the prevailing global backdrop. NZGBs showed a flattening bias, with rates down 3.5bps at the longer end of the curve. The 10-year swap rate fell 2bps to 0.52% while the 2-year rate was steady at 0%. Australian 10-year rates are about 2bps higher since the NZ close, so the pressure on the open will be for higher NZ long-term rates.
The focus for the day ahead will be the US election results that start being released during the afternoon, NZ time. We should have a good idea by late afternoon or early evening, but Trump’s threat to roll out his team of lawyers following the election means that uncertainty could linger for some time yet. NZ labour market data this morning are expected to show an increase in the unemployment rate, the only question being “how high”, with economist estimates as high as 7.0% and the consensus at 5.3%. The data tell us little about the outlook and the impact of the end of wage subsidies, so shouldn’t have much bearing on the monetary policy outlook. The key releases tonight are US ADP employment and ISM services.
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