The market continues to cheer the US election result, with a Biden victory and Republican senate still heavily odds-on to prevail. Equity markets have surged ahead for another day, while US Treasury yields have reversed course and show some upward momentum overnight. The USD is again weaker across the board, falling to a 2½-year low on the BBDXY index.
The US election outcome is still up for grabs, but with Biden’s odds of winning moving up from 80% to 86% according to betting site PredictIt over the past 24 hours. In the race to get 270 Electoral College votes, Biden currently has 264 against Trump’s 214 and he still has a number of paths to win depending on final outcomes for Nevada, Georgia, North Carolina, Arizona and Pennsylvania. Trump has tweeted he will legally challenge the recent States that Biden has won, but the rule of law isn’t in his favour and Trump’s move isn’t seen to be credible by the market.
The Senate race is still open, although heavily leaning towards the Republicans holding it. There is still a theoretical possibility of the Democrats taking a slim majority, including the casting vote of the Vice-President, if Biden wins and the Georgia Senate has a two-seat run-off in early January, which the Democrats then win. On the base case of no Democratic majority in the Senate, Biden’s agenda will be severely curtailed, leaving a grid-locked political scene in which few policy initiatives get enacted. To those who believe that governments are part of the problem, not the solution, then that’s a fantastic result.
US equities continue their strong post-election rally, based on the view that the Democrats won’t have the ability to push through with higher taxes or new regulations, particularly those proposed for the tech sector. The S&P500 is currently up 1.6%, extending this week’s rally to about 7%. The strong US market is spilling over to other markets, with the Euro Stoxx 600 index closing up over 1% and taking its weekly gain to over 7%.
On a more sombre note, the US reported more than 100,000 new COVID19 cases in a day for the first time and case numbers look set to increase further, as the experience of Europe has shown. Once the euphoria of the election result is over, we’d suggest that there is a good chance that the market switches focus to this disturbing trend and its economic consequences.
On that note, US jobless claims last week were fairly steady against expectations for a modest drop, continuing the theme that the US labour market is struggling to improve and, with the still-rapid spread of COVID19 and associated increased social distancing measures that will need to be put in place, the risk is that the economic recovery reverses course.
The post-election rally in US Treasuries reversed course after a low of 0.716% was reached for the 10-year rate before the US open. It has been a one-way trend since, with the yield pushing up to 0.78%, some 4bps higher from the NZ close. That could all change over coming hours. At 8am the FOMC releases its latest policy statement, followed by Chair Powell’s press conference. We’d expect only minor tweaks to the previous statement, with the Fed still committed to using its full range of tools to support the US economy. Powell will no doubt be encouraging further fiscal expansion to support the economy.
The Bank of England left its policy rate unchanged at 0.1% but surprised the market with a larger than expected boost of £150b to its bond-buying programme. There were clear signs of policy coordination with the Treasury, with the Chancellor Sunak announcing that the government would extend its furlough programme (in which the government pays 80% of wages for the hours that workers are unable to work) until March, beyond the scheduled end of the current lockdown.
The theme for currency markets has all been about USD weakness. Our view has been that the USD was on a path to weaken further over the medium-term, independent of the US election result, even if the short-term reaction was looking uncertain. The clearance of the US election as a risk event has now paved the way for the USD to fall further. The USD BBDXY index is down 0.6% for the day, taking it down to a 2½-year low.
The AUD has been one of the best performers, up 1.2% for the day to 0.7270, with increased chatter about China-Australia trade tensions cast aside as a non-event. The NZD is trading at 0.6760, after peaking at 0.6769. The charts show 0.68 as a level of key technical resistance, so that will be closely watched over coming days. NZD/AUD has slipped further, now just above the 0.9300 mark.
GBP saw no harm from the BoE’s boost to the QE programme, nudging out EUR again, trading above 1.31 and above 1.18 respectively. USD/JPY has pushed down through 104 for the first time since March.
The domestic rates market was pushed lower by prevailing global forces as well as strong demand at the latest government bond tender. Curve flattening was evident, with longer NZGB rates down as much as 7bps. The 2-year swap rate was flat at 0.01%, unperturbed by one of the major banks pushing out its negative OCR call further into 2021, while 10-year swap closed down 6bps to 0.50%.
The ANZ NZ business outlook survey showed little change in activity indicators at sub-par levels, but there was a further rise in inflation indicators. The data supported our view that the inflation outlook might not be as weak as many expect or fear, with less spare capacity in the economy than widely believed, some of that a hangover from the pre-COVID days.
After the FOMC announcement this morning, the RBA’s statement on monetary policy will provide the full forecast update to back its move to provide further stimulus earlier this week. US non-farm payrolls data tonight should show further slippage in employment growth. Weaker US data ahead should be an enduring theme as new COVID19 cases continue their upward march and consumers respond accordingly.
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