Equity markets consolidated on Friday following several days of large gains. The S&P500 was up 7.3% last week, its best week since April. US Treasury yields moved higher after a stronger-than-expected nonfarm payrolls release while the Bloomberg USD index fell to a fresh 2½ year low. The NZD touched 0.68 on Friday night, the first time in more than 18 months. Over the weekend US media have finally called the US election for Biden, although Trump has refused to accept the result.
Biden was announced as the winner of the US election by all the major media outlets yesterday morning after winning the key swing state of Pennsylvania. The final votes are still being counted in a few states, but Biden now has an unassailable lead in the electoral college. Trump has predictably refused to accept the result and his campaign have signalled that they will start legal challenges, with vote recounts likely in several states where Biden’s margin of victory is less than 1%. Several senior Republican politicians, such as leader of the Senate McConnell House Minority Leader McCarthy, have been silent since the result was called, which arguably undermines Trump’s attempts to discredit Biden’s win.
The key remaining uncertainty is the Senate contest. Georgia’s two Senate races will go to a run-off on January 5th, which will decide which party gains control. Were they to win these two run-offs, the Democrats would achieve 50 seats in the Senate, enough to gain control (as the Vice President, soon to be Kamala Harris, would have the deciding vote). This still looks a tall order, with betting markets giving the Democrats a less-than 30% chance of winning 50 seats, but it does leave open the slim chance that the Democrats could achieve a “clean sweep” after all.
Markets have been trading on the assumption that Biden would win the Presidency and Republicans would retain control of the all-important Senate, thus constraining the left-leaning Democrat policy agenda (such as higher corporate tax rates). This factor, alongside the passing of the event risk which was the US election, propelled equity markets to big gains last week. The S&P500 gained 7.3% last week, the NASDAQ 9% (investors in tech stocks cheering the reduced risk of higher taxes and antitrust legislation with a divided House and Senate) and European equities 8-9%. Movements on Friday were negligible, with all three US equity benchmarks flat on the day, effectively consolidating the big gains from earlier in the week.
The FOMC meeting came and went on Friday morning without much market impact. The Fed kept all its policy settings unchanged and made minimal changes to the statement. In the press conference Powell did note further monetary policy was likely to be needed and while the current pace of asset buying was right for the economy at the moment, the Fed did discuss the options around QE, including the ability to shift composition, duration and size of the bond buying program. With fiscal policy likely to be more constrained under a Republican-held Senate, pressure may again fall on the Fed if the economic recovery falters.
The other key event on Friday was the monthly US nonfarm payrolls report. Payrolls grew 638k in October, down slightly from the previous month but well ahead of the 580k market consensus. The unemployment rate fell sharply, from 7.9% to 6.9%, although the household survey, from which the unemployment rate is calculated, is considered less reliable than the payrolls survey of employers. While the labour market has recovered more quickly than expected to this point, the risk remains that the resurgence in COVID-19 curtails employment growth in the coming months, especially in the absence of another fiscal stimulus. The US has now recorded over 100,000 new cases over the past four days and the market’s focus may well return to COVID-19, including President-elect Biden’s approach to combatting it, once the dust settles on the US election.
US Treasury yields rose sharply after the payrolls report, with the 10-year rate rising 6bps to 0.82%. That still left it 5bps lower on the week, however, with market factoring in less fiscal stimulus (and thus less bond issuance) now the Republicans look likely to retain control of the Senate. Unwinds of popular curve steepening positions added downward pressure to US long-end rates on the week. In the absence of the Democrats defying the odds and winning the two Senate seats in Georgia, thus giving Democrats the ability to implement another huge fiscal stimulus, its unlikely Treasury yields will rise too far in the coming months.
The USD remained under downward pressure on Friday, with the BBDXY index making a fresh 2½ year low. The BBDXY was down 0.3% on the day and almost 2% on the week, its biggest weekly fall since March. The weakness in the USD last week came amidst the surge in equity markets (the USD is typically negatively correlated with risk appetite) and growing expectations the Fed will be relied upon more heavily to support the recovery (i.e. more QE bond buying), with fiscal policy likely to be more constrained.
European currencies led the charge on Friday, with the EUR rising 0.4% to around 1.1875, its highest level in more than a month and within proximity of the psychologically important 1.20 level. Movements in commodity and risk-sensitive currencies were more restrained on Friday, given that equity markets largely tracked sideways. The AUD was down 0.3%, to around 0.7260 while the NZD rose 0.15% to around 0.6775, briefly touching 0.68 for the first time since April 2019. On the week, commodity and risk-sensitive currencies outperformed, with the AUD rising 3.3% and the NZD up 2.4%. The prospect of a less hostile Biden administration with China saw the CNH rise 1.6% on the week, adding further support to the NZD and AUD.
Its potentially a big week ahead for the GBP, with further Brexit negotiations taking place ahead of the 15th November date that both the UK and EU had previously indicated as the deadline for a deal. UK PM Johnson and EU Commission President von der Leyen spoke by phone over the weekend, with both sides highlighting that there were still large differences to overcome on the thorny issues of state aid and fishing rights. The GBP hasn’t been affected much by the coming deadline as yet, with market participants perhaps conscious that big decisions involving the EU usually take place at the last minute.
NZ rates experienced a decent move higher on Friday as global rates increased and the market lost a little conviction in the chances of a negative OCR next year. OIS pricing for the OCR moved up another couple of basis points, with the terminal cash rate now priced at around -0.2% for late next year. The 2-year rose 3bps, to 0.04%, while the 10-year swap rate rose 5bps, to 0.55%. Both 2 and 10-year rates remain contained within well-established trading ranges for now.
It’s a big week ahead for the NZ rates market, with the November MPS taking centre stage on Wednesday. The RBNZ will keep the OCR unchanged, at 0.25% and, almost certainly, its QE bond buying programme too, at $100b. Instead, the RBNZ is likely to unveil details of its planned Funding for Lending Programme (FLP), which will allow banks to access long-term funding directly from the RBNZ at concessionary rates (at, or near, the OCR). We expect the RBNZ to retain an easing bias (i.e. keep alive the likelihood of a negative OCR next year) although we think it will stop short of publishing a forecast OCR track beyond Q1 next year, as this is likely to be read to literally by the market and reduce the Bank’s policy flexibility.
Focus offshore in the week ahead is likely to remain centred on US politics, with markets also keeping an eye on EU-UK trade negotiations, which are at a critical point. US CPI is the highlight data-wise overseas.
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