Brexit concerns reemerge with time running out and no sign of a breakthrough yet. S&P500 and Treasury yields fall modestly. NZD higher to start the week, with the AUD hitting a new post-2018 high

Markets have largely consolidated overnight, with the S&P500 pulling back slightly from its record high and bond yields giving back most of their gains from Friday.  Growing fears of a no-deal Brexit led to a sharp fall in the GBP, although it has recovered over the past few hours.  There hasn’t been much spill-over to other currencies or risk asset markets from the concerns around Brexit.  The NZD has appreciated modestly, with the USD still under pressure.

Brexit is back in the headlines, with talks right down to the wire and markets starting to fret that a no-deal outcome might be a real possibility.  EU chief negotiator Barnier told European ambassadors that negotiations were still stuck on the longstanding issues of fishing rights, dispute resolution, and so-called ‘level playing field’ conditions.  Barnier reportedly said he “cannot guarantee” a deal and it was up to the UK to make the next move.  UK PM Johnson and European Commission President von der Leyen are supposed to be speaking now in what has been described as a “make or break” conversation to see whether a deal can be reached.  We should expect headlines soon.

The market’s working assumption has been that a deal will be reached, even if that is at the eleventh hour, as this is in clear economic interests of both sides.  But with negotiations running down to the wire and no sign of a breakthrough yet, markets have started to get more nervous.  The GBP opened lower yesterday morning and extended that move in the London morning, falling as much as 1.6% at one point.  It has recovered over the past few hours to now be down 0.6% on the day, at around 1.3365.  The UK government’s announcement that it would drop the offending sections of its controversial Internal Markets Bill, if a trade deal was agreed, has given the GBP a small lift over the last hour.

There was only a brief impact on other currencies from the Brexit-induced weakness in the GBP.  The EUR fell 0.4%, in sympathy with the GBP, but it has since rebounded and is now 0.1% higher on the day, at around 1.2130.  Likewise, the AUD dipped to almost 0.7070, before rebounding strongly to 0.7150, a new post-2018 high.  The NZD has followed the same pattern, falling to near 0.70 before turning higher.  The NZD trades this morning around 0.7060, a gain of 0.2%.  The USD remains under pressure, with the BBDXY index hovering just above a 2½ year low.

There hasn’t been much impact on other asset markets, at this stage, from the re-emergence of concerns about Brexit.  Equity markets have paused for a breather overnight after their very strong run over the past month.  The S&P500 is down a marginal 0.2% while the NASDAQ has pushed on to a new all-time high, up 0.4% on the session.  European equity markets fell by up to 0.6%.

There haven’t been too many other notable developments overnight to report.  In the US, the bipartisan group of senators who recently proposed a $908b fiscal stimulus package are working on the wording of the bill, which they hope to present in the next day or so.  It’s not certain the bill will win approval from the legislative chambers, but recent conciliatory comments from both senior Republicans and Democrats has given the market hope that it will pass before the Christmas break.  In Japan, Bloomberg reported that new Prime Minister Suga will publish a new stimulus package, with fiscal measures (including loans) worth around ¥40tn (~7%/GDP).

In bond markets, US Treasury yields have reversed most of their sharp rise on Friday, which saw the US 10-year rate hit a nine-month high of 0.98%.  The US 10-year rate has fallen 3bps this week, to 0.93%, with the yield curve unwinding some of its recent steepening.  UK gilt yields have fallen by as much as 7bps, with growing nerves around Brexit leading markets to price-in a greater chance that the Bank of England takes further stimulus measures to support the economy.

There hasn’t been much economic data to move the market overnight.  Chinese export data in November was very strong, rising more than 20% from a year ago.  Demand for Chinese manufactured goods has been strong, with large parts of Europe back in lockdown and many US states having imposed fresh restrictions.  Less encouragingly, Chinese imports slipped from 4.7% to 4.5%.

In the local rates market, there was a further steepening in the NZ yield curve yesterday, as the NZ market played catchup to the US Treasury market moves from Friday night.  The NZ 2y10y swap curve increased 4.5bps to 70bps, its highest level since the start of 2019 (putting aside a brief spike during the crisis in March).  The short-end of the curve remains anchored, with market OCR expectations not shifting (the 2-year swap rate was unchanged on the day, at 0.26%).  Longer-term rates were lifted by global forces, with the 10-year swap rate rising to 0.97%, its highest close since April.  We should see a partial reversal of those moves today, with US Treasury yields slightly lower than where they were at the NZ market close.

Its another quiet session ahead as far as economic data goes, although there is the ECB meeting to look forward to on Thursday night.  Market focus is likely to remain centred on Brexit talks and the proposed US fiscal stimulus bill.