S&P500, bond yields give back gains over the past few hours as London gets ready for a tighter lockdown, New York told to prepare for possible lockdown. GBP, EUR higher on more positive Brexit vibes. Little reaction to a Trans-Tasman 'bubble'

Markets moves have been modest overnight.  On the positive side of the ledger, there is greater optimism that a no-deal Brexit can be avoided as well as growing hopes that a US fiscal stimulus bill might pass.  On the negative side, London is set to move into tighter lockdown amidst a “new variant” of Covid while New York was told to prepare for another full lockdown.  The S&P500 is up 0.2%, US Treasury yields are unchanged while the USD is marginally weaker so far this week.  There hasn’t been much market reaction to yesterday’s announcement from PM Ardern that a Trans-Tasman travel bubble was likely in Q1.

Risk asset markets started the week off on a positive note following the news over the weekend that the EU and UK had agreed to continue Brexit negotiations, amidst reports of compromise.  Overnight, EU chief negotiator Barnier reportedly told ambassadors that a trade deal could be reached this week while acknowledging that there were still issues to be overcome.  Meanwhile, Boris Johnson’s spokesperson told media that a no-deal outcome was still “possible”, a downgraded warning from Johnson’s claim last week that it was “very, very likely.”

The GBP appreciated more than 1% shortly after trading opened yesterday morning and, at one point overnight, had completely erased its losses from last week.  It has pared some of those gains over the past few hours but is still the clear outperformer in the FX market this week, up 0.9% to 1.3340.  The UK 10-year gilt yield increased 5bps, to 0.22%, as the market pared back BoE easing expectations.

Likewise, S&P500 futures opened higher in Asian trading yesterday, trading up as much as 1% overnight.  Risk appetite was supported by a Reuters report that the proposed US fiscal stimulus package might be split into two separate bills, to increase its chances of passing.  One bill would include just the proposed $160b funding for state and local governments (a key Democrat demand) alongside liability protection for employers (a key Republican demand).  The other bill would cover the remaining ~$750b spending proposal, for which there is a bipartisan consensus.  The fiscal stimulus bill(s) are expected to be released tonight, attached to a full-year spending bill.

Market sentiment has been shaken somewhat over the past few hours after news that London and New York were set for tighter lockdowns.  UK health minister Hancock announced that London would move to a Level-3 lockdown from midnight Tuesday amidst an exponential rise in cases in the area.  Troublingly, Hancock said a “new variant” of Covid had been identified, adding that the WHO had been informed.  Hancock claimed it was “highly unlikely” a vaccine would not be effective against the new variant, but the news is still a fresh reminder that the battle against Covid is not over.  In the US, New York’s Mayor warned residents that they should be ready for a full lockdown and asked employees to work remotely, if they could.  Vaccination has now started in the US and the UK, but it will take time to get through a significant proportion of the population.

Consequently, the S&P500 has given back most its gains over the past few hours, to now be up 0.2%, while the 10-year Treasury yield has reversed from 0.94% back down to 0.9%.  Tech stocks have outperformed amidst the London and New York news, with the NASDAQ 1% higher overnight.

The key USD indices, the DXY and BBDXY, made fresh 2½ year lows overnight, when equity markets were near their highs.  The USD has recovered somewhat over the past few hours as equities turned down.  The BBDXY is currently down 0.2%, erasing most of its gains from last week.

The EUR is up 0.4% to 1.2155, in sympathy with the GBP, and is again pushing up against its recent highs.  The JPY made a one-month high overnight but is now back to unchanged on the day.

The NZD made a new post-2018 high overnight, around 0.7120, when the USD was at its lows.  It has since fallen back below 0.71, to be broadly unchanged on the day.

There hasn’t been any discernible market reaction to yesterday’s announcement from PM Ardern said the government had made an in-principle decision to open a ‘travel bubble’ with Australia in Q1 next year, subject to the Australian government agreeing and no deterioration in the Covid-19 circumstances in both countries.  Ardern said there was work to be done around contingency planning (i.e. what would happen in the event there was a fresh outbreak in either country) and she would announce the planned start date in the new year.

The emergence of a Trans-Tasman bubble in Q1 should be a positive for the economy, even if the exact magnitude is uncertain (NZ tourists spent a similar amount in Australia last year as Australian tourists did in NZ).  The news will also count as a positive surprise to the RBNZ which, at the November MPS, assumed borders would remain shut until the end of next year.  More generally, it should help bolster confidence, being a sign that things are moving in the right direction.

There was no immediate reaction in the domestic interest rate market yesterday to the news.  The 2-year swap rate remained stuck at 0.26% while the 10-year swap rate fell 1bp to 0.90%.  Ahead of Wednesday’s HYEFU, at which the bond programme is widely expected to be reduced, government bonds outperformed, with yields falling by as much as 3bps at the long-end of the curve.

In domestic data, the PSI (the services version of the PMI) dropped back to 46.7 in November, below where it was when Auckland went back into Level-3 lockdown and the rest of the country was in Level-2.  The survey might provide some tentative evidence that the lack of foreign tourists is starting to have some impact on the services sector.  Clearly, the Trans-Tasman bubble, if it becomes a reality, should be helpful in that regard.

The highlight in the session ahead is the release of Chinese activity data, which is expected to show further improvement across retail sales, industrial production and fixed asset investment.  The RBA minutes are also released but shouldn’t contain many surprises.