Market moves were reasonably subdued on Friday as investors waited on the outcome of Brexit and US fiscal stimulus negotiations. Equities declined slightly, US rates nudged higher, while commodity prices continued to firm (copper reaching $8,000 for the first time since 2013). The NZD consolidated above 0.71 while the NZ 10-year swap rate hit 1% for the first time since April. In news over the weekend, the UK announced that London would go into full lockdown as new Covid-19 cases surge while a US fiscal stimulus deal looks to have been secured.
A $900b (~4.5%/GDP) US fiscal deal appears to have been reached over the weekend. The deal reportedly includes a round of $600 cheques for households, $300 extra per week in unemployment benefits, and extra funding for education and small businesses. As part of the compromise deal, the Fed will need Congressional approval to reactivate its emergency lending facilities from earlier in the year, although it will be able to set up similar facilities. The Fed’s current bond buying programme, in US Treasury and mortgage bonds, is unaffected, but the Fed would need approval to reactivate its corporate bond buying programme, which was instrumental in calming markets during the crisis. Congress and Senate are expected to sign off the bill as soon as today.
On Brexit, negotiators are now dealing with the financially immaterial but politically-charged issue of EU fishing rights in UK waters. A deal was supposed to be agreed by the end of the weekend to allow the European parliament time to review and sign it off, although French and UK politicians have suggested talks could yet stretch into this week. A deal can still be provisionally applied on 1st January even if the EU parliament doesn’t get to hold a vote in time.
Over the weekend, the US regulator formally approved emergency use authorisation for Moderna’s vaccine. The company aims to produce 500 million to 1 billion doses of the two-shot vaccine next year. The Telegraph reported that the UK regulator could approve the Oxford University/AstraZeneca vaccine before the end of the year.
Vaccination can’t come soon enough, with Covid-19 continuing to spread rapidly in the US, Europe and, especially, the UK (not to mention making an unwelcome return to Sydney). Over the weekend, UK PM Johnson announced a new Tier 4 level of restrictions for London and some surrounding areas. The Tier 4 restrictions, which amount to a full lockdown, will initially be reviewed on December 30 but could remain in place for months. All non-essential shops will be closed, people ordered to stay at home unless absolutely necessary and households banned from mixing. Several European countries have announced a travel ban on the UK, in response to the fast-transmitting new variant of Covid-19. In Italy, the government announced a full nationwide lockdown to cover most of the Christmas and New Years period. Meanwhile, the recent emergence of Covid-19 cases in the Northern Sydney beach suburbs has seen several Australian states place travel restrictions on those from Sydney or New South Wales. The Sydney cluster highlights the challenges with the proposed Trans-Tasman bubble, which NZ PM Ardern had earmarked for Q1 next year.
Up to this point, the market has appeared content to look through the negative news on Covid-19, presumably on the basis that a US fiscal stimulus will help bridge growth over the coming months until widespread vaccination allows countries to remove restrictions next year. Commodity prices continue to push higher, consistent with the market pricing a more positive demand outlook. Brent crude oil reached $52/barrel on Friday, its highest level since March, while copper touched $8,000/tonne, the first time since 2013.
In equities, markets edged down on Friday, with the S&P500 and NASDAQ falling 0.4% and 0.1% respectively. Tesla joins the S&P500 today, as the 7th largest company in the index, with index rebalancing by fund managers on Friday resulting in huge trading volumes. US bank stocks jumped in after-hours trading after the Fed said banks could resume share buybacks, with a number of big banks saying they intended to do so next year.
The US 10-year Treasury yield ticked up to 0.95% on Friday, near its recent highs. The recent rise in US rates has been driven almost exclusively by higher inflation expectations, with the US 10-year ‘breakeven inflation’ rate reaching a fresh 18-month high, at 1.96%, on Friday. This means US real interest rates have actually been falling over the past month, one factor contributing to the ongoing decline in the USD and continued ascent of equity markets. The US 10-year real rate is below -1% again.
In currencies, the USD managed a modest bounce on Friday (BBDXY +0.2%), but it was still around 1% lower over the course of the week. The BBDXY is within vicinity of a six-year low. Buoyant risk appetite, optimism around a synchronised global growth rebound next year, and ultra-low US real interest rates continue to weigh on the USD.
The GBP was an underperformer on Friday, with Brexit negotiations dragging on. The GBP fell 0.5%, albeit from what was a 2½ year high. The weekend news of London’s Tier 4 lockdown may hit the GBP today. The AUD has exhibited little reaction to news of the Sydney Covid-19 outbreak, ending flat against the USD on Friday at 0.7620. The NZD spent the Friday session consolidating above 0.71, eventually ending the week around 0.7140. The NZD/AUD cross continued to drift lower, hitting a six-week low around 0.9360.
The NZD showed little reaction to a stronger ANZ business survey on Friday. The survey showed business confidence moving back into positive territory for the first time since 2017 with the key ‘own-activity’ indicator reaching its highest level since early-2018. Notably, firms’ pricing intentions spiked sharply higher, to a level – at least, at face value – consistent with inflation heading into the top-half of the RBNZ’s 1-3% target range. Our forecast, and those of most commentators, is for inflation to remain low next year. But, if inflation did unexpectedly materialise, it could make things more difficult for the RBNZ to maintain its ultra-easy monetary policy stance.
NZ rates rose further on Friday, with the 10-year swap rate hitting 1% for the first time since early-April. When the RBNZ does eventually decide it’s time to ease back on its monetary stimulus, its first step is likely to involve tapering its bond buying to zero. As we head into next year, this implies that better domestic (or global) developments should be met with a steeper NZ yield curve, if the market prices the chance of less RBNZ bond buying support going forward.