Equities fall after reports that Biden will hike capital gains tax. Little change in global rates. ECB President Lagarde pushes back at taper talk. More cautious risk appetite sees USD stronger

Equity markets are lower overnight after reports that Biden will propose to almost double the US capital gains tax on wealthy individuals, as part of the next fiscal package.  The S&P500 is down just less than 1% while US Treasury yields reversed their earlier move higher.  There was only a modest reaction to the ECB meeting at which President Lagarde pushed back against tapering talk as “premature”.  Amidst a pickup in risk aversion, the USD is stronger across the board and the NZD is trading back down at 0.7160.

Equity markets had been tracking sideways through much of the overnight session before a Bloomberg report a few hours ago that Biden will propose to almost double the US capital gains tax for wealthy individuals (from 20% to 39.6% for those earning over $1m per year).  The capital gains tax hike will help fund Biden’s next major fiscal package, the American Families Plan, which is expected to include funding for, amongst other things, childcare, paid family leave, and education and could be worth in the region of $1 trillion ($1.5 trillion including new tax credits).  Biden is expected to announce details of the new fiscal plan next week.

The capital gains tax increase shouldn’t have been a major surprise for the market given it formed part of Biden’s election campaign and had been widely covered in the media in recent months.  Nonetheless, it appears that, after a strong rally in recent months, investors have used it as an excuse to sell equities.  The S&P500 and NASDAQ, which had been trading marginally higher on the day, are now down almost 1% on the session.  Likewise, the US 10-year Treasury yield dropped from 1.58% to 1.55%, near the bottom of its recent trading range.

The other major event overnight was the ECB meeting.  As expected, the ECB kept all its policy settings unchanged and reiterated that it would continue to ‘frontload’ its bond purchases this quarter.  President Lagarde pushed back against talk that it might taper its bond buying, saying this hadn’t been discussed at this meeting and such speculation was “simply premature ”.  While the ECB will surely be circumspect about announcing a formal tapering process any time soon, the market expects the ECB will stop ‘frontloading’ its bond buying after June, returning the pace of purchases to what it was before March.  The ECB continues to see the near-term risks as tilted to the downside and the medium-term risks as balanced.  Lagarde noted that the quickening European vaccine rollout supports the ECB’s view that growth will rebound this year.

The EUR fell in response to the Lagarde’s pushback on tapering, although the reaction has been fairly modest.  The EUR was trading around 1.2050 before the announcement and is now trading just above 1.20, although USD strength likely accounts for some of that move.  The 10-year German bund yield briefly dipped after Lagarde’s comments before recovering to end slightly higher on the day, at -0.25%.  The 10-year German yield is near its highest level since last March.

Amidst a more cautious backdrop for risk sentiment, the USD is unsurprisingly stronger across the board.  The Bloomberg USD index (BBDXY) is up around 0.3% and has made gains against all the G10 currencies.  Despite its rebound overnight, the USD remains near its lowest level in two months.

The JPY and Swiss franc have outperformed given their safe-haven characteristics while the AUD and NZD, along with the GBP, have underperformed.  The NZD is down 0.7% over the past 24 hours and trades this morning around 0.7160.  The NZD/AUD cross traded above 0.93 yesterday for the first time in over a month, but it is now back below that level.

In an unexpected development yesterday, Finance Minster Robertson announced that, as part of the Deposit Takers Bill, the government intends to regulate bank lending standards.  Bank lending standards, such as LVR ratios, have traditionally been the domain of the RBNZ, which has responsibility for maintaining financial stability.  According to Robertson, the RBNZ’s operational independence will be maintained, although the government will now have a say in what types of lending that lending standards, such as LVR ratios, can apply to.  We expect to hear more about this in the coming weeks, including at the RBNZ’s Financial Stability Report on the 5th of May.

NZ wholesale rates declined once again yesterday.  The 10-year swap rate fell 4bps, to 1.74%, and is now approaching the lows reached in the immediate aftermath of the government’s housing policy announcement last month.  A strong government bond tender added downward pressure to long-term rates.  At 2pm today the RBNZ will announce its bond buying schedule for the week ahead.  We are looking for a reduction to the bond buying pace given the RBNZ has been finding it increasingly difficult to source longer-dated government bonds in its buybacks.

The European ‘flash’ PMIs for April are released tonight and are the highlight in the session ahead.  The market consensus is for little change, with the manufacturing sector performing very strongly but the services sector close to the 50 mark (which notionally indicates unchanged activity). In economic data overnight, US jobless claims data continued to trend lower last week, consistent with ongoing recovery in the US labour market.  In contrast, US home sales were weaker than expected, with the recent increase in mortgage rates appearing to have dampened demand.