Risk sentiment continues to improve. USD weaker, driving NZD up to 0.72 and AUD through 0.75; NZD/EUR and NZD/JPY hit four-year highs. Domestic rates market remains a minefield

On another slow news day, risk sentiment has further improved, taking the S&P500 to within a whisker of a fresh record high, while global yields have been well-contained. Against the backdrop of a soft USD, the NZD has pushed up through 0.72 and while the AUD is up through 0.75.

After some rocky trading conditions through September, risk appetite has improved through October, evidenced by a steady fall in the VIX index to around the 15 mark, at the bottom end of the range since the pandemic started. The long list of concerns that enveloped markets only recently, including stagflation risks, imminent withdrawal of policy stimulus from the Fed, global supply chain bottlenecks, the spread of delta, and contagion risk across China from the collapse of Evergrande, to name a few, has been put to one side.

The S&P500 is currently up 0.3% and within spitting distance of breaking the record high set in early September. The latest earnings season continues to track well, with some evident resilience in the face of major supply issues and surging inflationary pressure and this is supporting market sentiment. The Euro Stoxx 600 index closed up 0.3%.

The steady fall in the VIX index this month has been closely correlated with the steady lift in the NZD and fall in the USD, suggesting that higher risk appetite has been in the driving seat. The NZD has broken up through the 0.72 mark this morning to reach its highest level since June, giving us some regret in abandoning our call earlier this month that it would move higher into the mid-0.70s. Still, we’re not there yet and sentiment could turn on a dime. Technical resistance levels have been broken on the way up and the next key level is the one evident over the first half of the year of 0.7315.

The AUD has shown the same risk-supporting lift this month and broken up through 0.75. Over the past 24 hours, the USD has been the weakest of the majors and the BBDXY index is down 0.3% for the day. NZD crosses are all higher, and new milestones made, with NZD/EUR and NZD/JPY up to four-year highs of 0.6180 and 82.3 respectively and NZD/GBP up to a five-month high just over 0.52.

China’s troubled property developer Evergrande is back in the news, after the proposed sale of a majority stake in its property management unit that would have raised $2.6b has fallen through. The 30-day grace period after missing coupons on its dollar-denominated debt is over by the end of the week, which will put it officially in default.

In economic news, UK CPI inflation remained well above the BoE’s target, with annual headline and core rates of 3.1% and 2.9% respectively, albeit slightly weaker than market expectations. The BoE expects inflation to climb further, to 4% by year-end, and the market is well priced for the first rate hike of the cycle beginning next month.

Canadian CPI inflation was slightly higher than market expectations, with the annual headline rate hitting 4.4% and the average of key core measures pushing higher to 2.7%, further away from the 2% target. The data should cement in another tapering of QE next week, ahead of a series of rate hikes next year, with the market pricing in at least three hikes by the end of 2022.

One of the most hawkish members of the ECB Governing Council, the Bundesbank’s Weidmann, resigned for personal reasons and it will be up for the new German coalition government, when it is formed, to make a replacement.

Global rates markets have been well contained, with European 10-year rates down about 2bps, while a steepening bias is still a key feature of the US Treasuries market, with a little downside pressure on 2-year and 5-year rates, a flat-to-slightly higher 10 year rate, and the 30-year yield up 4bps. The 10-year rate touched a fresh four-month high of 1.67% during the NZ afternoon, fell to a low of 1.62% overnight and has since recovered to 1.64%, after a soggy 20-year auction drew a yield of 2.5bps higher than the when-issued yield.

The domestic rates market remains a minefield in the aftermath of Monday’s massive CPI print. A clear steepening bias was evident in the swaps curve, with the 2-year rate down 1bp to 1.95% and the 10-year rate up 6bps to 2.56%. NZGB rates were up 2-4bps across the curve, apart from a flat 2-year rate. The OIS market has pared back the chance of a 50bps hike next month over the past couple of trading sessions, from a near-even chance to about a one-in-four chance. A hike of at least 25bps remains a given.

The economic calendar remains light with only second-tier data releases. In the US tonight, initial jobless claims, the Philly Fed business outlook survey and existing homes sales are released.