The new week has kicked off with a lift in risk appetite, with global equities markets showing some decent gains, higher global rates and weaker safe-haven currencies like JPY and the USD. The NZD has been a beneficiary of the change in sentiment, gaining 1% to 0.6460 during local trading hours and little net gain overnight.
After seven consecutive weekly falls in the S&P500, the new week has begun on a positive note, with the index currently up just under 2%. It remains to be seen whether the low has been reached, after recording a 20% decline from the peak in January during Friday’s trading session, but some buying activity has stepped up. Financials lead the way, up over 3% after JP Morgan provided some upbeat earnings and revenue guidance, saying it would benefit from rising interest rates. The Euro Stoxx 600 index closed up 1.3%.
As for the trigger for the turnaround in sentiment, there are no obvious drivers, and as far as we can see there has been a mix of positive and negative news stories, so we’ll revert to the “more buyers than sellers” excuse.
Commentary on China has been mixed. On the negative side, Beijing reported a record 99 of COVID19 cases during the current outbreak, including some in the community, raising fears that the city would suffer the same fate as Shanghai and face a prolonged lockdown. And during a trip to Japan, President Biden said that the US would respond militarily to defend Taiwan on an invasion by China. The comments came in response to a question, after Biden stressed that the US remained committed to the “One China policy” but that didn’t mean China could take Taiwan by force.
On the positive side, President Biden said he is considering removing some of the import tariffs on China that were imposed by Trump. Cutting tariffs would ease some inflationary pressure – although not much – but politically the Administration doesn’t want to be seen to be soft on China ahead of the November elections. This headline helped drive USD/CNY lower and it is down 0.6% on the day to 6.65. Also on the positive side for China, the government continues to incrementally ease policy, with a plan to offer some tax relief to businesses to help lift the economy, although the additional tax cuts only add up to 0.1% of GDP.
In economic news, Germany’s IFO survey showed a surprising lift in the business climate index, up 1.1 points to 93.0, albeit driven by the current assessment index up to 99.5, while the expectations component remained relatively weak and little changed at 86.9. The release noted that Germany’s economy proved resilient in the face of inflation concerns, material bottlenecks and the war in Ukraine, with no observable signs of a recession. We would add the word “yet” to the notion of recession, given the significant headwinds the country faces as it transitions away from Russian energy.
In a blogpost, ECB President Lagarde looked to become less ambiguous in her comments about the policy outlook, saying she expected QE to end “very early in the third quarter…a rate lift-off at our meeting in July” and “we are likely to be in a position to exit negative rates by the end of the third quarter”. With two meetings in Q3, this implied a 25bps rate in the July and September meetings, taking the deposit rate to zero. She added that the policy outlook was complicated by the presence of negative supply shocks, which created uncertainty about the speed that price pressures would abate and that argued for “gradualism, optionality and flexibility”. The detail provided around these comments implied a slower than faster pace of tightening, seemingly ruling out 50bps increments.
Lagarde’s comments set the scene for higher rates in Europe and the positive risk backdrop has supported the move. Government 2 and 10-year rates for the UK, France and Germany are up in the order of 6-8bps. US rates are higher across the curve, with the 2-year rate up 4bps to 2.62% and the 10-year rate up 8bps to 2.86%.
The USD has showed broadly based falls, alongside the yen, adding to the weakness of last week. While last week the USD weakness reflected US growth concerns, today it has reflected the more positive risk backdrop. The DXY index is down 1%, while the broader BBDXY index is down 0.7%.
The weaker USD backdrop has seen the NZD climb all the way up to about 0.6490, before settling this morning at 0.6460, so little net gain overnight after the decent rally during NZ trading hours. The AUD has showed a similar path and has currently settled at 0.71, with the result of the election having no obvious impact on Australian asset prices. NZD/AUD trades around 0.91.
Relative to Friday’s close, the EUR shows the best gain of the key majors we follow, up 1.2% to 1.0690, with Lagarde’s less ambiguous commentary around tighter policy providing some added support. This has seen NZD/EUR weaken overnight to 0.6050, after climbing up through 0.61 late yesterday. USD/JPY is flat just under 128 and NZD/JPY is up over 1% to 82.7.
In the domestic rates market, NZGB rates were up 2-3bps across most of the curve. In the swaps curve, there was some flattening pressure, with the 2-year rate up 6bps to 3.58% while the 10-year rate was flat at 3.68%. The focus this week is on the RBNZ’s MPS on Wednesday, where a 50bps hike to 2% for the OCR is fully priced in the OIS market.
On the economic calendar, PMI data for Europe UK and the US will be of some interest, with all the key indices expected to be a little lower on these flash May estimates. NZ retail sales data for Q1 is too dated and distorted by changing COVID restrictions to be of much interest.
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