Rumours last week of China looking to ease its zero-COVID policy continue to cause some market volatility. But there hasn’t been much net damage from the weekend news of China trying to quash that rumour, with the NZD and AUD recovering much of the losses seen in early trading on Monday, with the USD broadly weaker overnight. Global equities show small gains while global bond rates have pushed higher.
On paper it is a fairly uneventful week ahead by recent standards, with the US mid-term elections and US CPI release the key event risks. The market is unfazed by the elections, which look likely to see the House handed over to the Republicans and causing some policy gridlock, not a bad thing for those who consider government policies tend to do more harm than good. A good showing by the Republicans will likely see Trump formally confirm another run for Presidency in 2024. The US CPI, due Thursday night, looks like the bigger event risk for the market.
Risk appetite kicked off the week on a sour note, with the market digesting the weekend news from China that there was no change to its zero-COVID policy, it would “unswervingly” adhere to the current COVID controls, following rumours to the contrary. This put the NZD and AUD on a weaker footing. US equity futures opened weak, not helped by Apple issuing a statement that shipments of its newest premium iPhones will be lower than previously expected after China lockdowns affected operations at a supplier’s factory.
As the day proceeded it was clear that the market was prepared to take a “where there’s smoke, there’s fire” view on China’s zero-COVID policy, assuming that there probably will be some easing of restrictions, even if over a long period of time, enough to provide a glimmer of hope about China’s economic path through 2023. Hong Kong and Chinese equity markets closed on a positive note yesterday, up 2.7% and 0.2% respectively for the main indices, following the strong 6-9% gains seen last week.
The WSJ has helped feed that view, with a “China Weighs Gradual Zero-Covid Exit but Proceeds with Caution” headline, reporting that “Chinese officials have grown concerned about the costs of their zero-tolerance approach to smothering Covid-19 outbreaks…but they are weighing those against the potential costs of reopening for public health and support for the Communist Party. As a result, they are proceeding cautiously despite the deepening impact of the Covid-19 policies…pointing to a long path to anything approaching pre-pandemic levels of activity, with the timeline stretching to sometime near the end of next year.”
Chinese trade data were weaker than expected on both the exports and imports side, both down slightly year-on-year in USD terms – exports hit by weaker global demand and imports hit by weaker domestic demand, with local lockdown restrictions thrown into the mix.
After falling below 0.5850 yesterday morning, down almost 1½% from last week’s close, the NZD has recovered strongly back over 0.59. It met some resistance just over 0.5940, as it did last week, and currently sits at 0.5930. The AUD has recovered from a low of just over 0.64 to 0.6470, with NZD/AUD fairly steady around the 0.9160 mark. GBP shows the largest net move for the day, up over 1% to 1.15, on no obvious news, but with traders reporting a recovery after being whacked after the BoE’s dovish outlook on rates towards the end of last week. EUR shows modest gains back to just over parity. NZD crosses are on the weak side, with NZD/GBP down to 0.5150 and NZD/EUR down to 0.5920.
Global bond yields have pushed higher, with traders noting a deluge of corporate supply perhaps weighing on the market – Europe seeing the most new corporate bonds offered in weeks and at least 10 US investment grade offerings to kick off the new week. US 2 and 10-year Treasuries are up 4-6bps from last week’s close to 4.72% and 4.20% respectively.
The domestic rates market was quiet but swap spreads widened on some payside pressure, with rates up 4-5bps across the curve, against a lift of only 1bp for NZGBs, the 10-year NZGB closing the day at 4.54%.
In the day ahead there are only second-tier economic releases. Domestically, the RBNZ survey of expectations is released and there will be some interest in the 2-years-ahead measure of inflation expectations. The Fed’s Barkin speaks during local trading hours but we already heard from him at the end of the week, where he said it was “entirely conceivable” the Fed may need to take the policy rate above 5%, but “it’s not a plan”.
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