Risk appetite weaker following poor China trade data, Moody's ratings downgrades of US banks and windfall tax on bank profits proposed by Italy. Global rates lower. USD enjoys safe-haven flows

Risk appetite has been hit by another poor set of China trade data and a banking sector hit by a new windfall tax on bank profits proposed by Italy and ratings downgrades for US banks. Global equities are weaker and global rates curves are lower and flatter. The USD has been supported by safe-haven flows, seeing the NZD and AUD both weaker.

Seasonally, risk appetite is weaker during the months of August through to October, while August and September are seasonally two of the weakest months for both the NZD and AUD. More fundamental forces have been in play over the past trading session.

Yesterday afternoon, China trade data showed continuing falls in exports and imports, the latter particularly weak against market expectations. The poor figures, although exacerbated by lower commodity prices, continued the run of weaker than expected China economic data, and played to the theme of weakening domestic demand and a softer global economy.  USD/CNH has pushed up through 7.23 and this has spilled over into a weaker NZD and AUD.

Earlier in the afternoon, Moody’s Investor Services announced that it had lowered credit ratings for 10 small and mid-sized US banks and that it may downgrade a number of the major banks. It cited higher funding costs, potential regulatory capital weakness and rising risks tied to commercial real estate for the review. US banks are weaker across the board and, combined with the risk-off vibe, have helped drive the S&P500 down 0.7%.

The triple whammy hit to risk appetite came after Italy’s government shocked the market with an announcement of a proposed 40% windfall tax on bank profits which could cost banks more than €3b. Included in a package of populist measures was backing limits on transfers of technology and the creation of a new special commissioner for large foreign investments. European banks led the charge down in the Euro Stoxx index, with the sector down 2.7% amidst a 0.2% fall in the Euro Stoxx 600 index.

Global rates have been pulled down by the risk-off mood, with larger declines across Europe, with Germany’s 10-year rate down 13bps to 2.46%. Curves are flatter, with smaller moves at the short end. The US 2-year rate is down a touch while the 10-year rate is down 7bps to 4.02%, after falling to as low as 3.98% overnight. The US Treasury encountered strong demand for its 3-year bond auction, although a bigger test will be the 10-year auction tonight and the 30-year auction tomorrow night.

In Fed-speak, following Governor Bowman’s recent hawkish missive, on the other side of the spectrum, Philadelphia Fed President Harker (a voter this year) said he believed that the Fed might be at the point “where we can be patient and hold rates steady and let the monetary policy actions we have taken do their work”, barring any data surprises, though rates would need to stay at their current elevated levels for some time. Richmond Fed President Barkin (non-voter) didn’t want to pre-judge the decision on rates for September, ahead of the key inflation and labour market reports.

In US economic news, small business sentiment, as measured by the NFIB, nudged up for a third consecutive month, although remained at a historically low level. Of note, a net 25% of firms reported higher selling prices, the smallest share since early 2021. The US trade deficit narrowed to $65.5b in June, with both lower export and import values and the latter falling to their lowest level since November 2021.

In currency markets, the USD is broadly stronger, reflecting its safe-haven characteristics against a backdrop of weaker risk appetite. The NZD trended lower from yesterday afternoon and into the early hours of this morning, finding some support around 0.6035 before recovering to 0.6060. The AUD fell to just below 0.65 and has recovered to 0.6535. NZD/AUD has been mostly tightly rangebound although it currently sits at its low for the day at 0.9270.

The NZD is weaker against EUR and GBP, with both trading down to fresh three-year lows overnight, the former finding some support just over the 0.55 mark and the latter trading sub-0.4750 overnight.

The domestic rates market traded heavy yesterday with sellers of NZGBs lurking, pushing rates up 4bps across the curve – this against a backdrop of Australian bonds playing catch-up after the holiday, with lower rates and some extension of the move into the afternoon. NZ swap rates rose 2-3bps across the curve. Since the NZ close, the Australian 10-year bond future is about 5bps lower in yield terms, which will set the tone for the NZ open.

In the day ahead, NZ card spending data and the RBNZ survey of expectations are on the calendar. The latter should show a fall in 2-year ahead inflation expectations, reflecting its lagged response to weaker actual headline inflation. China inflation data should reinforce the view that the economy is seeing some deflationary impulses across the PPI and CPI indices.