Global risk sentiment supported by China's measures to "invigorate capital markets and boost investor activity". Global equities push higher; UST yields well contained, modestly lower

Ahead of a busy week on the economic calendar, culminating in the US non-farm payrolls report at the end of the week, it has been a quiet start to the week, with modest changes in currencies and US Treasuries trading in a well-contained range, with a small downside bias to yields.

Equity markets have opened the week on a positive note, following China’s measures announced on Sunday to “invigorate capital markets and boost investor confidence”. China lowered the stamp duty on stock trades for the first time since 2008, from 0.1% to 0.05%, and included other measures such as reducing the margin ratio for margin trading, encouraging companies to do more buybacks and fund managers to purchase their own equity funds, slow the pace of new IPOs and asking some mutual funds to avoid selling equities on a net basis. China’s benchmark equity index surged 5.5% on the open, but the rally fizzled out as higher prices just encouraged further selling by foreign investors, with the CSI300 index ending the day just 1.2% higher.

On other bourses, China-related stocks have improved and higher risk appetite has boosted US equities, with the S&P500 currently up 0.4% and broadly based gains across most sectors. The Euro Stoxx 600 index closed up 0.9%.

The US 10-year Treasury rate has been contained to a 4.19-4.24% trading range overnight and is down 2bps on the day, with a similar move since the NZ close. As a sign of rising financing costs for the US government, the 2 and 5-year Treasury auctions were awarded at the highest yields since 2006 and 2007 respectively, at 5.02% and 4.40%, reflecting the significant recent market sell-off.

In currency markets, net movements since Friday’s close have been confined to less than 0.3%, led by a gain of that amount for the AUD to 0.6420, supported by stabilisation in the yuan and improved sentiment on China’s equity market. The NZD has spent most of the day hovering just over the 0.59 mark, seeing NZD/AUD down modestly to 0.92.

Austria’s central bank Governor showed off his hawkish credentials, making a case for pushing on with a further rate increase in September “if there aren’t any big surprises”, adding that the ECB continued to be “somewhat behind the curve”. Speaking on the same panel, the Bundesbank’s Nagel wouldn’t give any signal about September “we will wait for the numbers…this is what we agreed at our July meeting”, but added that when the ECB has finished raising rates, it may need to keep them high to fully feed through to the economy. There has been no obvious impact on European rates or the Euro from these comments, with EUR spending most of the day hovering just over 1.08.

Overnight, the IMF released its final Article IV Consultation on NZ. There was a warning shot fired at the government, as the IMF “emphasised the need for medium-term fiscal consolidation to support rebalancing efforts and create space for addressing longer-term challenges related to population aging and climate change”, adding a call for “increasing the efficiency of discretionary spending”. On monetary policy, the IMF noted “persistently high inflation and wage growth could compel the RBNZ to tighten monetary policy further or keep rates high for longer, especially if fiscal policy does not consolidate as planned in the forecast period.”

The NZ government front-footed the IMF release in yesterday’s announcement of the Finance Minister “finding” savings worth $3b and a reduction in the operating allowance of another $1b in future budgets, that will see an aggregate $4b of less spending over the next four years., a response to the significant deterioration in NZ’s fiscal accounts as tax revenue comes in much lower than forecast.

That announcement came half an hour before the domestic rates market close, but it didn’t have any discernible impact. In a sleepy session, there was little movement in rates on the day.  Both NZGB and swap curves show a modest flattening bias. The 10-year NZGB closed the day unchanged at 5.02%.  The 2-year swap rate was up 2bps to 5.58%, while the 10-year rate fell 2bps to 4.85%. Long term bond rates continue to trade below swap rates in the face of a tsunami of weekly bond supply.

In the day ahead there are only second-tier global releases on the calendar. RBA Deputy Governor Bullock, who hasn’t yet taken over the reins as the new Governor, will be talking about Climate Change.