Growing optimism of US trade deals with key partners supports risk sentiment. US reaches agreement with Japan on tariffs and a deal with the EU appears close. Equity markets gain and global bond yields higher

Risk sensitive assets remained well supported amid optimism about the US reaching deals with key trading partners ahead of the August 1 deadline. A deal was announced with Japan yesterday and there is a growing expectation of a similar deal with the European Union. The developments contributed to further gains for global equities. The S&P reached a fresh record high near 6350 and the Euro Stoxx closed 1% higher. Asian stocks rose the most in a month. Treasury yields moved higher, and the US dollar was mixed against G10 currencies.

The trade deal reached between the US and Japan places a 15% tariff on Japanese exports to the US. In addition, Japan has agreed to make investments into America. The tariff rate on the auto sector was also set at 15% with no limit on volumes. The Nikkei rallied strongly in response with the index closing 3.5% higher, underpinned by strong gains in the auto manufacturers. JGB yields rose across the curve with weak demand in the 40-year auction not helping market sentiment.

The Financial Times reported that the EU and US are getting close to a trade deal that would set a 15% tariff for most European exports. The report noted the deal between Japan and the US had pushed European policy makers to accept a higher reciprocal tariff rate to avoid a damaging trade war. President Trump had threatened to raise the reciprocal rate to 30% from August.

Global bond yields have moved higher reflecting the upbeat risk sentiment. 10-year treasury yields are 5bp higher at 4.39%, after a decent rally off last week’s highs in recent sessions. There was decent demand from investors in the 20-year auction which cleared almost 2bp below the prevailing market levels. The backup in yields likely contributed to demand. Bund yields spiked on the report of a possible EU trade deal with 10-year yields closing 5bp higher at 2.64%.

Price action in currency markets was subdued overall with the dollar index little changed since the local close yesterday. EUR/USD rebounded from an initial dip as European rates moved sharply higher following news of progress on trade talks, but the overall moves are small. The yen also made modest gains against the US dollar but is little changed overall since the announcement yesterday.

The NZD is modestly higher against the US dollar and traded above 0.6040 in offshore trade, which is the highest level in almost two weeks. The NZD was stable on the major crosses.

The NZ swap curve ended the local session yesterday marginally lower in yield with a flattening bias. 2-year rates were unchanged at 3.14% while 10-year yields dipped 2bp to 4.05%. The government curve matched the move in swaps with the 10-year benchmark May-2035 line closing at 4.53%, 2bp lower on the day.

Australian 10-year government bond futures have increased 3bp in yield terms since the local close yesterday suggesting an upward bias for NZ yields on the open.

A new 5-year Kauri launched yesterday for pricing today. Kauri market activity has picked up in July – this is the second transaction launched this month – after an extended period with no new deals that stretches back to the beginning of 2024. NZ Debt Management will offer NZ$450 million of NZ bonds today split across Apr-29 (NZ$225m), Apr-37 ($175m) and May-54 ($50m).

After a quiet start to the week, the economic calendar is busier today. Although there is no domestic data, the RBNZ’s chief economist Paul Conway is scheduled to speak about impact of global tariffs on the NZ economy. He is not expected to provide additional information on the monetary policy outlook. RBA governor Bullock is also speaking.

After by a cumulative 200bp of cuts since the start of the easing cycle, the ECB is unanimously expected to leave rates unchanged which is reflected by market pricing. The policy rate is at the lower end of where the ECB considers neutral. Market pricing implies one further 25bp rate cut by the end of the year with about a 50% chance of a cut at the September meeting. Advance PMIs are released for European countries and the US.