Risk sensitive assets remained under pressure with large declines across global equity indices. There is growing caution from investors about elevated valuations in the AI sector

Risk sensitive assets remained under pressure overnight after the weak Asian session yesterday. There is growing caution from investors ahead of Nvidia’s earnings and about the elevated valuations in the artificial intelligence sector. There are also concerns about the required capital expenditure which is reliant on issuing huge amounts of debt. The S&P is lower in afternoon trading and there have been large falls across European and Asian markets. The VIX index of implied S&P volatility, increased to 26, the highest level since the liberation day turmoil in April.

There was limited economic data to provide the market with direction. ADP private payrolls fell an average of 2.5k per week in the four weeks to 1 November. This compares with -11k in the prior four-week period and reflects a modest improvement but lingering weakness. The market looks ahead to the delayed official labour market report for September tomorrow night. The New York Fed business activity index improved marginally, but remains at depressed levels, and the employment subindex deteriorated to the lowest level since the pandemic.

Federal Reserve Governor Waller has provided a counterpoint to the recent chorus of Fed officials cautious about a December rate cut. He said the Fed should lower rates by 25bp at the FOMC next month citing a weak labour market and noted that current policy settings are impacting low- and middle-income consumers. Waller said another rate cut would represent good ‘risk management’ and that he isn’t concerned about inflation accelerating given indicators of reduced demand for workers.

Pricing for the December FOMC is little changed with around 11bp of easing implied from futures markets. US treasuries rallied on safe haven demand through the Asian session but have since rebounded off the yield lows in line with a recovery in US equities. 10-year note yields reached a low of 4.09% before retracing to 4.12%. There was limited market reaction to the ADP jobs data. German 10-year bunds closed unchanged at 2.70% despite the near 2% decline in the Euro Stoxx index.

The long end of the JGB curve sold off with 40-year yields increasing 6bp to 3.64%. This is the highest level since the 40-year bonds were first issued in 2007. The move reflects concerns the upcoming fiscal package from Prime Minister Takaichi could pressure public finances.

Currency markets were subdued given the volatility in equities. The US dollar index struggled for direction and is largely unchanged from the NZ close yesterday. Commodity currencies outperformed at the margin within the G10 basket while the Swiss franc was relatively weak. Net moves in the major pairings were minimal. The NZD is marginally firmer on the key cross rates overnight. The exception is NZD/AUD which dipped towards 0.8700.

There was an initial sell off in NZ fixed income in the local session yesterday with market participants focused on the tap syndication of the May-2036 nominal government bond. The swap curve moved higher and steeper pre-pricing before retracing and ending unchanged. The move in swaps saw government bond yields also selloff initially before retracing. The May-2036 maturity closed 3bp lower on the day and 6bp below levels at the time of pricing for the tap. Demand for longer end bonds flattened the curve.

There was strong demand from investors in the syndication. Total book size, at final price guidance, was NZ$25 billion, a record for a NZGB transaction. NZ Debt Management issued NZ$6 billion at a spread of 12bp over the May-2035 reference line which was at the tight end of initial price guidance. The price action suggests there was unfilled demand even after issuing at the upper end of volume guidance. The weekly government bond tender on Thursday will be cancelled in line with convention.

Australian 10-year government bond futures are little changed since the local close yesterday suggesting a limited directional bias for NZ rates on the open.

The only domestic data of note today is Q3 Producer Price Indexes, which are not closely followed by market participants, given they come out after the CPI for the quarter. Q3 wage data is scheduled in Australia. UK CPI data for October will be in focus with the market pricing close to an 80% chance of a 25bp cut by the Bank of England next month. Annual headline, core and services inflation is expected to have edged lower in the month.

Stuart Ritson is a Markets Strategist at BNZ Markets.