Weaker risk sentiment on US-EU political tensions; global equities extend losses; US equities down sharply. No safe-haven bid for bonds; Meltdown in Japan's JGB market spills over into other markets. UST yields push higher

The fallout from rising US-EU political relations over the future of Greenland continues to reverberate through markets, with a meltdown in Japan’s bond market thrown into the mix.  Global equity markets are weaker, global rates are higher, and the USD is broadly weaker.  The NZD has become a safe-haven (lol), appreciating further to 0.5850 and up on most key crosses.

Trump’s desire to acquire Greenland remains a key focus of attention for the market.  In overnight developments, Trump said that “there can be no going back” on his plan and he had agreed to a meeting of the various parties in Davos.  Trump has been active on social media, not in a nice way, while EC President von der Leyen said that Europe would respond in an “unflinching, united and proportional” way to US pressure and that Greenland’s sovereignty was “non-negotiable”.

Reopening after the long weekend, US equities are weaker.  In early afternoon trading, the S&P500 is down 1.6%, with IT, consumer discretionary and industrials underperforming.  The Euro Stoxx 600 index fell 0.7% following up on yesterday’s 1.2% decline.

Global rates are higher across the board, with no sign of a safe-haven bid against a backdrop of weaker risk appetite.  This has been some spillover in global markets from a further meltdown in Japan’s JGB market.

Japanese long-term rates extended recent rises to record highs. An auction of 20-year debt wasn’t well received and the 10-year rate rose 9bps to 2.35%, taking the rise this year to about 30bps. The 40-year rate exploded up 29bps to 4.23%, taking its rise this year to over 60bps. Pre-existing concerns about the path of fiscal policy were added to this week after PM Takaichi pledged to cut an 8% sales tax on food and beverages for two years if she won a fresh mandate at the 8 February election, without indicating how the policy, costed at about 5 trillion yen, would be paid.

At Davos overnight, Japan Finance Minister Katayama called for the market to calm down, suggesting that the government would consider financing options for the tax cut measure and providing evidence that the government’s fiscal policy was responsible and sustainable.

US Treasury yields were higher from the Asia open yesterday and trended up through the session, only finding support after the 10-year rate breached 4.30%.  It currently sits at 4.27% up a couple of basis points from the NZ close.  The curve is steeper, with short-end rates well grounded.

The Danish pension fund AkademikerPension said it is planning to exit US Treasuries by the end of the month, with the CIO telling Bloomberg that the US is not a good credit, long-term the US government finances are not sustainable, and a weaker USD justifies the move. The move follows other Danish pension funds that have recently sold down US Treasuries.  This story likely only got some attention because of market chatter this week that Europe could use the threat of selling US assets as leverage over Trump’s ambitions to seize Greenland.

In currency markets, the USD is broadly weaker, with the DXY index down 0.9% for the day, again a sell America sentiment overwhelming its usual safe-haven characteristics.  In fact, throughout this period of market angst, the NZD is proving to be a safe-haven, extending its lead at the top of the leaderboard for year-to-date performance for the majors.  Domestic factors, such as convincing signs of an economic recovery taking hold and the likelihood of this Friday’s Q4 CPI data showing sticky inflation around 3% have added to NZD support.

The NZD traded just over 0.5850 overnight, reaching the resistance level we suggested in yesterday’s report.  NZD crosses are all higher for the day.  NZD/EUR traded above 0.50 for the first time since September although it has pulled back a little overnight. NZD/AUD has pushed up to 0.8670 while NZD/GBP is approaching 0.4350.  The JPY remains a clear underperformer on concerns over the trajectory of policy.  NZD/JPY pierced up through 92 and peaked at 92.5, its highest level since mid-2024.

In economic news, UK labour market data were on the softer side of expectations, with payrolled employees down 43k in December, suggesting job cuts at their fastest pace since 2020, while wage inflation continued to moderate.  The key private sector earnings figure excluding bonuses rose 3.6% y/y, the lowest inflation in five years.  The data had little impact on BoE policy expectations, with the next 25bps rate cut not fully priced until June.

There was a chance of the US Supreme Court releasing its ruling on the legality of Trump’s tariffs today, but that opportunity passed and now the court prepares for a four-week recess.  This means the earliest possible day for a ruling is now 20 February.

Domestic rates climbed higher yesterday, reflecting a mix of global and domestic forces.  NZGB rates were up 2-5bps across the curve, with more upside pressure at the shorter end of the curve.  In the swaps market the 2-year rate rose 5bps to 3.06% while the 10-year rate rose 4bps to 4.17%. A sharp lift in the PSI added to the thematic of a rebound in NZ economic activity and, combined inflation likely tracking higher than the RBNZ projected, the market continues to focus on the timing of the first rate hike for the cycle.

On the economic calendar, UK CPI data will be released tonight, with the consensus expecting a small lift in annual inflation figures for December across the key headline, core and services metrics.

Stuart Ritson is a Markets Strategist at BNZ Markets.