US equities fall by more than 1%, US Treasury yields lower on risk-off vibe. Yen and ultra-long JGBs continue to rally after Takaichi's big election win

Newsflow has been light but risk appetite is weaker, and US equities are much lower, dragged down by lingering concerns in the IT sector.  Currency movements have been modest but CHF has been the best performer overnight, while NZD/USD has pushed lower.

The S&P500 is down 1% in early afternoon trading, dragged down by the IT sector.  The scene was set with Cisco Systems recording strong revenue growth due to AI, but its stock price showed a more than 10% fall on concerns about shrinking margins on higher costs of memory chips and other costs related to AI spending.  It hasn’t been all bad news for equities though, as global markets continue to outperform the US. Markets reaching new intra-day record highs for the day include the Euro Stoxx 600, FTSE100, MSCI Asia Pacific and Japan’s Topix.

Global rates are mostly lower, including falls of 4-6bps for US Treasuries.  The 10-year rate is down 5bps to 4.13%. US initial jobless claims fell by 5k to 227k last week, a slightly smaller fall than expected. The data continue to convey a picture of a low-firing environment. Existing home sales plunged 8.4% m/m in January, much weaker than the 4.6% fall expected by the consensus, although forewarned by the 9.3% plunge in pending sales previously reported for December. A cold winter snap was a likely factor in dragging sales lower, and the large fall went against the flat trend in mortgage rates, so most are not reading too much into the data at this stage.

UK GDP rose by just 0.1% q/q in Q4, below the 0.2% gain expected, with weaker business investment and net exports a drag on growth.  The data rounded off a weak second half of the year, following surprising strength over the first half. There was little market reaction, while the data supported the view for easier monetary policy, with the market pricing in more than a 70% chance of a March rate cut by the BoE.

The risk premia that had been built into ultra-long JGBs and the yen continues to fade, with the removal of political uncertainty following Takaichi’s commanding victory at the weekend snap election and a subsiding of fiscal concerns, for now at least. Japan’s 40-year bond dropped 8bps to 3.66%, basically back to where it started the year after a round trip that reached over 4.2% at its mid-January peak. 

The yen strengthened for a fourth successive day, with USD/JPY sustaining a move below 153. Against a backdrop of weaker risk appetite, CHF has been the best performer.  Commodity currencies have modestly underperformed.  The AUD has fallen back below 0.71 while the NZD trades this morning a little weaker at 0.6040. NZD/AUD has recovered back over 0.85.  NZD/JPY has fallen to 92.3 but the NZD is relatively stable on the other key crosses.

For the oil market, weaker risk appetite has trumped concern about a military strike against Iran, with Brent crude falling nearly 3% to USD67.40 per barrel.

Yesterday, global forces pushed up NZ rates, with NZGBs ending the day up 1-3bps across the curve and swap rates 3-4bps higher.  There was strong bidding at the weekly bond tender, helped by higher yields leading into the event. The 10-year NZGB closed the day up 2bps to 4.52%.  The Australian 10-year bond future is down 5bps in yield terms, which will set scene for trading on the open.

In the day ahead, NZ’s PMI and RBNZ’s survey of expectations will be of some interest. Given the lift in inflation through 2025, we wouldn’t be surprised to see the survey record a lift in inflation expectations as well.  US CPI data tonight are expected to show headline and ex food and energy inflation at 0.3% m/m and 2.5% y/y.

Jason Wong is the senior Markets Strategist at BNZ Markets.