Risk sentiment improves, particularly for AI-sector, driving bounce-back for US equities. Commodity currencies outperform; NZD pushes higher. European assets underperform, with spillover of French riots across the region

Risk appetite has improved, with a rebound in tech stocks driving a recovery in US equities. Commodity currencies have outperformed, while European assets have struggled following the weekend riots in France, putting French bonds under renewed pressure.

After last week’s hit to investor sentiment towards the AI thematic, semiconductor stocks have rebounded, with the SOX index up 1.7% and breaking an eight-day losing streak. It remains to be seen whether this is merely a dead-cat bounce or whether investors view the recent sell-off as an opportunity to reload into the sector. In afternoon trading, the Nasdaq is up 1.1% and the S&P 500 is up 0.5%, paring earlier gains.

European equities have underperformed, with the Euro Stoxx 600 closing down 0.8% and all major markets in the region lower for the day. The shocking and widespread riots across France over the weekend have not helped sentiment. Gavekal Research sums up the situation neatly, with France confronting a social crisis, an immigration crisis, an energy crisis, an economic crisis, and a fiscal crisis.

In the bond market, the French-German 10-year spread has widened by 10 bps to 148 bps, its highest close since the European debt crisis in 2012, although spreads have been wider on an intraday basis over the past couple of weeks. France’s 10-year yield rose 13 bps to 4.94%, its highest close since 2002, compared with a 3 bp rise in Germany’s 10-year yield.

Reflecting some spillover from European markets and improved sentiment towards the AI sector, US Treasury yields have risen steadily overnight, with rates up 5–7 bps across the curve since last week’s close. The 10-year yield is currently 5.14%, up 8 bps from the NZ close, following a small decline in yields during the Asian trading session.

In economic news, Canada’s annual CPI inflation edged up to 3.1% y/y, slightly below consensus. The average of the two key core measures was also slightly weaker than expected, edging down to 1.85%. Meanwhile, the Bank of Canada’s quarterly business outlook survey showed a sharp rise in inflation expectations, following BoC Governor Macklem’s hawkish weekend comments on inflation and monetary policy. Together, these developments have shifted the balance towards the market pricing a good chance that the BoC raises rates next week, which would be its first hike of the cycle. Canadian 2-year yields are up 11 bps, supporting the CAD.

US homebuilder confidence, as measured by the NAHB survey, fell to 29, its lowest level since 2012, against a backdrop of higher mortgage rates and elevated new-home inventory.

Yesterday, China’s Q3 GDP figures were stronger than consensus, with growth of 4.5% y/y, up from 4.3% in the previous quarter. Growth averaged 4.6% over the first three quarters of the year, within the government’s annual target range of 4.5–5%. The monthly activity data continued to convey the same message: the significant downturn in the property sector remains a major drag on domestic demand, while growth is being powered by the AI boom and the export sector.

In currency markets, stronger risk appetite has supported commodity currencies, although overall moves have been modest. The AUD is the best performer among the majors, up 0.4% from last week’s close to 0.6980, after meeting resistance just below 0.70 overnight. The NZD has edged up to 0.5665, after reaching an overnight high of 0.5675. NZD/AUD is modestly weaker at 0.8115. Higher rates have supported the CAD, leaving NZD/CAD weaker at 0.7980.

France’s predicament has weighed on European currencies. EUR traded below 1.12 but is currently above that level. NZD/EUR has traded at its highest level in about six weeks and is currently at 0.5050. The NZD has also made modest gains against GBP and JPY.

In the domestic rates market, NZ bonds again underperformed on a cross-market basis, with NZGB yields marked 1–2 bps higher across the curve. The 10-year yield closed at 5.01%, 5 bps below the US 10-year yield at the time, compared with the negative 20–25 bp spread at which it traded early last week. In the swaps market, both the 2-year and 10-year rates were marked 1 bp higher, at 4.08% and 4.70%, respectively.

On the economic calendar, UK labour market data are due for release, followed tonight by second-tier US housing market data.

Jason Wong is the senior Markets Strategist at BNZ Markets.