Expectations of further stimulus across central banks fuelling sentiment; NZX WMP dairy futures at 3-month lows; AUD buoyed by stronger business confidence

By Jason Wong

A bout of positive market sentiment continues to drive markets. 

Global equity markets are stronger across the board, with the S&P500 extending its record high and the MSCI AC World index has now recovered all of its post-Brexit losses. Our risk appetite index stands at 52%, its highest level in a year.

A positive start to the US earnings season has helped sentiment. A further kicker has been a more positive flow of economic data over recent weeks. Citigroup’s economic surprise index is at its highest level in 18 months. Expectations of further stimulus (BoE, Japan, ECB) are also fuelling sentiment, while a swift resolution to the UK leadership battle is another factor.

GBP heads the leaderboard, rising by 2.1% to 1.3270. Traders have been caught short and weren’t expecting such a quick result to the Conservative party leadership contest. Having a new PM in place this week removes one source of political uncertainty. GBP could come under further pressure when the economic (recession) data starts rolling it, but for now the big downward trend has been arrested.

Traders have also been caught with long Yen positions. The decisive upper house election victory for PM Abe has invigorated his Abenomics plan and further stimulus should emerge soon. The Nikkei newspaper reported Monday the amount of stimulus could be more than 10 trillion yen (USD96bn), while some whisper numbers are double that.  After touching as low as 100 on Friday night, USD/JPY almost reached the 105 handle this morning.

The NZD has reached a fresh high, currently trading at 0.7310, not far off the highs for the day. It has been buoyed by positive risk sentiment and higher commodity prices, although we’d note that NZ commodity prices are underperforming. 

Crude oil is up 4½% but NZX WMP dairy futures have fallen to 3-month low of USD2060 for the second contract. A rising NZD and weak dairy prices are not a good mix for the economy and the RBNZ is likely to continue to struggle to meet its inflation target.

The AUD is also strong, blasting through the 0.76 handle yesterday, supported by more positive business confidence on NAB’s survey. It has extended that gain overnight and stands at 0.7640, with NZD/AUD relatively steady around 0.9570.

USD indices are down a touch, while EUR is relatively flat at 1.1070.

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