US equity markets rose again overnight, with the S&P500 and the NASDAQ up around 0.75%. The tech-heavy NASDAQ has outperformed so far this year; it is up more than 6% in 2018 and is around a percent below its record highs from late January. Recent correlations suggest that more hawkish comments from Powell and increases in Treasury yields will push equities lower, and vice versa for a dovish testimony.
The US dollar is broadly unchanged against most of the major currencies from this time yesterday. During the Asian session yesterday, the US dollar weakened across the board, but it has mostly recovered those losses overnight. There was no obvious driver for the intraday moves in the FX market, with the likely explanation being pre-Powell positioning among investors.
The NZD moved from around 0.7280 at lunchtime yesterday to a high of 0.7345 overnight, but it has since returned to 0.73. The NZ trade balance is released this morning. We expect strong growth in both exports and imports to generate a monthly trade deficit of $214m (vs. median expectations of 0). There shouldn’t be more than a fleeting market reaction to the data. The ANZ Business Survey tomorrow will likely have greater market impact.
The EUR is unchanged from 24 hours ago. ECB President Draghi addressed the European parliament, saying that central bank needed to be patient because of the lack of underlying inflation and low level of headline inflation. Spanish and Germany CPI is released tonight ahead of the all-important Eurozone core CPI data on Wednesday evening (consensus is looking for the YoY rate to remain unchanged at 1%, well below the ECB’s target).
In the UK, Labour leader Jeremy Corbyn officially announced the party’s intention to remain a member of “a” customs union after leaving the EU. He said “I appeal to MPs of all parties...to join us in supporting the option of a new UK customs union with the EU.” A small number of pro-EU rebel Conservative MPs have tabled an amendment to the government’s Customs Bill (to stay in the customs union) and in so doing have effectively sided with the opposition Labour’s own policy. Given Theresa May’s slim Parliamentary majority, one possible outcome is a government defeat in the bill, which may then trigger a no confidence vote in the government. While we acknowledge the risks, we remain constructive on GBP for now as we expect a transitional arrangement to be agreed over the coming few months. Despite UK politics remaining in flux, GBP wasn’t overly affected overnight, and it might be a case of the market being fatigued by the constant barrage of Brexit-related headlines. Theresa May sets out her ideas for post-Brexit relations on Friday.
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