Market moves were reasonably modest overnight, although there is a lingering risk-on tone from yesterday’s tentative trade agreement between the US and Mexico. The USD was mixed, but the NZD has moved up towards resistance around 0.6725.
There hasn’t been too much news-flow to move markets over the past 24 hours but the US-Mexico trade agreement announced yesterday has kept risk appetite well supported. The S&P500 and NASDAQ have moved slightly higher to new record highs while the VIX index of volatility hovers at low levels, around 12.
After the US-Mexico agreement, Canada’s foreign minister, Chrystia Freeland, flew to Washington to join talks in the hopes of agreeing a revised three-way NAFTA deal. While there remain a number of sticking points between Canada and the US, including the protections afforded to the Canadian dairy sector, the market seems to be viewing recent developments positively for now; the CAD is the second best performing G10 currency on the day and is at its strongest level since June (although the Mexican peso, in contrast, has fully reversed its post-agreement gains).
Focus will undoubtedly shift onto the trade stand-off with China now. Overnight President Trump said “it’s just not the right time to talk [to China] right now" while Commerce Secretary Wilbur Ross said the US was focused on sorting out trade agreements in “our own neighborhood” before moving onto China. The public consultation on Trump’s proposed $200b of tariffs on Chinese imports ends on 5th September, and there doesn’t appear any sign from the US administration that it is backing away from the threat. This will prove a bigger test to the resiliency of risk assets if the tariffs go through.
In the bond market, US Treasury yields moved higher, helped in part by a stronger than expected US consumer confidence release. The Conference Board’s headline confidence number reached its highest levels since 2000 while the ‘jobs differential’ (the difference between ‘jobs plentiful’ and ‘jobs hard to get’) also reached its best levels since 2000, indicative of continued strength in the labour market. The 10 year Treasury yield moved up 3bps to 2.88%, but it remains well contained within its recent 2.80% - 3% trading range. The 2s10s yield curve steepened 1bp to 21bps. The yield curve has become a prominent topic of conversation in the market recently given an ‘inversion’ (i.e. 2 year yields above 10 year yields) has been a historically reliable lead indicator of US recession (with a lead time of one to two years).
The USD initially extended its losses from yesterday, reaching a one-month low, but the stronger than expected consumer confidence data and bounce in US rates has helped it recover. The declines in the DXY and Bloomberg DXY indices over the past two weeks have pushed the USD firmly back into the range that had been established between June and July.
The EUR initially moved up towards resistance near 1.1750, but it has since retraced back towards 1.17 (+0.2% on the day). Meanwhile, the GBP weakened 0.2% against the USD with the lingering risk of a ‘no-deal brexit’ continuing to hang over the market. Overnight, Theresa May quoted the head of the WTO in saying "he said about a no-deal situation that it would not be a walk in the park, but it wouldn’t be the end of the world", and she added “I’ve said right from the beginning that no deal is better than a bad deal." The market’s concern is that a no-deal brexit is being gradually destigmatized and can no longer be ruled out.
The NZD is one of the better performing currencies on the day, and is up 0.3% from last night’s local close to 0.6710. The NZD ran into resistance around 0.6725, and has since eased back slightly, in sympathy with the USD reversal. NZ rates moved slightly higher and steeper yesterday, with the 10 year swap rate up 2bps to 2.89%. We’d expect a similar move today based on the overnight move in US Treasuries.
The second release of Q2 US GDP tonight is the highlight.
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