Friday night saw another choppy trading session on Wall Street and the net result was a decent rally. Volatility in other asset classes remained subdued, with only modest changes in currencies and little change in US Treasuries.
Trading conditions were fairly calm throughout Friday, with volatility confined to equity markets. The S&P500 closed the session up 1.4% after trading a range of flat to +1.7% throughout the day. It ended a volatile week with the index down 4.1%. Despite the turmoil during the week the chartists will note the index closing 1 point above its 200-day moving average, a positive sign. However, even if trading conditions normalise over coming weeks, last week’s price action was a reminder that when you’re late into a bull cycle and interest rates are trending higher, then a shift higher in volatility is completely normal.
The economic data flow was light on Friday. US consumer sentiment slightly undershot expectations but remained at a very high level. China’s trade surplus was stronger than expected in September, driven by strong export growth. However, much of the surprise was in shipments of products heavily targeted by US tariffs, suggesting that companies rushed existing orders out the door before the full force of the tariffs hit.
US 10-year Treasuries followed the ups and downs of S&P futures during the day, seeing the yield down at 3.13% at the low and closing at 3.16%, up 1bp for the day and down 1bp from the NZ close. In a TV interview Chicago Fed President Evans, a former dove and now more in line with the median, said he supported tightening policy until at least a neutral level for the Fed Funds rate is achieved, said to be between 2.75-3%. “Let’s see how the economy is performing at that point, and then we might have to do a little bit more at that point…maybe 50 basis points above” that threshold.
Currency markets were tightly range-bound on Friday, with only some weakness in GBP of note, down 0.6% to 1.3150. Bloomberg reported that UK and EU officials are discussing a new proposal to solve the last major hurdle in Brexit talks and soothe the concerns of PM May’s Northern Irish allies, according to diplomats. The new proposal is to allow for the transition – the 21-month grace period that’s due to kick in after Brexit day – to be extended if needed. However, the FT reported that PM May “faces cabinet revolt” over her customs union plan. Brexit negotiators want to agree a complete draft withdrawal treaty ahead of the EU summit on Wednesday. Expect some GBP volatility in the week ahead as negotiations continue.
The NZD traded a tight 24pip range on Friday night and closed the week around 0.6510. In an interview Friday night, Finance Minister Robertson said he’s “not uncomfortable” with the NZD at the moment, “It’s down to the mid-60s and some would argue it’s probably in a more sustainable position”, he added. For the week the NZD was up 1% and was up on most crosses apart from a slight fall against JPY – not a bad performance considering the big drop in risk appetite during the week. As noted previously, this likely reflected some short-covering, as appetite to hold positions across a number of financial assets diminished.
The NZ rates market showed some modest upward movement on Friday and for the week, suggesting that the local market was continuing to march to its own beat and wasn’t particularly tied to the US market. The modest rise in NZ rates for the week was in the opposite direction to the 7bps fall in the US 10-year Treasury yield.
US retail sales data are released tonight, but after last week’s market volatility, other factors are likely playing on the mind of investors, including how the earnings season that has just begun is playing out and whether the S&P500 can hold above the key 200-day moving average. Domestically, we’ll be focused on NZ’s Q3 CPI report tomorrow, which is expected to show inflation – headline and core – tracking above RBNZ estimates.
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