Trading on Friday was fairly subdued as markets awaited the highly anticipated Xi-Trump meeting held at the weekend. US equities were stronger, US rates were lower, while the NZD closed near its recent highs.
As it turned out, Xi and Trump’s meeting held Sunday NZ time was highly successful according to both parties. A ceasefire on the trade war was agreed, with the US not proceeding with the planned increase in tariffs from 10% to 25% from 1 January. In return, China agreed to purchase a “very substantial” amount of agriculture, energy, industrial and other products from the US. The Presidents agreed to begin negotiations on “structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture”. If no agreement is reached after 90 days, then the previously proposed increase in tariffs will proceed. It also looks like China agreed to put some pressure on North Korea that sets the scene for another historic Trump-Kim meeting. Perhaps Trump has one eye on a Nobel Peace prize ahead of the 2020 Presidential election.
The US-China trade war has been a key driver of markets for much of this year and a de-escalation of tension sets the scene for a broadly-based rally in risk assets. While it would be naïve to think that US-China relations are on a new path forward and much will change, some of the negative tail risk from this risk factor appears to have been removed. As previously alluded to, we will have to revise our NZD forecasts higher, which were based on further tariffs proceeding, with the associated hit to global growth and spillover effects. On the open, the NZD has already pushed 0.7% higher to 0.6920-30, while AUD is almost 1% higher at 0.7375.
Towards the end of last week, the market looked to be moving in this direction. The S&P500 ended the week on a strong note, up 0.8% and capping off its best week since 2011, rising by 4.8% – US equity investors seemingly unconcerned about the weekend Xi-Trump dinner date and in a happy mood, putting more weight on the macro environment of not-too-hot growth alongside not-too-high inflationary pressure, which might soon see a pause in the Fed tightening cycle. The Chicago PMI was surprisingly strong in November, creating some doubt whether tonight’s more important ISM manufacturing index will show a further reduction. During the Asian session, China PMI data continued to point to slowing growth momentum in the country, with the official manufacturing index now right on the 50.0 mark, its lowest level since mid-2016.
US Treasuries were well supported, driven by the long end into month-end, and as repricing for reduced Fed rate hike expectations continued. The 2-year rate fell by 2bps to 2.79% while the 10-year rate fell by 4bps to 2.99%, its lowest close since mid-September. The bias for rates should be higher as the new week begins.
Oil prices fell by around 1% after data showed that US oil production surged to a record high in September, with preliminary data revised higher, while the Russian energy Minister said that he was comfortable with prices where they currently are. OPEC meets this week and an advisory committee ahead of the meeting suggested a 1.3m barrels-a-day cut from October levels, which helped prices recover a little later in the session. The fall in prices capped off the worst month since the GFC, with Brent crude down over 22% for the month. This dynamic dragged down local petrol prices significantly through November adding to household spending power. It was no coincidence that NZ consumer confidence rose during the month, after the dip in October.
The NZD ended the week on a good note, closing around 0.6880, not far its recent high. That capped off a strong month, up 5½% driven by a more optimistic view of US-China trade relations and stronger domestic data which saw a repricing of RBNZ rate expectations earlier in the month. A covering of short positions was also a likely factor.
EUR was the weakest of the majors, down 0.7% to 1.1315. Core euro-area inflation slipped back down to 1.0% y/y in November while the unemployment rate held up at 8.1% against expectations of a nudge down. The soft data are the last key indicators before the ECB meets next week. The asset purchase programme will still draw to a close at the end of the year, but it’s hard to see the Bank becoming more hawkish about the outlook – it is likely to reiterate that policy will remain extremely accommodative, with rates on hold “through the summer” of 2019. NZD/EUR closed the week just under 0.6080, its highest level in over a year.
GBP was modestly weaker, closing the week at 1.2750, with NZD/GBP just under 0.54. Media reported that a number of MPs, including Cabinet Ministers, are secretly discussing pivoting towards a Norway-style plan B should PM May’s deal gets rejected by Parliament. On current numbers a first round defeat in Parliament looks the most likely scenario.
NZ rates continued to drift lower, driven by global forces. Rates were down by 1-2bps across the government bond and swaps curve, but rates should reverse course today.
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