Markets optimistic on positive signs in US-China trade discussions, further policy tweaks by China, more positive Brexit smoke signals, and Trump signing bill to reopen the US government

Markets optimistic on positive signs in US-China trade discussions, further policy tweaks by China, more positive Brexit smoke signals, and Trump signing bill to reopen the US government

By Doug Steel

An air of optimism spread through markets on Friday night with a risk on vibe seeing equities, commodities, and bond rates higher. This despite more poor economic news out of Europe. The US dollar weakened.

A combination of developments seemed to lift the market’s mood. Some positive signs on US-China trade discussions, additional policy tweaks from China, more positive Brexit smoke signals, and Trump signing a bill to reopen the US government all played a part.

The latter was promptly passed by the Senate and the House. It represents a back down from the President, as the bill contains no new money for his wall. Trump relented as the government shutdown’s hurt on the economy continued to mount. Importantly, the legislation will only fund the government until February 15. So it is a temporary fix; the government may not remain open for long. Trump will continue his campaign to persuade lawmakers to provide funds for his wall and threatens another shutdown or emergency declaration if no progress is made. For the meantime though, it is a monkey off the market’s back.

In other news, US Commerce Secretary, Wilbur Ross, revealed that up to 30 Chinese delegates will join VP He in Washington this week to discuss trade – taken as a positive sign. And earlier, the PBoC injected more money into the market via a targeted cut of the RRR.

It all added to an improvement in risk appetite, with the VIX ‘fear’ index closing near its lowest point since early December. Equity markets were generally higher through Asia, Europe, and the US. The Euro Stoxx 50 closed up 1.2%, while the S&P500 finished nearly 0.9% higher. The US dollar was weaker, with the broad BBDXY index down around 0.7%.

It all followed earlier positive Brexit smoke signals appearing on Friday with reports that the Irish DUP will back May’s deal if the PM can get the backstop time limited. That would help the chances of the plan being approved, even if there are still many hoops to jump through. In the least the latest news shows some movement as the DUP (and Brexitiers) try and avoid the alternatives of remain or a second referendum. The GBP jumped half a cent against the USD on Friday as the news broke, piercing through 1.3100 for the first time since early November. GBP extended up through 1.3200 as the US dollar weakened. GBP/USD opens this morning around 1.3180. The next vote early Wednesday morning (NZT) will be important for the GBP’s performance this week.

EUR pushed above 1.1400 on Friday night as the US dollar weakened. The single currency gained despite weaker than expected German IFO data that added to a run of weak European data. The headline IFO index fell to 99.1 while its forward looking component dropped to 94.2 – its lowest level since 2012.

Commodity currencies performed well as you would expect in the risk on environment. NZD, AUD, and CAD all gained 1% or more against the US dollar.

NZD continued to make gains in the afterglow of last week’s stronger than expected CPI data and as the US dollar weakened. NZD/JPY rose 1.1% to near 75.0 as the JPY underperformed in the pro-risk backdrop.

NZD/USD made a new year-to-date high on Friday night, briefly pushing above 0.6850 before easing back. The AUD shrugged off its dip late last week following NAB’s interest rate increase, closing up 1.2% around 0.7180. NZD/AUD traded broadly sideways, consolidating recent gains and closing the week around 0.9530. Further upside is possible for the pair this week if Wednesday’s Australian Q4 CPI data were to come in at the bottom end of market expectations as our NAB colleague’s forecast suggest.

US treasury rates lifted between 4bps and 5bps across the curve out to 10 years. US 10 year treasury yields rose more than 4bps to close the week just shy of 2.76%. The positive risk tones provided enough grunt to more than unwind the ECB inspired dip towards 2.70% earlier in the week. We don’t expect much movement from this week’s FOMC meeting as it is likely to affirm the pause message from the recent round of Fed speakers.

Locally, rates edged lower on Friday driven by the longer end of the curve echoing offshore moves from the previous session. NZ 5-year swap rates closed near 2.115%, down 3bps on the day, while 2-year swap fell around 2bps to end the week just above 1.90%. Some retracement is possible today given offshore moves.

Today is shaping up to be a very quiet start to the week with Auckland Anniversary Day providing a regional holiday while Australia Day is celebrated across the Tasman. It is a quiet local data week ahead with only a handful of monthly data reports. Any direction over the coming week or so is likely to come from offshore, with little on the domestic calendar to excite markets until next Thursday’s labour market data.


 

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