Markets are trading with a risk-on tone as hopes grow for an extension to the trade war ceasefire between the US and China. Democratic and Republican negotiators also came to an agreement in principle to avert another US government shutdown, although Trump still needs to sign it off. Global equities and bond yields have moved higher. The USD has fallen back from its year-to-date highs overnight amidst the improvement in risk sentiment. The NZD is unchanged ahead of the RBNZ today.
Market sentiment has been boosted over the past 24 hours by some more encouraging news on US-China trade negotiations. Yesterday, White House advisor Kellyanne Conway told Fox News that Trump “wants to meet with President Xi very soon” while the President added at a campaign rally that “we don’t want China to have a hard time.” And then a short time ago, Trump said he was open to letting the March 1st deadline “slide”, suggesting he was coming around to an extension to the trade-war ceasefire. While the two sides are still reportedly far away on some of the more structural issues – such as alleged Chinese intellectual property theft and enforcement mechanisms – an extension to the ceasefire would allow negotiators more time to iron out differences and provide a window for Trump and Xi to meet face-to-face to finalise a potential deal. While the market was already coming around to the view that the March 1st deadline would be extended, Trump’s comments are nonetheless a boost for broader market sentiment.
Adding to the risk-on tone was news yesterday that Republican and Democratic negotiators had come to an agreement in principle to avert another government shutdown. The tentative agreement provides $1.5b for “modern physical barriers” (a “wall” or a “fence” depending on what side of the political fence one sits on) along the border with Mexico, well below the $5.7b Trump has demanded. The deal needs to be signed off by the Senate and House as well as the President before Friday to avert a shutdown. Trump sounded lukewarm about the tentative deal, telling reporters “I can’t say I’m thrilled”, but said he would study the proposal. A funding deal for the government, were it to be signed off by Friday, would remove another source of uncertainty facing the market.
Global equity markets are up across the board the past 24 hours, with the Chinese CSI300 index up 0.7%, European bourses mostly up around 1%, and US equities more than 1% higher. The S&P500 is set for its highest close since early December, and it is now 17% off the lows reached on Christmas Eve. Similarly, market implied volatility continues to drift lower, with the VIX at 15.6, near its lowest level since October (and below the average since 2010).
US bond yields have moved higher amidst the improvement in risk sentiment, with the 10 year Treasury yield rising 3bps to 2.69%. US economic data had no market impact. Small business optimism fell more than expected last month, to its lowest level since the US Presidential election in 2016, although a potential resolution to the government shutdown and the recovery in US equities bodes well for a bounce-back in the coming months. The index remains at relatively elevated levels historically. Meanwhile, US job openings rose to their highest level since the survey was created in 2000, indicative of continued strength in the US labour market. US CPI, released tonight, and retail sales on Thursday, are more likely to be market-moving.
The USD reversed some of its recent gains overnight, with the DXY index 0.3% lower to 96.79. The USD indices remain close to their year-to-date highs, although well contained within the broader trading ranges of the past six months. The EUR rose 0.4% to 1.1320, despite the usually hawkish ECB Governor Klass Knott saying that the “build-up of inflationary pressures will also incur some slight delays” in Europe and that a wait-and-see approach is appropriate at present (suggesting a willingness to delay rate normalisation beyond the end of the year). The Japanese yen and Swiss franc have fallen against the USD amidst the improvement in risk appetite.
The increased optimism around a potential US-China trade war ceasefire boosted the AUD, which is the second-best performing currency on the day, up 0.5% to almost 0.71. On the data front, the NAB business survey released yesterday showed business conditions recovered around half of the sharp fall seen the previous month. Despite the bounce-back in January, business conditions have moderated broadly across most industries and states in recent months. Our NAB colleagues changed their RBA rate call yesterday, and now see the cash rate on hold over the entire forecast horizon, with the risk of rate cuts (if there were any sign of deteriorating labour market conditions or further weakness in consumer spending).
The NZD is unchanged from this time yesterday, at 0.6730, despite the broad-based weakening in the USD on the day. The market awaits the RBNZ Monetary Policy Statement at 2pm today. We are expecting a more dovish Statement than that released in November in light of the slow-down in global growth and increased downside risks (much as that RBA alluded to last week), but not one as dovish as that priced-in by the market. NZ rates declined by 1 to 2bps yesterday, outperforming other markets, on swaps receiving ahead of the RBNZ.
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