US equity markets have fallen back sharply overnight while global rates have declined; USD is modestly higher, although the NZD and AUD have outperformed; NZ rates increased, and the curve steepened yesterday

By Nick Smyth

After initially rising on the back of reports that a US-China trade deal was in the “final stages”, US equity markets have fallen back sharply overnight while global rates have declined.  The USD is modestly higher, although the NZD and AUD have outperformed amidst the reports on a possible US-China trade deal. 

The WSJ reported yesterday morning that the US and China were in the “final stages” of trade negotiations which could see which could see the US reverse its tariff hikes on at least $200b of Chinese imports.  China, for its part, was said to be offering to increase purchases of US goods, loosen foreign ownership limits, strengthen intellectual property protection, and reduce tariffs on imported cars.  The WSJ reported that Trump and Xi could meet at a summit, probably around March 27th, to finalise a potential deal.  National People’s Congress spokesman Zhang Yesui confirmed yesterday that “substantial progress” had been made in the trade talks.

Chinese equities added to their impressive gains this year, rising 1.2% on the day (having been over 3% higher at one stage).  The CSI300 is now 26% higher in 2019, as the markets price-in a high chance of a US-China trade deal, the consequent removal of some tariffs, and more stimulatory measures from the Chinese authorities.  On that front, Bloomberg reported that China was planning to cut the VAT rate for manufacturers by 3% in an effort to boost the economy, with an announcement possible at the National People’s Congress this week.

The positive news on US-China trade negotiations initially fuelled a 0.5% rally in S&P500 futures in the Asian session yesterday, but those gains have evaporated overnight.  US equities have dropped sharply over the past few hours, on no apparent news, with the S&P500 and NASDAQ now down over 1% on the day (suggesting that a US-China trade deal had already been priced-in to a large extent by the market).  The overnight fall in US equities reversed a puzzling rise on Friday, that occurred in the face of disappointing US economic data.  All sectors of the S&P500 are in the red, with the health care and IT sectors leading the way lower.  

Global rates have tracked US equity markets lower.  The 10 year Treasury yield has moved 3bps lower to 2.72%, reversing Friday’s moves, with similar moves seen in German bunds and UK gilts.  US construction spending data was weak, although the market is more focused on the ISM non-manufacturing index which is released tonight.  The early indications for Q1 US GDP are not terribly encouraging, with the Atlanta Fed’s GDPNow forecast for Q1 sitting at just 0.3% (quarterly, annualised rate), although these early estimates can change significantly as new data is received. 

NZ rates increased, and the curve steepened yesterday, reflecting the previous session’s increase in global rates.  The 10 year swap rate was 2.5bps higher to 2.51%, although we should see those moves reverse today. 

The USD started the week on the back foot after Trump’s weekend comments that he didn’t want “a dollar that’s so strong that it makes it prohibitive for us to do business.”  The DXY index opened 0.1% lower yesterday morning, but it has reversed that move over the past 24 hours and is now 0.2% higher on the day.  Stepping back from the day-to-day volatility, the USD remains entrenched within the trading range it has established over the past five months. 

The Japanese yen is the strongest of the major currencies, up 0.2% on the day, amidst the pick-up in risk aversion.  The NZD and AUD are both up around 0.1%, with the positive reports on US-China trade negotiations providing some support.  It’s a big week ahead for the AUD, with the RBA meeting today, Governor Lowe speaking on the housing market and economy tomorrow and GDP also released tomorrow.  Australian profits and inventories data released yesterday were weaker than expected, and our NAB colleagues see downside risk to their already below-consensus 0.4% forecast for Q4 GDP (the RBA’s forecast is 0.6%).  For the NZD, another Global Dairy Trade auction takes place tonight, and we are expecting a further rise in prices. 

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