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Equities and bond yields have fallen and the JPY outperforming overnight; NZD is unchanged from this time yesterday, at 0.6740; EU is likely to reject Theresa May’s request for a short extension

Currencies
Equities and bond yields have fallen and the JPY outperforming overnight; NZD is unchanged from this time yesterday, at 0.6740; EU is likely to reject Theresa May’s request for a short extension

By Nick Smyth

Market sentiment is a little more cautious, with equities and bond yields falling and the JPY outperforming overnight.   Market moves have been reasonably contained however, ahead of a series of key events tonight and tomorrow morning. 

After a strong run recently, equity markets have pulled back overnight while bond yields are modestly lower.  The S&P500 is down around 0.6% while European indices were between 0.3% and 1% lower.  The 10 year Treasury yield is down 3bps to 2.49%,.  Market participants are waiting for the key event risks tonight – US CPI, the FOMC minutes, the ECB meeting, and the EU Summit where leaders will decide on a Brexit extension to offer Theresa May.  

The IMF cut its forecast for global growth this year to 3.3%, down from 3.5% in January, describing this as a “delicate moment” with multiple downside risks, and one in which policymakers should avoid missteps.    The IMF lowered both its US (2.3% from 2.5%) and European (1.3% from 1.6%) growth forecasts, although, more encouragingly, it revised up its Chinese growth forecast by 0.1% to 6.3%.  However, as Gavyn Davies noted over the weekend in the FT, policymakers are often more backward looking than markets, and the recent data-flow has not been as bad as that in late 2018.  The rebound in global equity markets since late 2018 implies a more positive forward-looking growth outlook. 

There was only second-tier data released in the US overnight, and little market reaction.  US small business sentiment was unchanged in March after its sharp fall – from what was close to an all-time high – the previous month.  Meanwhile, US job openings fell sharply in February, although the series can be volatile month-to-month, prone to revision, and it remains near record high levels.  The focus is on US core CPI tonight, where the market is looking for a 0.2% monthly increase in March, which would keep the year-on-year rate at 2.1%. 

On the trade front, Trump tweeted that he would impose tariffs on $11b of EU imports, in retaliation for state subsidies for Airbus.  Trump added that “The EU has taken advantage of the US on trade for many years. It will soon stop!”  If the US goes through with the tariffs, the EU has said it will impose countermeasures, raising the risk of further escalation.  The sums involved at this stage of course pale in comparison to the US tariffs imposed on China, which cover more than $250b of imports. 

Currency market movements have been muted.  The only two movers of any note being the Japanese yen, which has strengthened 0.3% amidst a modest pick-up in risk aversion, and the GBP, which has declined 0.2% ahead of the EU Summit tomorrow. 

On Brexit, the EU is likely to reject Theresa May’s request for a short extension to the 30th June according to the FT and instead offer a longer extension (possibly to 31st December or 31st March) with a break-clause that will allow the UK to exit earlier if parliament can agree to a suitable deal – a so-called “flextension”.  The French, whose President Macron has been the most openly sceptical of a long extension, are reportedly prepared to grant an extension beyond June 30th provided conditions are placed on the UK.  An extension to Brexit beyond 30th June may see a modest relief rally in the GBP, although by kicking the can down the road, Brexit will likely remain a headwind for the currency (at least until a soft Brexit option comes into clear view). 

The NZD is unchanged from this time yesterday, at 0.6740.  Having reached a high of 0.6760 in the London morning, the NZD has drifted lower overnight amidst the pull-back in risk appetite.  NZ rates moved 2bps to 3bps higher across the curve yesterday, although these moves should at least partially retrace today.  The market prices a 40% chance of a May rate cut by the RBNZ. 

It’s a busy session ahead.  RBA Deputy Governor Debelle speaks on The State of the Economy this afternoon.  Tonight, the ECB meeting is first up, where Draghi will likely be asked about the likelihood of an extension to forward guidance and the possibility of a tiering system for negative interest rates on banks.  That’s followed by US CPI and then the FOMC minutes at 6am tomorrow morning.  The EU Summit will also take place.


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