Markets opened the week suffering under the weight of President Trump’s early Monday morning tweet; NZD has settled this morning around 0.6610; NZ rates pushed lower yesterday

After a risk-off session during the NZ time zone yesterday following Trump’s tweet that threw US-China trade negotiations into disarray, markets have settled as we await further developments, and we’ve see a recovery in most risk assets overnight. The NZD is an exception, weakening a touch overnight but holding up just above 0.66.

Markets opened the week suffering under the weight of President Trump’s early Monday morning tweet (NZ time) threatening to raise the punitive 10% tariff rate on 200bn of Chinese imports to 25% by the end of the week and threatening to put fresh tariffs on all Chinese imports.  Risk assets understandably fell, with S&P500 futures down as much as 2% at one point.  The S&P500 opened the NY session down 1.6%, its low for the day, and has been crawling its way higher, to be currently down “only” 0.6%.

There has been little development on this story overnight. China’s foreign ministry said that officials were still planning to travel to the US this this week for the next round of talks, but we are none the wiser about the size of the delegation or if China’s chief trade negotiator, Vice Premier Liu, will attend. 

Yesterday, China’s Shanghai-Shenzen composite (CSI300) fell 5.8%, and CNH was down over 1% at one stage, but has since recovered.  USD/CNH is up 0.5% to 6.7710. Commodity prices were generally weaker, although oil prices have staged a strong comeback.  Brent crude plunged below USD69 a barrel, down over 3%, but has recovered strongly to be up 0.8% for the session to USD71.40, after reports that the US has dispatched an aircraft carrier strike group and bomber force to the Middle East.

The NZD has settled this morning around 0.6610, down 0.6% from last week’s close and the weakest of the majors, taking it lower on all the crosses. While the NZD reversed course overnight after trying to recover in late-Asia trading, the AUD has nudged up further, being attracted to the strong support level of 0.70. So after spending much of the local trading session hovering around 0.9475, NZD/AUD has pushed down to 0.9440. Focus today turns to the RBA policy announcement, where a rate cut is widely seen as a lineball call. In a Bloomberg survey, a slim majority of 15 out of 29 economists predict a 25bps cut in the cash rate to 1.25%, while a rate cut in the OIS market is priced close to a 50/50 chance. A market reaction in the rates market and AUD (and spillover for NZD) seems guaranteed, no matter the outcome.  An RBA rate cut would add to the view that the RBNZ will follow tomorrow.

NZ rates pushed lower yesterday on the global risk-off move, seeing swap rates down 1-3bps across the curve and government rates down 2-3bps.  A recovery in risk assets of sorts has seen the US 10-year rate drift higher overnight, after falling during NZ trading hours.  It currently sits at 2.50%. USD/JPY is back to 110.90 after falling as low as 110.30 yesterday.

GBP is on the soft side as the market reins in some optimism that the Conservatives and Labour will do a Brexit deal.  PM May is directing new clauses to be written into the Withdrawal Agreement Bill that would provide for a customs union-style arrangement, as preferred by Labour. John McDonnell, Labour’s Treasury spokesman, poured cold water on the idea that the talks are close to success, suggest Sunday that May’s leaks of confidential talks were in “bad faith” and that he didn’t trust her.  GBP is edging downwards and is currently down 0.6% for the day to 1.3100.

As noted earlier, the focus for the day will be the RBA’s policy announcement at 4:30pm NZ time. Ahead of that Australian trade and retail sales data are released.  Tonight we’ll be watching German factory orders, while after 10 consecutive price increases at the GDT dairy auction, our own Dairy Doug is predicting a flat outcome.

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