Equity markets have rebounded over the past 24 hours; Brexit continues to linger as a risk for markets; NZD made a fresh year-to-date low; bond yields have continued to edge higher

Equity markets have rebounded over the past 24 hours after the US granted a temporary reprieve to Huawei.  Brexit also continues to linger as a risk for markets, with Labour leader Corbyn saying his party will vote against Theresa May’s withdrawal agreement bill.  Meanwhile, Governor Lowe indicated that the RBA would consider cutting rates next month, leading to a sharp fall in the AUD.  The NZD made a fresh year-to-date low. 

Market sentiment has been bolstered by news that the US commerce department has granted US mobile phone and broadband providers a 90-day temporary licence to do business with Huawei.   As a result, Google will be allowed to send out software updates to Huawei phones that use its Android operating system.   Huawei has been the recent focus on the deterioration in US-China relations, and the market saw the move as a positive development, possibly keeping the window open for a resumption in trade talks between the two sides (none of which are currently scheduled).  Trump scaled back similar restrictions on ZTE, another Chinese telecommunications firm, last year at the request of President Xi, as a goodwill gesture in the trade negotiations. 

The news was a welcome boost to equity markets, especially semi-conductor stocks which have been hit hard since the US placed restrictions on Huawei.  The S&P500 is up almost 1% overnight, with the NASDAQ and the Philadelphia semiconductor index 1.1% and 2% higher respectively.  Earlier, European equity markets had posted gains of 0.5% - 1% and China’s CSI300 was up 1.4%.  The offshore Chinese renminbi (the CNH) is trading marginally stronger (USD/CNH at 6.935).  For all the recent trade-related turmoil and barrage of negative news, the S&P500 is less than 3% from its all-time high. 

Sticking with trade, President Xi said China is embarking on a “new Long March, and we must start all over again!”, suggesting he was preparing the country for a drawn-out conflict.  Xi also visited rare earth mining and processing facilities on Monday, according to the South China Morning Post, raising speculation that China could ban rare earth exports, which are used high tech electronics and military equipment, to the US as a retaliatory measure.  The market however chose to focus on the more positive Huawei developments on the session. 

Bond yields have continued to edge higher, in sympathy with the moves in equity markets.  The 10 year Treasury yield is around 1bp higher, at 2.42%, while the 10 year German bund is 3bps higher to -0.06%.  The USD has strengthened modestly – by around 0.2% on the key indices we track – and is approaching its highs of the year.  There was nothing market-moving in Chair Powell’s speech yesterday morning, nor speeches by regional Fed Presidents Evans and Rosengren overnight.  Rosengren noted that the trade war was a “prominent downside risk”. 

The GBP has been volatile the past 24 hours as sentiment around Brexit continues to drive currency movements.  Theresa May unveiled her ‘bold’ new withdrawal agreement bill in a speech, including a promise to allow MPs to hold a vote on whether to hold a second referendum.  The GBP surged over a cent, to above 1.28, on the headlines, but these moves were quickly reversed after Labour leader Corbyn said his party would vote against the bill and Conservative Brexiteers lined up to pan it.  Hard-line Brexiteer Jacob Rees-Mogg called it “worse than before.”  Commentators see little prospect of the bill passing, when its presented to the House of Commons the week after next, which is likely to lead to Theresa May’s resignation and trigger a leadership contest where the frontrunners are all hard Brexiteers.  The European elections later this week are likely to add to the pressure on May, and probably enbolden those leadership candidates with hard Brexit views, with Nigel Farage’s Brexit party expected to receive the most votes. 

The NZD and AUD have fallen over the past 24 hours after Governor Lowe pointed to an RBA rate cut next month.  In his speech yesterday, Lowe made the pointed comment that “at our meeting in two weeks' time, we will consider the case for lower interest rates.”  Lowe repeated the message from the minutes, which were released earlier in the day, that the RBA’s forecasts already built in two 25bp rate cuts, without which “the forecast for unemployment would have been higher”.  The market took the comments as confirmation that a rate cut is coming next month, with the June meeting now 90% priced and over 60bps of cuts priced-in by mid next year.  The AUD has fallen 0.4% to 0.6885, although it has managed to bounce off the lows at the end of last week of 0.6865. 

The AUD had earlier received a short-term boost from news that APRA, the banking regulator, would change the calculations for determining mortgage serviceability, in a move that may loosen credit constraints for some borrowers.  APRA plans to scrap the 7% floor and proposes that lenders calculate borrowers’ ability to service mortgages using a buffer of 2.5% above the loan rate.  While this is likely to provide only a small boost at present, it should increase the transmission of cuts to the economy. 

The NZD has traded very much in sympathy with the AUD the past 24 hours and is down 0.5% on the day, to just above 0.65 – new lows for the year.  The market saw the increased prospect of an RBA rate cut next month as increasing the chances that the RBNZ follows suit.  The market now prices a slightly better-than-even chance of an August rate cut by the RBNZ, with a 25bp rate cut almost fully-priced for November.  NZ swap rates were around 1bp lower yesterday. 

The highlight in the session ahead is the release of the FOMC minutes, at 6am tomorrow. 

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