Despite little news, risk appetite is higher, with global equity markets showing gains, the NZD and AUD at the head of the leaderboard, and global 10-year rates pushing higher.
Despite the long list of worries we have reported on in previous editions, risk appetite has improved with no obvious triggers, although at the margin one could point to the good start to the US earnings season and the market pulling in its horns on Fed tightening prospects as supporting the overnight moves.
The S&P500 is currently up 0.7%, getting closer to breaking above the early-September high, with market commentary noting the earnings beats for Johnson & Johnson and Travelers Cos., but Procter & Gamble underperforming after noting rising costs had eaten into its margins. Earlier, the Euro Stoxx 600 index closed 0.3% higher.
The US Treasuries curve is steeper, with the 2-year rate dragged down by 3bps to 0.39%, as traders peel back some bets on Fed tightening next year, while the 10-year rate has pushed up 3bps to 1.63%, trading at a fresh 4-month high. European 10-year rates are up 3-4bps.
The economic calendar has been light, with US housing starts and permits both undershooting market expectations, but the figures were weighed down by the volatile multi-family unit components.
In the European gas market, Russia signalled that it won’t ship more gas to European consumers without regulatory approval to start shipments through the controversial Nord Steam 2 pipeline. The market had already suspected that Russia would only help stabilise the European gas market if it served its own interests so there was limited impact on the market. Traders were more focused on weather reports showing a warmer and windier start to the approaching winter season that would help rebalance the market. Oil prices are up 1-1½%, with prices just shy of the multi-year highs set in the previous overnight session.
In the currency market, the NZD and AUD have been the best of the majors over the past 24 hours and overnight, the NZD currently trading near its highs for the day around 0.7170, close to the early September peak. This might be seen as the next level of resistance after breaking above its 200-day moving average around 0.7100, which coincided with the downside trend resistance from a line drawn from the February peak. While technically this is a positive move, there have been a number of times since June that the NZD broke above the 200-day moving average without pressing on ahead. The AUD trades this morning around 0.7485, just above its early September peak.
Other majors have been closely packed, with little change against the USD overnight. However, over the past 24 hours the safe-haven USD, JPY and CHF have been the laggards and the USD BBDXY index is down 0.4% for the day. This sees EUR up to 1.1640 and GBP up through 1.38. The NZD has extended its gains on the crosses, with NZD/EUR up to 0.6160, NZD/GBP close to 0.52 and NZD/JPY approaching 82. NZD/AUD continues to recover, sitting at 0.9580.
The overnight GDT dairy auction showed a lift in prices for all products offered, with the price index up 2.2%. Whole milk powder rose by 1.5% while skim milk powder rose by 2.5%. The price index has now increased for five consecutive auctions, recovering some prior losses, and adds to the prospects of a bumper payout for the FY22 season, with NZX futures for the milk price recently trading above $8.60 per kg/milk solids.
The domestic rates market had another wild session, amidst some post-CPI positioning adjustments, poor liquidity conditions and volatility seen in the Australian short-end curve. The 2-year swap rate was marked within range of about 1.92-2.01%, opening on a high note, before plunging, then recovering to close the session up 3bps to 1.96%. The 10-year rate ranged between 2.46-2.56% and closed up 1bp at 2.51%. NZGBs showed a flattening bias, with the 2-year rate up 5bps and 20-30 year bonds down 3bps.
All eyes were on the RBA to see if stood by its YCC policy to keep the April-2024 bond near 0.1%, a key part of its forward guidance strategy on the cash rate. It passed on any buying activity during the day but after the market close it adjusted the repo rate on the Apr-23 and Apr-24 bonds, charging 100bps (up from 25bps) to cover short positions on these bonds. After trading as high as 0.17% during the day, this announcement saw the rate on the Apr-24 bond fall back to around 0.12%. The message is that the RBA’s forward guidance stands. The minutes of the October meeting reiterated the Bank’s policy stance and expanded a little more on why the RBA thinks Australia’s wage and inflation experience is quite different to other countries. The market’s pricing in of rate hikes from mid next year is consistent with the view that Australia isn’t actually different and a rogue CPI or wages print could easily see the RBA flip.
Tonight sees the release of CPI data in the UK and Canada.
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