Against a backdrop of better risk sentiment, the NZD has bounced a little, but it remains near multi-year lows; US bond yields are near unchanged on the day; AUD is the strongest performer

By Nick Smyth

Risk markets have recovered overnight as China didn’t immediately retaliate to the President Trump’s latest threat to impose tariffs on $200b worth of imports.  Against a backdrop of better risk sentiment, the NZD has bounced a little, but it remains near multi-year lows. 

Global equities are higher across the board over the past 24 hours, with the S&P500 up 0.8% and near its highest level since March while the NASDAQ made a new record high overnight.  The Chinese response to President Trump’s latest threat to impose tariffs on $200b of imports has been a little more conciliatory.  A spokesman for the Chinese Ministry of Commerce said China would take “necessary” steps to defend its interests but didn’t explicitly say it would respond with equivalent measures while China’s vice minister of Commerce said “we should sit down and try to find a solution to this trade problem”.   Meanwhile, US Treasury Secretary Mnuchin told the US House Financial Services Committee that the US was “available” for negotiations if China made structural changes.  The S&P500 is now back to where it was on Wednesday morning, before the US administration gave more details on the $200b tariff threat.  The Shanghai composite index rose over 2% yesterday, more than reversing the previous day’s falls. 

FX market moves over the past 24 hours reflect this ‘risk-on’ tone, with the Japanese yen and Swiss franc the weakest currencies while the AUD (the market’s preferred China proxy in the G10) is the strongest.  Emerging market currencies have also made gains.  The broader US dollar indices are close to unchanged on the day. 

The improvement in risk appetite has helped the NZD stage something of a recovery over the past 24 hours.  It has moved up to around 0.6770 from its lows of 0.6748 yesterday.  Unlike equities however, the NZD remains around a percent below where it was trading on Wednesday morning (0.6840) before Trump’s $200b tariff threat.  NZ food price data yesterday was marginally higher than we had anticipated (although didn’t impact the market) and affirmed our 0.6% q/q forecast for Q2 CPI for next week (which would bring the annual rate to 1.7%). 

There was next to no market reaction from the US CPI release, with core inflation meeting expectations and the annual rate moving up to 2.3% from 2.2%.  US bond yields are near unchanged on the day, with the US 10 year Treasury yield at 2.85%, despite the move higher in equity markets.  Fed Chair Powell gave a radio interview an hour or so ago reiterating the symmetric nature of the inflation target and noting (unsurprisingly) that trade tariffs “could be a negative for our economy”.  The market prices a 50% chance of a fourth hike this year by the Fed. 

There was little market reaction to the release of the UK government’s long-awaited white paper on Brexit which outlined the UK’s plans to have a free-trade area in goods but some divergence in services.  The white paper said the complicated “facilitated customs arrangement” would be phased-in and there could be a delay of 12 to 18 months after the transition period ends in December 2020.  Commentators are still dubious that the EU will agree to the plan and Theresa May still has to contend with a potential rebellion from hard-line brexiteers in her party.  The GBP is near unchanged on the day, just above 1.32. 

There’s not too much by way of economic data likely to move markets in the day  ahead, but the US earnings season unofficially kicks off tonight with JPM, Citi and Wells Fargo reporting.  The NZ PMI is released this morning as well.  

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