US equities have continued their record-breaking run while, after last week’s strong rally, US Treasury yields are modestly higher. European markets have settled after last week’s selloff, with French assets recovering

European markets have settled after last week’s selloff, with French assets recovering somewhat. US equities have continued their record-breaking run while, after last week’s strong rally, US Treasury yields are modestly higher. Currency movements have been small, with the NZD giving up a little of last week’s gain and the euro being the best performer, albeit up only 0.3%.

After last week’s beating dealt to European assets, centred on France because of heightened political risk ahead of the snap election, the market has settled. France’s benchmark CAC40 equity index rose 0.9% after last week’s 6.2% drop, the France-Germany 10-year bond spread broke its upward trajectory and narrowed 3bps, and the euro shows a modest recovery to 1.0735. Marine Le Pen attempted to appeal to a wider spread of voters saying she would work with President Macron, seeking so-called “cohabitation” and noted that when financial markets see her party’s policy proposals in detail they will find them “rather reasonable”.

After last week’s strong rally, the US 10-year Treasury yield jumped higher on the Asian open and took another leg higher from the US open, to reach a peak overnight of 4.29% before the market settled.  It is currently up 5bps from Friday’s close to 4.27%. There will be a cacophony of Fed-speak this week and Philadelphia Fed President has kicked off, noting he was in the camp of projecting just one rate cut this year. However, he said the Fed was data dependent and “I see two cuts, or none, for this year as quite possible if the data break one way or another”. Economic news has been light overnight. The volatile Empire manufacturing survey, which measures activity in New York state, bounced back slightly more than expected in June to -6.0.

US equities have continued their record-breaking run, with the S&P500 currently up 1%. Despite the bounce-back in French equities and a small recovery in Germany’s DAX index, Europe’s Stoxx600 index showed only a small gain of 0.1%.

Currency markets show only modest movements at the start of the week.  The modest recovery in the euro has spilled over into other European currencies. The yen is on the weak side of the ledger, with USD/JPY up slightly to 157.70, not helped by higher US Treasury yields, but the BoJ’s dithering last week on tightening policy – not willing to provide details on reduced bond buying activity until the next meeting – effectively locks in a soft yen for another month and raises the chance of further intervention.

The NZD and AUD are also soft to start the week but in the context of their outperformance last week. The NZD found some support overnight just over 0.61 and currently trades at 0.6130, down slightly from last week’s close. The AUD is flat at 0.6615 and NZD/AUD has consolidated around 0.9270. The market ignored NZ data showing yet another poor economic print, this time a fall in the performance of services index (PSI) to 43.0 – its lowest level for a non-COVID lockdown month since the survey began in 2007, so even lower than the levels reached during the GFC. Anecdotes from some businesses suggest trading conditions are currently worse than the GFC, so the PSI at such a low level is consistent with those comments.

The domestic rates market had a quiet session, with global forces resulting in a 1-3bps fall across the curve for NZGBs.  NZ swap rates were lower across the curve before some profit-taking in 2-year swap saw it close unchanged at 4.93%, against a 2bps fall in 10-year swap.

Yesterday, the PBoC left is key policy rate unchanged for a tenth successive month, continuing to be reluctant to ease monetary policy to avoid further pressure on the yuan. The array of monthly activity indicators showed slower industrial production against a small lift in retail sales and overall didn’t give much confidence that China’s economy was on a stronger economic path. The property market downturn remains a source of concern and Chinese house prices continue to fall in the over-supplied market.

In the day ahead, we get NZ consumer confidence data for Q2 and the RBA policy update. No change in rates or tone is expected, with the Bank likely to repeat guidance of “not ruling anything in or out”. Tonight sees the release of US retail sales, where modest growth is expected for May after the weak April print.