Financial markets ended last week on a soft note, with weaker global equity markets, higher global rates and lower commodity prices. Volumes were light, as trading activity was restricted by the global IT outage that affected Microsoft Windows systems. Against a backdrop of weaker risk appetite, the USD was broadly stronger, and the NZD closed the week at a two-month low around 0.6010.
Risk appetite fell last week, with our index closing just over the 60% mark, its lowest level since November. US equities fell for a third consecutive day, with the S&P500 down 0.7%, taking the fall for the week to 2%. The tech-heavy Nasdaq underperformed, down 0.8% on the day and falling 3.6% for the week. The Russell 2000 index also fell on the day, down 0.6%, but the strong gain earlier in the week left it up 1.7%, a second week of strong outperformance, reflecting the rotation out of the mega-cap stocks and into smaller cap stocks, in anticipation of the Fed easing cycle commencing.
There were no obvious reasons for the fall in risk appetite on Friday, but for the week overall, one might point to the market beginning to price in a Trump victory, nerves on IT stocks ahead of earnings reports or simply investors deciding to buy some protection after a strong rally in risk assets.
The economic data flow was light. Ahead of the Bank of Canada’s meeting this week, Canadian retail sales figures were weaker than expected, alongside downward revisions to prior data. Sales fell 0.8% m/m in May and an advanced estimate for June showed a 0.3% fall, while the ex-autos measure fell 1.3% m/m. The Bank of Canada is widely expected to cut its policy rate by another 25bps to 4.50% and the move is almost fully priced.
UK retail sales for June were also weaker than expected, with the ex-autos measure showing a 1.5% m/m fall in spending volumes, with bad summer weather a possible factor.
Japan annual CPI inflation was steady at 2.8% but that made it 27 months in a row of inflation above the 2% target. Annual inflation on the CPI excluding fresh food and energy index ticked up to 2.2%, making it 21 months in a row of above 2% inflation on that measure. Above-target inflation and accelerating wage inflation give the BoJ no good reason to leave monetary policy ultra-easy. Excuses to keep rates low ran out some time ago and questions around its independence will be increasingly raised if it doesn’t tighten monetary policy, with the next available opportunity at the end of the month.
US Treasury yields were up about 4bps across much of the curve, with the 10-year rate closing at 4.24%, capping off a low-vol week where the low-high range was just 10bps and with the high reached towards the end of the week. European 10-year rates were also up about 4bps on the day, while the UK 10-year gilt was 6bps higher.
In currency markets, the USD was broadly stronger, but gains were small, although the NZD was a notable underperformer again, down 0.6% on Friday, taking its weekly loss to 1.8%. The currency closed around a two-month low of 0.6010. The technical picture looks weak and, while there looks to be some support around 0.60, the April lows just below 0.59 are also on the radar – the combination of weaker risk appetite and the RBNZ’s recent dovish pivot provide significant headwinds.
NZD/AUD had its lowest weekly close since October 2022, ending at 0.8990. NZD/GBP closed at an 11-month low just over 0.4650.
The domestic rates market showed steeper curves, with lingering downward pressure on short-term yields and upside pressure on longer term rates. The 2-year swap rate fell 3bps to 4.34%, taking its fall since the RBNZ’s dovish pivot to 47bps. The 10-year swap rate rose 3bps to 4.15%. NZ bonds continued to outperform on a cross-market basis, with the 10-year rate up 3bps to 4.37%, and the spread to Australia fast closing in towards zero.
The economic calendar contains only second-tier data for the day ahead, with NZ trade data, euro area consumer confidence and US existing home sales. The calendar for the week ahead is light, with the only key releases being global PMIs, US Q2 GDP and US PCE deflator data. As noted, the Bank of Canada meets.
As we go to print, President Biden released a statement on social media that he is dropping out of the Presidential race. More details will follow later in the week, but he did not immediately endorse VP Harris or another candidate to be the Democratic nominee. This muddies the outlook to the extent that the odds of Trump winning the election immediately reduce after he was looking like a shoo-in, given recent momentum and facing Biden as the opponent. At the margin we could see a small unwind of the “Trump trade” that was beginning to be priced over the last couple of weeks.
[chart;daily exchange rates]
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