Market reaction to President Biden’s withdrawal from the Presidential race has been muted, with only small changes in the USD and Treasury yields. US equities have rebounded, recovering from last week’s hiccup, driven by the tech sector. The AUD and NZD have underperformed on China concerns and falling industrial commodity prices. The NZD has made a clear break below 0.60, while NZD/AUD is up slightly, back to 0.90.
With a quiet economic calendar, the market was focused on President Biden’s withdrawal from the Presidential race, just ahead of the Monday morning opening. Initial market reaction was muted across assets on the watchlist. VP Harris is the clear frontrunner to win the Democrat nomination, winning endorsements from key party members, Governors and lawmakers, while donations on the day exceeded any other so far in the election campaign.
The market’s reluctance to unwind much, if any, of recent price action on the Trump trade, reflected odds that still clearly favours a Trump victory. PredictIt odds of a Trump victory fell from 65% to 60%, still well ahead of the Democratic contender.
US equities have rebounded, with the tech sector leading the gains after the recent rotation out of these stocks. The tech-heavy Nasdaq index is up 1.7% against a 1.1% lift in the S&P500. Energy stocks have underperformed – one of the few Trump trades that looks in play – but the move might be coincidental, with oil prices backing up the 3% fall at the end of last week with another fall. Brent crude is down ½% to a six-week low of USD82.
US Treasury yields have pushed higher. The small fall in Asia trading reversed course during the US trading session, seeing the 10-year rate up 2bps to 4.26% or 4bps from the NZ close. The curve is marginally steeper but within the realms of rounding error.
Outside of US politics, key news was the PBoC easing monetary policy further, cutting its 7-day reverse repo rate by 10bps to 1.7%, which directly flowed through into cuts for the 1-yr and 5-year loan prime rates. The PBoC said it wanted to “step up financial support for the real economy”. The move follows last week’s economic data showing softer GDP growth, weighed down by the property market and consumer spending. Easier monetary policy in China so far has been ineffective this cycle, given the extent of the property downturn, and with the PBoC reluctant to cut rates aggressively to avoid further downward pressure on the yuan.
Industrial metal prices continue to tumble, with Bloomberg’s price index of these down 1½%, falling for a sixth consecutive day, and down over 7% over that short time frame. The outcome of China’s Third Plenum – a major policy meeting meant to set economic and policy priorities for the next five years – was widely seen as disappointing, with a lack of further policy initiatives to address the property slump or reinvigorate the economy.
Weaker commodity prices have dragged down the AUD and NZD, with notable underperformances by both against a backdrop of only small moves in the other key majors. Relative to last week’s close, the AUD is down 0.6% to 0.6640 while the NZD is down 0.5% to 0.5980, with NZD/AUD up slightly to 0.90. Yesterday we noted the poor technicals for the NZD and the break of 0.60 brings the April low near 0.5850 into play.
JPY is the strongest of the majors, somewhat surprisingly against the backdrop of slightly higher Treasury yields and uncertainty about whether the BoJ will deliver a rate hike next week. Bloomberg reported that BoJ officials see weakness in consumer spending complicating their decision over whether to raise interest rates at next week’s policy meeting. “Some” officials see skipping a rate hike as an option to provide more time to examine incoming data to confirm if consumer spending will pick up as expected and “some” hold the position that the BoJ should avoid giving the impression of being overly hawkish. The article added that other officials are open to raising rates at the meeting. While the rates decision appears finely balanced, the central bank “doesn’t intend to cause any major surprise” regarding its plans to reduce bond purchases.
USD/JPY is down 0.2% to just over 157 after falling to as low as 156.30 overnight. EUR and GBP are less than 0.1% higher from last week’s close, so NZD crosses against these currencies are all lower. NZD/JPY is sub-94, NZD/EUR is sub 0.55 and NZD/GBP is probing fresh multi-year lows around 0.4625.
The Slovakian member of the ECB’s Governing Council Kazimir said that market bets on two more ECB rate cuts this year aren’t entirely misplaced, but shouldn’t be taken as a given or a baseline scenario. He added that there is no need to rush decisions.
The domestic rates session was quiet yesterday, with some small upside pressure to rates. Swap yields were up 1-2bps, while NZGBs underperformed and showed some steepening curve price action, with short rates up 2bps, the 10-year rate up 3bps and the ultra long bonds up 5bps.
The economic calendar remains light, with only second-tier releases due tonight.
[chart;daily exchange rates]
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