Global equity markets continue to consolidate recent gains. The S&P is up 0.5% in early afternoon trade while major European indices were close to unchanged. The Nikkei reached a 33-year intra-day high yesterday before closing down 0.6%. Japanese stocks have advanced almost 30% this year, underpinned by strong company results, a weak Yen and progress on corporate governance. Global bond yields are marginally higher, and the US dollar has extended recent losses.
Oil prices have continued to rally. Brent crude prices increased 2% and are now back above $82 per barrel. Opec+ is expected to consider extending production cuts when they meet in Vienna on Sunday.
Commercial banks in China kept benchmark rates steady in November. The 1-year loan prime rate was unchanged at 3.45% while the 5-year rate was kept at 4.2%. This was in line with expectations. The 5-year rate serves as a reference point for mortgages and is quoted as a spread over the PBOC’s one-year policy rate which was left unchanged at 2.5% last week.
Governing Council member Wunsch said in a Bloomberg interview that the ECB may have to raise borrowing costs again if the markets pricing for easier policy undermines the bank’s policy stance. Wunsch is among the more hawkish members on the council and his remarks did little to alter the pricing in money markets although EUR/USD did edge higher.
European bond yields moved higher with yields on 10-year bonds up 3bps to 2.62%. Italian bonds outperformed following Moody’s decision to revise its outlook to stabilize from negative. The spread between 10-year Italian BTPs and German bunds has tightened from 208bps to 173bps since mid-October amid improved risk sentiment. US treasury yields were marginally higher across the curve with 10-year yields up 2bps to 4.45% ahead of the US$16 trillion 20-year auction.
The US dollar extended its recent decline. It has been under pressure amid softer than expected inflation and activity data which has reinforced investors’ expectations that the Fed tightening cycle is complete. The dollar index fell a further 0.4%.
Asian currencies have performed strongly. USD/JPY could not regain the psychological 150 level in Asian trade yesterday before trading 0.8% lower. Large speculative short Yen positioning could exacerbate any USD/JPY move lower. A stronger than expected PBOC fix and the general weak dollar backdrop contributed to the USD/CNH falling to the lowest level since early September.
The NZD could not build on the gains of the local session yesterday and is close to unchanged overnight. A move higher lost momentum ahead of technical resistance in the 0.6055/60 region which has corresponded with the highs on several occasions over the past 8 weeks. NZD/AUD was stable while NZD/JPY fell back to 89.40.
NZ yields edged higher in the local session yesterday in a parallel curve shift. 10-year government bonds increased 3bps to 4.91% and are continuing to consolidate the large move lower in yield last week. Bonds underperformed relative to swaps with the benchmark 10-year government bond (April 2033) trading 15bps above the same maturity swap. Australian bond futures are 3-4bps higher in yield terms suggesting a modest upward bias for NZGB yields on the open.
The NZ Local Government Funding Agency (LGFA) launched a 7-year Australian dollar issue yesterday. This follows the inaugural 5-year AUD transaction in July this year.
It is a quiet day ahead on the economic calendar. Trade data for October is released and the annual deficit is expected to contract further having reached a peak of NZ$17 billion back in May.
Reserve Bank of Australia (RBA) Governor Bullock is speaking on a panel and the market will be looking for guidance on the bank’s mild hiking bias. The minutes for the RBA’s November meeting are unlikely to add additional information with the Statement on Monetary Policy having already provided insights into the recent decision to increase rates to 4.35%.