Higher risk appetite driving global equities higher while US Treasury yields ended slightly higher; currency movements weren’t significant, although commodity currencies headed the leaderboard, while Brexit uncertainty continued to weigh on GBP

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By Jason Wong

The March quarter ended on a positive note on Friday, with higher risk appetite driving global equities higher while US Treasury yields ended slightly higher.  Currency movements weren’t significant, although commodity currencies headed the leaderboard, while Brexit uncertainty continued to weigh on GBP.

China PMI data released Sunday were stronger than expected for both the manufacturing and non-manufacturing sectors, the former erasing 5-months of losses and now back above the 50 mark – a tentative sign that policy stimulus is beginning to improve or at least stabilise growth momentum. This should help see risk assets get off to a good start for the week.

The S&P500 rose by 0.7% on Friday, capping off another good month and a very strong quarter (up 13.1%), following the miserable December quarter, while the VIX index ended the month at a risk-loving 13.7. Month-end flows might well have been behind the move but there was also a positive vibe around US-China trade talks. Xinhua, a Beijing based official newswire, reported that Chinese and US negotiators had made “new progress” towards a trade agreement after a series of meetings in Beijing, matching the positive rhetoric from the US side, with Mnuchin calling the talks “constructive” and Kudlow saying the two sides made “good headway”.  Talks continue this week in Washington.  Officials seem keen to maintain an appearance of equality between the two sides, hence the alternating meetings in Beijing and Washington.

US economic data were mixed, with softer consumer spending and a lower Chicago PMI, but stronger new home sales, and the final reading for the University of Michigan consumer sentiment was higher.  The Fed’s preferred inflation gauge – the core PCE deflator – was lower than expected at 1.8%.  Inflation momentum is heading lower, with the six-month annualised rate running at 1.5% – supporting the Fed’s more dovish tilt recently, but also lending some support for Trump’s latest twitter outburst on Friday that condemned the Fed’s “mistakenly” raising of interest rates and “ridiculously” timed quantitative tightening.

White House chief economic adviser Kudlow called on the Fed to “immediately” cut interest rates by a half percentage point, according to a report by Axios, which cited an interview done on Friday. However on CNBC Kudlow was less direct and said a rate cut would protect the strength of the American economy from weakness abroad, though he said such a move isn’t needed immediately and the “underlying economy” isn’t slowing.  US rates showed signs of consolidation following the strong rally that took the 10-year Treasury yield to a multi-year low earlier in the week.  The 10-year rate ended the session up 1bp to 2.405%.

In currency markets, CAD headed the leaderboard, with USD/CAD down 0.65% to 1.3350, with much of the move following monthly Canadian GDP data which were surprisingly strong. The risk-positive backdrop supported the AUD and NZD, closing the week just under 0.71 and just over 0.68 respectively.  Early on Friday, RBNZ Governor Orr gave his first speech on monetary policy. In the Q&A, responding to a question about the fall in rates and the NZD following the shock move to an easing bias on Wednesday, Orr effectively sanctioned the move, saying that he was pleased as “markets have shown that they understand what we are focused on and they are forward looking.”  The 2-year swap rate was flat at the historically level of 1.63%, while there was a sharp steepening of the curve – the 10-year swap rate rose 7bps to 2.16%, while long-term government rates rose 6bps across the curve, alongside higher Australian bond yields.

GBP was the worst performer on Friday as the UK Parliamentary circus continued.  GBP went sub-1.30 at one stage before ending the session at 1.3035. The UK Parliament rejected PM May’s Brexit Withdrawal Agreement for a third time.  Time is running out before the new 12 April deadline.  Over the coming week the UK Parliament will try to work on something a majority can agree on, while EU leaders have called for an emergency summit on 10 April ahead of that.  Based on last week’s indicative votes, a customs union is the most favoured plan within the UK Parliament, albeit lacking a majority. It might come down to a final vote between May’s plan (again) and a customs union, given that “no-deal” remains undesirable and the UK Parliament must agree on something before the deadline. Another possibility remains an extended delay, with another referendum or general election still in the mix.  In other words, the number of permutations remains numerous, but we maintain a constructive view of the ultimate outcome.

The economic calendar over the next 24 hours is reasonably full.  Euro-area core CPI inflation is expected to slip to 0.9% y/y while in the US focus will be on retail sales and the ISM manufacturing indicator.


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