Asia Session: NZD Rallies; Negative Rate Expectations Ease

The New Zealand dollar is rallying vs. the USD and AUD as expectations for negative rates are being pared after the RBNZ said it’s too early to tell whether negative rates are warranted.

The RBNZ earlier agreed to provide additional stimulus to the economy via a Funding for Lending Programme (FLP) from December. This was broadly expected, as was the decision to leave the Official Cash Rate (OCR) on hold at 0.25% and the Large Scale Asset Purchase (LSAP) Programme unchanged at NZD100 bn. There's pushback in the statement against NZD strength, while openness to further stimulus has been driving NZDUSD downside post-decision. NZD underperformance can persist on the crosses, although a weaker USD's broad environment should limit the NZDUSD downside.

Strong Equity Inflows Into Korea

Foreign equity inflows into Korea hit the highest level since September 2013 on Nov. 9 on a 5-day cumulative basis ($2.15 bn). Korea can continue to benefit from equity inflows on improving global economic expectations for 2021. Exports are off to a good start in November, +20.1% y/y for the first 10 days. This partly reflects a positive workday effect - there was one more workday this year - but that shouldn’t detract from strong data. Chip exports rose 31.9% y/y, while exports to the EU rose 40.5% and shipments to the US by 23.5%

Steeper Curves Support Rotation In Equities

The great rotation in stocks from tech to small companies continues, albeit at a slower place on Tuesday, with the two-day outperformance of the RTY vs. NDX at 9.5%, the highest on record.

The UST curve continues to bear-steepen; 2-Ys vs 10-Ys (77bp) is the highest since February 2018. Beyond a successful rollout of a COVID vaccine (or the expectation thereof), the extent to which tech underperforms from here depends on the Fed’s willingness to cap higher UST yields. And  given the logistical delays in rolling the vaccine out, it's debatable just how much juice is left in the tank over the short term for those most unloved  sectors. 

Singles' Day Sales

Look for markets to stay relatively frothy during the Singles' Day buying splurge extravaganza. Today is Singles' Day in China. Held each year on Nov. 11, it is one of the busiest and most famous online shopping days of the year and continues to grow in size and scope. The COVID-19 pandemic has brought more shoppers online, as Chinese shopping habits changed this year. Gross merchandise volume on platforms operated by Alibaba Group (NYSE:BABA) reached CNY372.3 bn in the 10 days leading up to the main event and through its first 30 minutes.

China's growth is on a firmer footing and the structural trend in its relations with the US is arguing for reducing dependency on the dollar for both trade and capital market transactions. As such, China has embarked on a renewed push for RMB internationalization. This looks to be an enduring theme for the market as the PBoC shows greater tolerance towards flexibility and appreciation for the currency to encourage increased participation from offshore investors. With a Biden presidency offering up China's most predictable policy outcome, look for the yuan to march relentlessly to the 6.50 level and possibly beyond. 

And the yuan gravitational pull will be felt across G-10 currencies. 

Gold the underperformer

Gold is a cross-asset underperformer this week, falling 3.8% on higher real yields. With disinflationary drivers now less convincing, reasons to buy gold need to change.

Higher US nominal yields have been driven by real yields, with the 10y rising ~31bp from the Sept. 1 cycle low to -0.79%. As a result, gold is a cross-asset underperformer this week, falling 3.8%.

Lower real yields have been positive for gold prices, a relationship that has been particularly tight since the start of 2015. Portfolio benefits from holding zero-yielding gold (not accounting for storage costs) improve in a world in which the yield on risk-free proxies collapses beyond zero. With the global secular stagnation becoming more compelling through the 2010s, gold has acted as a disinflationary hedge. With the disinflationary factor now less convincing, the reasons to buy gold need to change. New bullish reasons include broad-based USD weakness or higher inflation (actual or breakevens). However, switching from disinflation to reflation as a gold driver will not happen immediately, suggesting that gold prices are biased lower in the near term. Indeed, US 5y5y breakevens (2.18%) are broadly flat since end-August.
 

Interest rate effect 

Interest rates come back into play as the markets price COVID-19 vaccine news. So much of the equity market bounce this year has been based on the lower for longer mantra. Risk has been able to price zero short-term rates and historically low long-term rates. However, if efficient self-correcting markets start to price at higher interest rates, then perhaps the market will need an asymmetrical response from the FOMC to address the market's newfound funding disadvantage. For example, implied 3m money at the end of 2023, when the Fed's current guidance ends, has increased 17bp in the last week, 7bp straight after the US election, and 10bp after the vaccine news.
 
The US 10y yield is at its highest point since the market dislocations of March. Of the 14bp nominal yield gain Monday, 7bp was real, and 7bp was breakeven. The speed limit for the most rate-sensitive sectors in S&P is 30bp a month. It might not be long before investors once again start to think about the influence of the rate on equity.

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