Risk sentiment has soured, not helped by the focus on the oil market, which is seeing a further plunge in pricing. Equity markets are down 2-4% and the US 10-year Treasury yield has fallen to the bottom end of its range for the past month. Yesterday’s fall in the NZD to below 0.60 has extended overnight, while the AUD has slipped further below 0.63.
Focus remains on the oil market, where yesterday’s historical move in the WTI price for the near contract falling into deep negative territory now significantly spilling over into other contracts. The dire near-term economics of the oil market has been plain to see for some weeks now, with oil demand slumping as much as 30m barrels per day and oil supply barely changing. Even a nearly 10m cut in daily production by OPEC+ members from 1 May alongside a few million barrels elsewhere would see significant excess supply conditions remaining at a time when oil storage is running out. Until lockdowns end which sees oil demand recovering, prices will remain under downward pressure.
Yesterday’s move into negative territory has awoken the market to the realities of the market. Lower prices would normally encourage lower supply but in the case of the US, it looks like politics might get in the way of market forces. President Trump tweeted that he will “never let the great US Oil and Gas industry down” and will “formulate a plan which will make funds available so that these very important companies and jobs will be secured long into the future!”
Optimistic speculators, punting that the oil market will ultimately improve, have been piling into oil ETFs, but are now panicking, seeing the June WTI contract fall more than 50% to less than $10 per barrel. Lower WTI pricing is dragging down Brent crude as well, now down below $19 per barrel, having lost over 25% in two days.
Plunging oil prices are not helping overall market sentiment and are a reminder of how bleak the global economic picture currently is. The possibility of future political instability in the Korean peninsula has added to the risk-off mood. Yesterday, US intelligence suggested that North Korea leader Kim Jong Un was critically ill after undergoing cardiovascular surgery last week, but South Korean and Chinese sources suggest otherwise.
The S&P500 is down about 2½%, following a 3½% fall in the Euro Stoxx 600 index, dragged down by a 4% fall in Germany’s bourse. News that the US government is set to sign off on another rescue package – extending the loan programme for small businesses and aid for the health sector – has had little impact on the market.
The risk off tone sees increased demand for safe haven assets like US Treasuries. The 10-year rate has fallen to the bottom of the range of the past month, currently down 3bps to 0.57%, after touching a low of 0.54%. Despite the plunge in oil prices, there is no sign of panic in credit markets like we saw last month. Spreads are wider on weaker risk appetite, but not dramatically so.
The risk-off mood sees the USD well supported, alongside CHF, JPY and EUR, the latter supported by talk that Italy is ready to work with the EU on a new ESM credit line. Italy has previously been reluctant to go down that track, given the conditions involved in accepting funds from the ESM.
GBP is the worst of the majors we cover, down 1.2% for the day to below 1.23. Market chatter is that hard-Brexit risks have become more into focus, with COVID-19 having hitherto been a welcome distraction. The UK’s position is that it won’t ask for a Brexit extension and if the EU offers one, it will refuse.
The NZD fell yesterday to below 0.60 and has extended its losses overnight, going sub 0.5940 but now recovered to 0.5970. The risk-off mood that emerged in the afternoon didn’t help and neither did dovish comments from RBNZ Governor Orr, even with little new information. Orr reiterated the RBNZ view that a negative OCR wouldn’t be ruled out and that the Bank would be thinking about additional stimulus in May, alongside a comment that the Government will also be wanting to issue more debt. This is in line with our view that the RBNZ will be looking to upscale its QE programme at the May MPS. Governor Orr also said that he was open-minded on direct monetisation of debt. While this is seen as “taboo” by some purists, as we noted in research last week it is effectively equivalent to what is going on now, with the government issuing debt to the market and the RBNZ hoovering it up as part of its QE programme.
Orr’s comments had little impact on the rates market, with only small movements in the swaps and government curve through the day. Earlier in the day, the RBNZ announced a proposal to remove current loan-to-value restrictions to “help banks to keep lending to support customers”. Given the very short 7-day consultation period, we see this as a done deal. Banks are hardly likely to oppose the move, as it restores their previous freedom to lend as they see fit. A loosening of LVR rules is yet another RBNZ move to offer as much support as it can to the economy.
The overnight GDT dairy auction showed a 4.2% fall in the price index, near enough to our expectations, with a 3.9% fall in whole milk powder. Lockdowns are negative for global demand, and lower oil prices are not helpful for dairy prices either. Meanwhile, EU and US milk production is ramping up into their peak and is tracking meaningful above year earlier levels.
NZD/AUD tracked lower yesterday, but has found some support between 0.9480-0.95, with the AUD just below 0.63. RBA Governor Lowe gave a sobering outlook, with GDP expected to fall 10% over 1H20, the unemployment rate rising to 10% by June and not to expect business as usual when activity recovers. He noted the success of the RBA’s QE policy in achieving the 0.25% target for the 3-year bond yield and addressing market dislocation.
Earlier in the day, new weekly payrolls data showed payroll employment down 6% since mid-March and about 4-5% of people have lost work. On NAB’s estimates, this equates to a loss of 800,000 jobs for April.
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