Risk appetite fades. Equities, yields lower. AUD marginally lower on Melbourne lockdown. NZD falls then recovers  

The was a consolidation of risk appetite overnight. Equity markets are generally lower, led by Europe, while the USD is marginally higher. US interest rates have edged lower.

The news flow started off poorly last evening with more questions around the economic outlook. The Fed's Bostic stated, in an FT interview, the U.S. economic recovery is in danger of stalling due to the recent spike in coronavirus cases across many American states.

German industrial production rose by 7.8% in May, but undershot expectations. The 19.3% y/y put the current situation in context. Sentiment was further eroded as the European Commission downgraded its euro area growth forecasts to a contraction of 8.7%, a full percentage point lower than previous projections.

Meanwhile, tensions between China and the West continue to simmer with US Secretary of State, Pompeo, saying the US is ‘’certainly looking” at banning Chinese social media apps, specifically TikTok. And China warned the U.K. it will face “consequences” if it chooses to be a “hostile partner” after it emerged Prime Minister Boris Johnson is preparing to begin phasing out the use of Huawei Technologies Co. equipment in the U.K.’s 5G telecommunications networks as soon as this year.

Chinese equites extended Monday’s gains, albeit at a slower rate, up around 0.6% on the day, as state media toned down the previous day’s strongly bullish sentiment. There was some positive COVID news, with no new cases reported in Beijing for the first time since 11 June.
The positive sentiment didn’t carryover to Europe. The Euro Stoxx 50 index fell 0.85%. The S&P500 did fare better, but has given up 0.4% of recent gains.

It all saw the USD strengthen initially, as the EUR underperformed. From around 1.1310 last night, EUR weakened to test 1.1260 before recovering to around 1.1280 currently.

GBP rose ahead of a meeting between UK and EU Brexit negotiators and a speech on fiscal stimulus by the UK Finance Minister tonight. GBP topped the major currency leader board, lifting 0.6% to sit near 1.2560 this morning.

The early risk off tone saw the AUD and NZD come under selling pressure early last night. The AUD was further sold as Victoria announced Metropolitan Melbourne will go into a 6-week lockdown starting from midnight tonight. This follows Victoria reporting 191 new COVID cases yesterday. The Victorian-NSW border has closed for the first time since the 1919 Spanish Flu epidemic.

The AUD, which had pushed up toward 0.7000 yesterday as Asia opened, sank below 0.6930 before partially recovering as the USD gave up its gains. AUD opens this morning around 0.6950.

Yesterday’s RBA meeting had as much impact as it was expected to have: none. As universally expected, the Bank held its cash rate steady at 0.25% and also maintained its 3-year yield target at 0.25%. The Bank did note signs of gradual improvement but also the uncertainty about both the health and economic situation.

The NZD performed a near perfect ‘V’ through the night, falling to test 0.6520 before recovering as risk sentiment stabilised a little. The NZD/USD opens this morning at a familiar level around 0.6550, little changed from this time yesterday. A much stronger than expected GDT dairy auction did no harm to the NZD’s recovery that was already well underway. The GDT Price Index rose 8.3%, driven by a whopping 14% gain in wholemilk powder prices. NZD/AUD has edged marginally higher to sit around 0.9420 currently.

There was no reaction to this morning’s QVNZ housing market report showing house prices rose 1.3% over the three months to June, seeing annual house price inflation ease from 7.7% to 7.4%. If heat is coming out of the market it is only slowly. QVNZ cite pent up demand following lockdown, returning expats over recent months, and record low interest rates as supportive factors, while noting future headwinds as mortgage holidays and the wage subsidy scheme end over coming months. QVNZ still see a 5-10% price correction from pre-COVID levels by Christmas.

In rates, US 10-year Treasury yields have generally traded a touch lower in keeping with the general risk off market tone. Yields currently sit around 3bps lower around 0.64%, easing over the past few hours having traded a tight range for much of the night. This has generated a curve flatten bias, with short end US bond yields steady.

Any flow through from this pressure on the NZ market today may be tempered by domestic steepening pressure as the market eyes next week’s 2041 bond syndication.

NZ swap rates were largely flat yesterday, albeit with a hint of a rally late in the day following AU rates into the RBA meeting. NZ 2 year swap closed essentially flat at 0.2275%, while 10 year swap was down 1bp to 0.78%. The yield on NZGB 31s closed down 2bps at 0.975%.

There is little on the data calendar to disturb markets over the coming 24 hours. Regardless, focus remains largely elsewhere.