The risk rally took a step back overnight European and US equities fell, along with US treasury yields. The US dollar is marginally higher, amid contained currency movements.
Risk appetite was checked by virus concerns and reports that Wells Fargo, the largest employer among US banks, is preparing to cut thousands of jobs starting this year. News that the US is banning Huawei from US government contracts also kept US-China tension simmering, limiting risk taking. The VIX ‘fear’ index popped above 30 at one point, to its highest level of the week, before easing.
US jobless claims beat expectations but was not enough to lift the mood. With 1.31m people applying for the unemployment benefit last week, it is still double the highest level during the GFC. In any case, further declines are in question as virus concerns continue to circulate.
US infections rose by 2%, just above the 7-day average, increasing by a daily record. Florida reported records in both new hospitalisations and deaths, while Arizona added the most cases in six days.
Fed speakers continue to express caution. Last night the Fed’s Rosengren was out saying ‘my expectation and my fear is that we still have community spread in many areas of the United States and that’s likely to continue being a problem, not only for public health, but also for the economy’. This morning the Fed’s Bostic suggested the US economy won’t return to pre-crisis levels ‘until mid-2021 or maybe later into 2022.’
The S&P500 was as much as 1.7% down at one point before recovering to currently sit around 0.5% lower on the day. Financials and energy have led the falls, the latter not helped by Brent crude oil prices easing more than 2%, as a rebound in Libyan output adding to a weaker risk backdrop. The Wells Fargo news has questions the resilience of risk sentiment ahead of next week’s key earnings reports from the likes of JPMorgan, Citigroup and Wells on Tuesday, followed Thursday by the tech heavy weights of Microsoft and Netflix.
Currencies have seen little movement. The step back in risk appetite sees the US dollar slightly stronger on the day. The DXY index is up 0.3%.
The AUD/USD briefly nudged 0.7000 late yesterday, as risk looked supported as Chinese equities continuing to lift. But with risk appetite fading, the AUD has eased back to sit around 0.6960 now.
NZD/USD followed a similar path, after touching 0.6600 and its highest level since January, it has eased back to open this morning around 0.6570. NZD/AUD remains close to the top of recent ranges, currently sitting around 0.9435.
Yesterday, Chinese equities continue to bound ahead with the CSI300 index up another 1.4%, taking the week-to-date gains to a very impressive 9.6%. This has been accompanied by the USD/CNY adjusting lower, with the pair falling below 7.00 for the first time since March, and a factor in the AUD and NZD testing recent highs.
Global factors remain in the driving seat for the NZD, with the currency immune to local developments yesterday. It wasn’t budged by the news that NZ’s aluminium smelter was to close next year, with a pending loss of circa $1.1b export revenue along with the loss of 2,600 jobs including estimates of those indirectly affected. Nor was it changed by the afternoon’s business survey that saw a reasonable improvement in firms’ activity expectations, albeit that they remained in negative territory. Likewise, no obvious reaction to the government’s announcement that it is reviewing all policy settings with Hong Kong along with a travel advisory warning that New Zealanders in Hong Kong faced an increased risk of arrest, related to the new national security law. It wasn’t until late in the day that the NZD found any sort of traction, upward, coinciding with another lunge higher in Chinese equities.
US Treasury yields have pushed lower, consistent with the pullback in risk appetite. The curve flattening was extended following a strong 30-year bond auction. The US 30-year Treasury yield is currently down nearly 9bps, while the 10-year yield is down around 6bps at 0.61%, and the 2-year yield down 1bp.
Locally, swap rates were again little changed yesterday, while the NZGB curve pushed higher and steeper directionally following offshore moves from the previous session. NZGB31s closed 4bps higher at 1.01%, while the 23s rose 1.5bps to 0.34%. Today, there will be flattening pressure from offshore but this may be tempered as the market looks ahead to next week’s 2041 syndication.
Today we also have the RBNZ’s LSAP announcement at 2pm. We don’t expect any change from last week’s $40m LGFAs and $940m NZGBs, with the RBNZ’s pace now consistent with getting to the Monetary Policy Committee’s $60b limit by May next year. That said, there will be some interest in the mix of bonds sort. There is a possibility of a tilt towards the longer end of the curve in the lead up to next week’s syndication.
As far as the upcoming data calendar is concerned, there is yet again little to get excited about over the coming 24 hours.
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