Mild risk off tone on COVID, US stimulus timing. US equities and bond yields generally lower. NZD still hovering around 0.72

Wellingtonians coming back from their sunny anniversary day yesterday won’t notice much change across many major markets from our last report on Friday. Market movements have been reasonably subdued albeit with some risk off type moves on Friday, initial recovery into the new week, before another dip in risk sentiment appeared this morning. The net result sees equities generally lower, US bond rates lower, and the US dollar a touch firmer.

Risk sentiment faded on Friday with another round of bad COVID news in the driving seat from various lockdown announcements to reported delays in the rollout of vaccines. The range of PMI readings were mixed: a bit better in the US, close to expectations in the EU, and a shocker in the UK where the services index slumped to a dreadful 38.8 – its lowest since May – due to the latest lockdowns.

Overnight, European equities fell despite yesterday’s positive lead from Asia. Travel and leisure suffered amid news France may go into another lockdown, the UK may tighten border controls and as Israel moved to bar foreign flights from entering the country. The Eurostoxx 50 closed down around 1.4%. A lower than expected IFO business confidence survey in Germany didn’t help the mood.

Initial optimism around the $1.9T US stimulus bill was checked when top Senate Democrat, Schumer, disappointed expectations on when the bill may get passed. ‘We’ll try to get that passed in the next month, month and a half’. This dented risk appetite. The S&P500 was down as much as 1.4% at one point, but has recouped a lot of those losses to currently sit down around 0.1%. Tech outperformed, but the NASDAQ has pared initial gains to sit up 0.2% at present.

Lower risk appetite saw US bond yields generally lower and the curve flatter. US 10-year Treasury yields are down around 4bps on the day, while the 2-year yield is close to flat.

In currencies, the US dollar has edged marginally higher in the mild risk off environment. The DXY is up 0.2% on the day and about the same since our last report on Friday. European currencies have tended to underperform. EUR is around 0.2% lower, sitting around 1.2140. There was no market moving news from the virtual World Economic Forum, with the ECB’s Legarde staying on script from last week’s policy meeting saying ‘the ECB will make sure that financing conditions are preserved at a favourable level’.

GBP is little changed at 1.3670, regaining its composure from Friday’s losses and ahead of UK employment figures tonight that are expected to show another sharp decline.

AUD’s attempted recovery yesterday from Friday’s losses run out of puff. The risk off tone overnight seeing a dip under 0.7690 at one point. It opens today around 0.7710.

NZD continues to trade around the middle of its 0.71 to 0.73 range. After pushing up through 0.7220 immediately after Friday’s stronger than expected CPI release, it has eased back. Overnight, it tested Friday’s lows again down toward 0.7170 on the dip in risk sentiment but has recovered to currently sit around the 0.7200 mark. NZD/AUD continues to creep higher, edging up toward 0.9340 from last week’s low just above 0.9220. There has been no detectable change in trajectory from NZ’s latest COVID news.

Locally, news of a new COVID community case identified during the weekend bears watching. The person had tested negative during managed isolation, but subsequently tested positive. The infection is the highly transmissible South African variant. It is not known how the person became infected but further tests have shown it as an exact match to an existing case of another returnee at the same isolation facility. Close contacts of the new community case have so far tested negative. Australia has suspended quarantine-free travel for travellers from New Zealand for 72 hours. Markets are unperturbed to date, but will no doubt keep an eye on further developments. It is local point of focus.

Domestic interest rates have settled after pushing higher and steeper on Friday following a stronger than expected CPI inflation reading. The CPI rose 0.5% in Q4, keeping annual inflation at 1.4% (against market expectations of 1.1%). Importantly, core measures of inflation looked firm, congregating around 2%, adding weight to the view that the RBNZ will not signal any more easing than it has already.

The market responded to the CPI release by further paring back OCR easing expectations for this year and adding some rate hike risk premia into 2022. From pricing a near quarter chance of another 25bp cut this year before the CPI, the market now only has a residual chance of such a move. The 2-year swap rate pushed up toward 0.33% after the CPI, from around 0.28% beforehand, but has eased back to close yesterday at just over 0.305%. The 5-year swap rate has settled around 5.5bps higher from before the CPI, closing yesterday at a touch under 0.63%.

Today, there is the NZ Performance of Services Index on the calendar while across the ditch it is the Australia Day holiday.