Risk off dominates ahead of FOMC this morning. Equities, yields lower; USD higher. NZD dips back below 0.72

After largely drifting through the week to date, markets are trading with a distinctly risk off tone ahead of this morning’s (8am NZT) FOMC announcement. Equity markets across Europe and the US are weaker, US bond yields are lower, and USD firmer.

EuroStoxx50 is down 1.6% as a spat between the EU and AstraZeneca over vaccine delays descended further with the two sides disagreeing over whether a planned call to resolve the issue would take place. The EU’s vaccination pace is lagging the US and UK.

The S&P500 headed due south on the open, dropping more than 2% in short order before paring losses. It remains choppy, but currently sits down around 1.4%. All sectors are down, bar energy (as oil prices nudge higher). Volatility continues in pockets of the market where retail traders are becoming a dominate force with speculation that hedge funds will be forced to reduce equity holdings to cover losses on other short positions.

Investors will be looking for the Fed to keep a steady hand at this morning’s meeting. No change is expected from the Fed in either rates or QE guidance. We think it will want more clarity on the extent of further US fiscal stimulus and the vaccine rollout before tweaking its policy tone.

The PBoC is obviously not keen to remove stimulus too early. PBoC Govenor Yi Gang, on a panel hosted by the World Economic Forum, said the central bank won’t exit ‘prematurely’ from its supportive monetary policies while at the same time keeping debt risks under control.

Economic data didn’t help the tone overnight. German consumer confidence fell to -15.6 from -7.5, a much bigger fall than expected with confidence at its lowest level since last June. French consumer confidence also fell.

EUR starting drifting lower following the data and came under more downward pressure after the ECB’s Knot said the central bank has tools to counter EUR appreciation if needed and ECB officials said the market is underestimating the odds of a rate cut. This follows yesterday’s reports that the ECB will look deeper into the appreciation against the USD since the start of the pandemic. EUR fell from around 1.2160 pre data and comments to around 1.2060 before bouncing. It currently sits around 1.2110, to be down 0.4% on the day.

Accordingly, the USD was stronger also benefiting from the risk off mood. The DXY index currently sits up 0.4%.

Oil prices rose on reports US crude stockpiles shrunk by nearly 10m barrels last week, the biggest decline since July, and exports rose in the wake of global supply cuts. Brent crude is up around 0.6% to just over $US56/bbl.

Despite higher oil prices, commodity currencies peeled off as the US dollar rose and risk sentiment declined.

NZD dipped just under 0.7150, its low for the week, before recovering a touch. It opens this morning at around 0.7190, down around 0.6% on the day.

A weaker EUR saw NZDEUR initially push higher. NZDEUR nudged up through 0.5960 late last night, hitting its highest level in a year before easing back. NZDEUR opens this morning around 0.5940.

AUD tested its lows for the year at one point at just under 0.7650, before paring its losses. It still sits down around 0.7% on the day, currently sitting around 0.7690.

This after briefly poking through 0.7760 yesterday on a headline CPI result (+0.9% y/y) being higher than market expectations (+0.7% y/y), but the upside was limited given the core measures were closer to expectations. Core inflation is still very subdued, with trimmed mean annual inflation at 1.2%, so little in the way of near-term implications for the RBA. Also released yesterday, the NAB business survey saw business conditions improving to their highest level since 2018, to +14 from +7. This suggests strong momentum in Australia’s economic recovery and is one reason why we don’t think the lift in the NZDAUD over the past week will extend too far. NZD/AUD is flat on the day at around 0.9350.

In bonds, the risk off mood sees US 10-year Treasury yields down about 2bps on the day to around 1.01%. The yield did briefly dip just below 1.0%, a level last seen on January 6 when the outcome of the Senate runoff elections in Georgia put the Democratic party on track to control both chambers of Congress. That spurred a bond sell-off that would take the 10-year yield to its recent high of just over 1.18% on January 12, before falling on concern over new virus variants and stimulus delays.

Local bond and swap rates pushed higher yesterday, with some steepening bias. 2-year swap yields rose just over 1bp to close at 1.3%, while 10-year swap yields lifted 4.5% to finish at just over 1.15%.

The immediate focus today will be the FOMC at 8am NZT. Overnight we also get US Q4 GDP. The consensus is for a 4.2% annualised rise.