Equities rise to new highs; Apple’s revenue revision now ‘yesterday’s news’. USD strengthens further. JPY weakens sharply due to recession fears, risk-on backdrop. Stronger USD drives NZD down to a fresh low for 2020

Equities rise to new highs; Apple’s revenue revision now ‘yesterday’s news’. USD strengthens further. JPY weakens sharply due to recession fears, risk-on backdrop. Stronger USD drives NZD down to a fresh low for 2020

Markets are back trading with a positive tone overnight, with equities bouncing back strongly from Apple’s revenue warning.  The USD has continued to appreciate, with the BBDXY making a four-month high.  The JPY weakened sharply overnight amidst the risk-on market sentiment and growing fears of recession in Japan.  The NZD made a fresh YTD low. 

A day after Apple’s revenue warning led to a mini sell-off in equities (-1% in the S&P500 at one point), markets have recovered their poise.  The S&P500 closed well off its lows yesterday and it has continued that momentum overnight, rising 0.6% to a fresh record high.  Even Apple has completely reversed its losses seen in the wake of its revenue downgrade (+1.6% overnight).  European equity indices were up around 1%, with both the German Dax and Eurostoxx 600 reaching record highs. 

The market appears to be encouraged by the continued decline in the number of reported new COVID-19 cases in China, giving hope that China can start easing up containment measures in the coming months and the economy can return to ‘normal’.  There were 1,749 new COVID-19 cases on February 18th in China compared to 1,886 the day before.  The Chinese authorities are also expected to step-up support to the economy, with the PBOC expected to cut the 1-year loan prime rate by 10bps today and Bloomberg reporting overnight that the government was looking at bailouts for struggling smaller airline operators or mergers with state-owned players.  The IMF left in place their forecast of a moderate strengthening in the global economy this year (to 3.3% from 2.9% y/y) while cautioning that “downside risks to the outlook continue to dominate.”

Bond markets continue to paint a more cautious outlook than equities.  Yields have been unmoved by the risk-on backdrop, with the US 10 year Treasury yield continuing to trade around 1.56%.  US rates shrugged off stronger US economic data in the form of higher-than-expected US PPI, housing starts and building permits.  The US housing market remains a bright spot for the US economy (building permits reached their highest level since 2007), assisted by the fall in mortgage rates over the past year and still-strong labour market conditions.  There have been several Fed officials speaking over the past few hours, but the market is more interested in the FOMC minutes which are released at 8am this morning. 

The USD has continued its recent appreciation, with the Bloomberg DXY (BBDXY) rising 0.25% overnight to a four-month high.   The BBDXY has increased 2.4% this year, leaving it just 0.5% below its 2019 highs and within reach of its highest level since the beginning of 2017.  The USD remains supported by its carry advantage (the Fed has the second highest policy rate in the G-10 after the BoC), relative strength in economic data (as we noted yesterday, US and European data surprises have diverged), and lesser exposure to the COVID-19 outbreak than export-oriented countries such as Germany and Japan. 

The big mover in FX markets overnight has been USD/JPY, which broke above 110 in the London morning and has since shot up to 111.25 (+1.2% on the day).  Besides the broad-based strength in the USD, the rally in equity markets and risk-on backdrop have been negative factors for the (traditionally safe-haven) JPY.  There are also growing concerns about recession risk in Japan following on from the much larger-than-expected contraction in GDP in Q4 and with COVID-19 likely to dampen growth this quarter (Japan has 74 reported COVID-19 cases, the third highest behind China and Singapore).  Weaker-than-expected machine orders data released yesterday did nothing to assuage concerns about the lack of momentum in the Japanese economy.  The BoJ has limited options left to provide stimulus and the JGB market has been little moved the past few weeks, suggesting the burden of providing additional support to the economy will fall on fiscal policy. 

The broad-based strengthening in the USD overnight has driven the NZD down to a fresh year-to-date low of 0.6373 (as we write).  The NZD is down 0.2%, roughly in-line with the moves in the BBDXY and the AUD on the day.  While equity markets appear to be taking an optimistic view of the economic impact of COVID-19, there is little sign of that in the NZD or AUD, with the risk-on backdrop not providing much of a boost. 

In other currencies, the GBP has also underperformed overnight, despite an upside surprise to UK CPI.  Difficult trade negotiations between the UK and EU continue to hang over the market, with the UK insisting it should have the right to be able to diverge from EU standards but the EU insisting that there should be a ‘level playing field.’  The GBP is down 0.6% to 1.2920, and it has now fully reversed its rise after Rishi Sunak was appointed Chancellor late last week.  The Norwegian krona and CAD have outperformed (+0.5% and 0.2% respectively), helped by a 3% rise in Brent crude oil.  Brent crude is now some 12% off its lows reach little more than a week ago, in a possible sign that the market is growing less pessimistic around COVID-19. 

The FOMC minutes are released at 8am this morning and the Australian employment report at 1:30pm.  The PBOC is expected to announce a 10bp cut in the 1-year prime loan rate this afternoon while the Philly Fed business outlook survey is released tonight. 

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