Whippy trading in equities and bond markets continues with yesterday’s exuberance in equity markets giving way to despair overnight, while US 10-year Treasury yields hit a fresh record low below 0.90%. Safe haven currencies have outperformed, while the AUD is the worst of the majors, slipping back below 0.66.
The number of confirmed cases of COVID-19 is approaching 100,000, while the death toll is over 3,300. The number of new daily cases continues to slow in early hotspots China and South Korea but increase across the rest of the world, spreading across the US, Europe and Africa. Measures to contain the virus continue, with further travel bans being introduced, school closures and workers being sent home. The airline industry association warned that the virus could cost airlines as a much as USD113bn in lost revenue.
A number of countries are easing fiscal policy, with funds allocated to fight the virus as well as ease the economic pain. Australia’s government – hitherto reluctant to ease policy – is heading down this path with Treasurer Frydenberg indicating that the government is preparing to spend billions to help businesses, with an emphasis on protecting cashflow and employment. As well as interest rate cuts, central banks around the world are considering targeted measures better suited to support businesses such as lending programmes.
Still, economic forecasters are getting out the knife and slashing growth forecasts. The Institute of International Finance (IIF) said that the world economy may struggle to grow much more than 1% in 2020. By historical standards, this is consistent with a significant world recession, not as deep as the GFC, but deeper than the late 1990s Asian crisis and early 2000s global recessions. Bloomberg estimates show that China’s economy is currently running at about 60-70% of its normal level, up slightly from the previous week as factories attempt to restart production on the government’s orders.
The economic dataflow over the session has been light, with only US weekly jobless claims of note. They remained at a low level, indicating a healthy labour market, but this state of affairs is unlikely to be sustained as COVID-19 takes hold across the States and layoffs accelerate.
After yesterday’s gain of 4.2%, the S&P500 is currently down over 3%, continuing the whippy trading pattern as investors try to come to grips with how bad the economic impact of COVID-19 will turn out. Earlier, the Euro Stoxx 600 closed down 1.4%, while in Asia’s trading session, China’s market closed at a 2-year high – go figure. A flight to safety sees a strong rally in US Treasuries, taking the 10-year rate just below 0.90%, a fresh record low. In a classic risk-off fashion, the flight to quality sees core European rates lower, but the troubled periphery (Portugal, Italy, Spain, Greece) seeing higher rates.
Yesterday, rates were higher across the NZ market with a reversal of some of the bond-swap narrowing we’re seen of late. 5-10 year swap rates rose by 7bps, while the equivalent rise in bond yields was 2-3bps.
In currency markets, CHF and JPY head the overnight leaderboard, while AUD is at the opposite end. The NZD traded a 0.6282-0.6334 range overnight and currently sits flat for the day around 0.63. With USD/JPY falling through the 106.50 mark for the first time since October, NZD/JPY is back down breaking below 67.. With the relatively bigger fall in US rates, EUR and GBP have been well supported. While the NZD has managed to hold its ground, AUD has been weaker, nudging below 0.67, with the market ignoring the clearer indications of easier fiscal policy ahead.
In the day ahead, a number of US Federal Reserve speakers will be out in force and we might glean some soundbites about their thinking post the intra-meeting 50bps cut this week, ahead of the FOMC meeting later this month. The US employment report should remain solid, but much of this pre-dates the arrival of COVID-19 at its doorstep.
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4 Comments
Although its unlikely the RBNZ will cut inter meeting ,(doing so would put Yvil into a soft padded motel room), even though the conditions and yields would support such a move, and certainly when considered against the 2001 RBNZ reasoning, the outlook for the NZD and indeed AUD remains troubling in the near term . The daughters have , after consideration decided to open additional short positions NZD /JPY before closing on Saturday morning at 67.003, targeting 61 and a similar position in AUD/JPY . With an additional 90 contracts in play ,the coming week promises to be more turbulent than the last , hopefully Mr and Mrs Yen decide they want their money home for a few weeks.
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