Markets in panic mode on Friday. Rates down to record lows; VIX up through 50. Weaker USD helps support NZD. Oil prices slump and price war will see a further slump today

On Friday risk appetite plunged further, with the VIX index reaching levels not seen since the GFC and another meaty fall in US Treasury yields to fresh record lows. Australian and NZ government bond yields also reached that milestone. The USD came under further selling pressure, seeing the NZD rise for the fifth consecutive day, while a plunge in oil prices saw CAD at the bottom of the leaderboard.

Signs of panic were evident in financial markets on Friday as COVID-19 spread throughout the world and the risk of a meaningful global economic recession grows by the day.  The number of confirmed COVID-19 cases blasted up through the 100k mark (now just under 110k) and the number of deaths is approaching 4,000. A live update with full country breakdown and charts can be found at https://www.worldometers.info/coronavirus/.

The head of the WHO tweeted “We're concerned that in some countries the level of political commitment & the actions that demonstrate that commitment don't match the level of the threat we all face. This is NOT a drill, NOT the time to give up, NOT a time for excuses. This is a time for pulling out all the stops”. With around 7,400 cases, over the weekend Italy’s government imposed travel restrictions in Lombardy and surrounding provinces that will affect a quarter of its population.

The number of cases in the US is rising at a steady rate (now 464). Trump’s Economic Advisor Kudlow said that the administration was working on a limited policy response, looking at “timely and targeted micro-measures” and rejected the suggestions of broadly-based measures, saying “we don’t want to willy-nilly throw $300-400b, with a thousand dollar check to every American”. Meanwhile Trump suggested that it was up to the Fed, saying “The Fed should cut and the Fed should stimulate”. The response from the US administration so far is not giving the market much confidence.

With a potential economic slump at the door step of the US, the market ignored the blockbuster US employment report for February, showing a 273k gain in employment and net revisions of +85k, with the strong labour market seeing the unemployment rate return to its 50-year low of 3.5%. Annual wage inflation remained well-contained at 3.0% y/y. Earlier in the session, German factory orders were much higher than expected after a poor run, surging 5.5% m/m in January, but the market seeing that as old news ahead of the impact of COVID-19. These are some of the last “good” reports ahead of what will be a dire set of economic reports over coming months. Over the weekend, China trade data showed a 17.2% y/y slump in exports in USD terms across January/February, while imports held up better than expected, only falling by 4.0%.

There were signs of sheer panic in the bond market, with the US 10-year rate hitting a fresh record low of 0.66%, down 25bps for the session at that point before closing down “only” 15bps at 0.76%. That took the weekly fall to 39bps. Mortgage-related hedging might have been in play – as mortgage rates fall, the pressure on the 10-year rate is to fall further, due to “convexity hedging”

The 2-year rate hit a low of 0.39%, before ending the session down 9bps at 0.51%. More than 50bps of cuts have been priced for the next Fed meeting in less than two weeks, with a terminal rate of 0.20% priced by the end of the year. In an interview, former Fed Chairman Greenspan said that there’s really not a limit on how low the 30-year bond yield (which closed the week at 1.29%) can go, with a negative rate possible.

Record low interest rates were also seen on Friday across Australia and NZ. The implied yield on Australia’s 10-year bond future got down to 0.62% at its low. NZ’s 10-year government bond rate closed down 12bps at 0.95%, with further downside pressure likely, with slightly lower US and Australian rates since the NZ close and further bad news over the weekend.

Oil prices plunged by more than 9% to a three-year low after talks broke down between OPEC and Russia, without any agreement to cut oil production in response to the plunge in demand. The market was worried about the prospect of an uncontrollable lift in production as alliances break down and that risk was realised over the weekend – Saudi Arabia slashed prices to its customers and indicated that it will raise production to over 10m barrels a day next month (possibly rising to 12m thereafter). Expect oil prices to plunge further on the open later this morning.

A late rally in the final hour of trading saw the S&P500 down “only” 1.7%, after being down as much as 4%, capping off a tumultuous week that saw wild daily and intra-day swings as the market tries to make up its mind about how long and deep the economic slump due to COVID-19 will be. The weekly gain of 0.6% belied the market volatility. The VIX index hit an intra-day high of 54.4, a level not seen since the GFC.

Amidst the turmoil across bond and equity markets, the currency market remained relatively restrained.  The USD remained under pressure on compressed US-global rate spreads, falling against all majors apart from CAD, which weakened as oil prices slumped further. The weak USD helped lift the NZD for the fifth consecutive day and end the week close to 0.6350, after meeting some resistance just above 0.6370. NZ’s normally positive relationship with risk appetite has been temporarily suspended as the currency has been more influenced by the plunge in US-NZ interest rate differentials. Once this factor fades, we’d expect the NZD’s downtrend to resume, as it is apt to do in the lead-up to global economic recessions.

The AUD followed a similar trend, hovering between 0.6630-6650 for much of the European and US trading session, although found less support than the NZD, seeing NZD/AUD end the week at 0.9580. EUR capped off a good week, blasting up through 1.13 before closing just under that mark. Weaker risk appetite supported JPY, seeing USD/JPY touch 105.00, a level not seen since August.

In the day ahead expect more market volatility and a potentially rocky session, with a focus on how oil prices trade and how that feeds into lower inflation expectations (real bond yields) and commodity currencies. CAD will likely be worst affected, followed by AUD.