It has been a whippy trading session overnight, with early rebounds in global equities not being sustained, while US Treasuries have traded a wide range. Higher US rates have helped support the USD, while the NZD has finally come under pressure, alongside the AUD.
During the local trading session, risk appetite improved based on a number of factors, including more detailed plans from governments such as the US, UK and Australia on how they can step in with fiscal assistance to ensure cash continues to flow through their economies and reach the areas that may be most affected by COVID-19; and President Xi’s visit to the coronavirus epicentre of Wuhan, signalling increasing confidence that China – where the daily rise in new cases has been falling sharply – is firmly on top of the situation.
On the negative side, Italy’s government enacted a nationwide lockdown including a (non-essential) travel ban, shutting schools for a month and introducing a curfew to close bars and restaurants at 6pm. And while the number of new cases is barely rising in China, the spread of COVID-19 still looks out of control in Iran, pockets of Europe (Italy’s cases have breached 10,000), and the CDC reports that the window for fully containing the virus has passed in some parts of the US.
The mixed news has seen choppy trading conditions. The volatility hasn’t been helped by the uncertainty around the US government’s response to the virus outbreak. Congress looks to push back on some of Trump’s ideas, while the President has fired another barb at the Fed, calling it pathetic and slow-moving with its interest rate cuts.
The Euro Stoxx 600 index was up almost 4% at one stage but closed down 1.1%. The S&P500 opened some 3½% higher, but in a choppy trading session the gain has been pared back to around 1½%. US Treasuries sold off during the NZ session and the 10-year rate has shown a large swing, trading a range of 0.56-0.74% to be currently up 12bps for the day at 0.66%, not far from the level at the NZ close. Markets still expect the Fed to cut rates next week, by at least 50bps and a good chance of a 75bps move.
Saudi Arabia announced that it would supply the oil market with 12.3m barrels a day in April, more than initially indicated last weekend. This level is greater than current production capacity, implying that it would run down its inventories to help boost supply – nasty! Russia responded that it could raise production by a further 500,000 barrels per day in the near future. The oil market has nevertheless still managed to stage a rebound in pricing, indicating how savage the price fall was earlier in the week. WTI and Brent crude are currently up over 8% for the day.
In currency markets, the increase in US rates amidst hope for US government policy action has helped stage a broadly based recovery in the USD, in the order of 1-1.5% depending on the choice of index. USD/JPY is up over 2% to 104.40, EUR/USD is down 1.1% to 1.1320 and GBP/USD is down 1.4% to 1.2930. The AUD and NZD have also seen some chunky falls, down 1.6% to 0.6480 and down 1.2% to 0.6260 respectively. This move looks more in line with fundamentals than we’ve seen over the last week and a bit. Global recessions are not kind to commodity currencies and the path of least resistance remains downwards.
On NZ data, the preliminary read on the ANZ’s business outlook survey for early March showed a slump confidence and activity indicators, with the own-activity indicator down to a net -12.8%, a level consistent with economic recession, while pricing indicators were also a lot weaker. Provisional/experimental trade data were mixed, with total exports for February up 1.7% y/y even with a near 12% fall in exports to China. Meanwhile imports slumped 11% y/y. The ANZ survey showed a severe slump in export orders to its lowest level ever recorded in the survey that dates back to 1988.
The RBNZ published a paper on Principles on Using Unconventional Monetary Policy in which the Bank gave more detail on policy prescriptions in an environment of very low interest rates. It gave the impression that the lower limit for the OCR was seen to be mildly negative and Governor Orr said that the first unconventional step would be negative rates – before considering use of interest rate swaps or government bond purchases. Term loans to banks would be considered as a final possible measure.
While last week’s advisory said that the speech would not discuss current economic conditions, Governor Orr provided an update of his thinking and the comments as reported on Bloomberg indicated some reluctance to cut interest rates. He suggested that current monetary policy was already very stimulatory and “time is on our side”, “we don’t need a kneejerk” monetary policy reaction. He gave the impression that fiscal policy will form a significant part of the policy response and the Bank was in dialogue with Treasury on policy coordination. These comments saw a significant repricing of OIS for the March meeting, with the odds of a 50bps cut in two weeks’ time slashed, and the market now pricing a more likely chance of a 25bps than 50bps move.
The 2-year swap rate closed 4bps higher at 0.76%, while the sell-off in Treasuries and Australian bonds saw upward pressure at the long end of the curve, with 10-year swap up 7bps to 1.03%. From a record low level, the 10-year government rate rose 9bps to 0.92%.
In the day ahead, there will be some interest in what the RBA’s Debelle has to say, while tonight sees the UK Budget. We can’t see the US CPI release being of much interest during these volatile times.
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