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Extreme volatility continues. Many central banks make large rate cuts. Bond yields continue to head higher and curves steeper. NZD hits lowest level since 2009

Currencies
Extreme volatility continues. Many central banks make large rate cuts. Bond yields continue to head higher and curves steeper. NZD hits lowest level since 2009

There was more eye watering volatility on Friday across global markets.  The S&P500 increased more than 9%, reversing most of its losses from the previous session, after Trump declared a national state of emergency and announced some measures to support the economy.  Bond yields continued to head higher, rounding off an exceptionally volatile week.  The Bank of Canada and Norges Bank both cut 50bps in unscheduled decisions.  The USD strengthened again amid signs of a liquidity squeeze in dollars, although the NZD managed to stay above 0.60.  The NZD is likely to start the week on the back foot after PM Ardern said almost all travellers to the country would need to self-isolate for 14 days, which will hit the tourism industry particularly hard.  The NZ government is due to announce its fiscal response to COVID-19 tomorrow, with PM Ardern saying it would be “significant”.

Policymakers were out in full force on Friday, announcing a range of measures intended to support their respective economies from the inevitable consequences of COVID-19.  Trump declared a national state of emergency, which will reportedly free-up around $50b (~0.25% of GDP) of funding, announced that interest on (Federal) student loan debt would be suspended indefinitely, and said testing for the virus would be stepped up significantly.  Markets were relieved by Trump’s more assertive response, which suggests he is finally taking the situation seriously and contrasts with his widely panned address to the nation midweek.  Trump also said he had directed the Department for Energy to purchase oil for the US strategic reserves, with his claim that “we’re going to fill it right to the top” implying up to 77 million barrels of oil purchases. 

Equity markets showed signs of stabilising during the Asian trading session, following Thursday’s almost 10% fall.  Equity markets increased over the course of the London session before spiking higher while Trump was speaking, leaving the S&P500 9.3% higher on the day (and almost 12% above the intraday lows implied by futures markets).  The recently battered Financials sector led gains (+13%) while Trump’s promise to buy crude oil helped support a 9% recovery in Energy sector stocks.  Despite Friday’s rise, the 10th biggest one-day gain recorded on the S&P500, the index was still some 9% lower on the week. 


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Over the weekend, Congress has approved an economic assistance package to combat the virus which includes two weeks of paid sick leave, increased food aid, improved unemployment insurance and more funding for Medicaid.  The package was brokered between House Democrats and the US administration, and Trump urged the Senate to approve it.  While the sums involved are unlikely to move the needle too much on a macro basis, it shows that the two parties (and the President) can put aside differences to work together, if the situation requires it.  House Democrat leader Pelosi said Congress would now start work on another stimulus package.  The WSJ reported that policymakers were looking at a range of “significant” stimulus options. 

Elsewhere, Finance Minister Scholz said Germany would deploy a “bazooka” to combat the crisis, saying “we will use it to do whatever it takes”.   Scholz said Germany would offer “unlimited” liquidity to affected businesses, facilitated by loans from state bank KfW.  Borrowing undertaken by KfW isn’t classed as central government borrowing which means the government can notionally keep to its “black zero” balanced budget policy but still help the economy.  Scholz added that the country would consider full-blown fiscal stimulus if the situation got worse.  Meanwhile, European Commission head Ursula von der Leyen said she's ready to recommend that member states trigger an emergency clause that would allow the whole Euro area bloc to engage in fiscal stimulus if there's a big downturn.  von der Leyen also said that restrictions on providing state aid could be softened, allowing governments to help prop up struggling firms in affected industries.  There will be an “extraordinary” G7 leaders’ summit held by videoconference tonight, so we can expect further headlines coming from that. 

On the monetary policy side, the Bank of Canada cut rates unexpectedly, by 50bps to 0.75%.  The BoC’s rate cut was unscheduled and took place less than two weeks since it cut 50bps at its March meeting.  BoC Governor Poloz cited the economic impact of the coronavirus and the fall in oil prices, adding that the Bank would “do what is required” to support the economy and financial system.   The Norges bank (Norway’s central bank) also cut by 50bps on Friday, to 1%, in an intra-meeting move.   In Europe, ECB Governing Council members were in damage limitation mode, a day after ECB President Lagarde said the ECB was “not here to close spreads” between different sovereign bonds.  The comment suggested a reluctance to backstop Italy, which has seen its spreads to German bunds widen sharply since the market turmoil kicked off.  ECB Chief Economist Lane said “we stand ready to do more and adjust all of our instruments, if needed” to ensure elevated spreads didn’t disrupt the monetary policy transmission.  Bank of Italy Governor Visco implied the ECB could front-load Italian purchases. 

Volatility in bond markets remained exceptionally high, with a further bear steepening move evident on Friday.  The US 10-year Treasury yield reached 1% on Friday, only four trading sessions after hitting an all-time low of 0.31%.  It ended the week at 0.96%.  The 30 US Treasury yield experienced a 109bp range on the week, comparable to the annual ranges seen over the past 8 years. 

The increase in global bond yields over the course of the week, despite the brutal sell-off in risk assets, has occurred against a backdrop of sharply decreasing market liquidity.  The NY Fed said it would purchase $37b of US Treasury bonds on Friday, almost half its monthly $80b target, in a bid to smooth out what it described as “temporary disruptions.”  There have been reports of investors selling government bonds to fund redemptions and as some close out losing making positions.  It’s also the case, however, that a 10-year US Treasury yield of 0.5% or below is just not going to provide the same level of portfolio insurance for multi-asset funds looking to hedge the likes of equities. 

NZ rates got caught up in the global moves on Friday, with the 10 year government bond yield up 20bps on the day, to 1.2%.  There was another huge move in swap-bond spreads, moving 10bps tighter.  The short-end of the swap curve remains under upward pressure due to funding pressures, with FRA-OIS spreads approaching 50bps in NZ, levels not seen since the GFC.  The 2 year swap rate was 7bps higher on Friday, at 0.84%, despite the market increasing its OCR rate cut expectations. 

The focus for the NZ market this week is the government’s economic response package to COVID-19, which is due to be announced on Tuesday.  Prime Minister Ardern said over the weekend that it would be “significant”, signalling that it would be larger than $12b.  Ardern also announced over the weekend that all international travellers to NZ would now need to self-isolate for 14 days (except those coming from the Pacific islands).  The rules would be reviewed in 16 days’ time.  The measure is likely to hit the tourism sector and will likely see GDP forecasts cut further (we already forecast a recession in the first half of the year).  There might even be speculation about an intrameeting RBNZ cut tomorrow morning, to show a joined-up approach with the government (which was what the BoE did earlier this month). 

Other countries are also taking dramatic steps to halt the spread of the virus.  Australia announced similar measures to NZ, requiring international arrivals to self-isolate for 14 days, while China is imposing a mandatory 14 day quarantine for all travellers arriving in the country from overseas.  Over the weekend, Spain followed Italy in imposing a national quarantine while in France cafes, restaurants, and most shops are shut.  Germany is largely shutting its borders to Austria, France and Switzerland while Austria is banning gatherings of more than five people.  The UK is preparing to advise over-70s to stay at home to protect themselves.  And the US added the UK and Ireland to its travel ban. 

Credit markets started to show some stability on Friday amidst the recovery in equities.  The CDX index of investment grade companies tightened by 30bps while the high-yield equivalent tightened more than 100bps (actual corporate bond spreads were stickier, likely due to the overhang of selling due to bond fund redemptions).  Liquidity in the NZ credit secondary market remained strained and spreads on bank and corporate bonds widened by at least 10bps on Friday. 

In FX markets, the USD reached a three-year high amidst signs of a liquidity squeeze in dollars.  The BBDXY added another 1.1% on Friday, bringing its cumulative gain on the week to around 3.3%.  This was the fifth biggest weekly move in the BBDXY since 2005. 

The CAD and Norwegian krona both appreciated in response to the sharp rise in oil prices (Brent crude +8%), even as both central banks surprised markets with emergency rate cuts.  The JPY slumped more than 3% amidst the surge in equities and increase in global rates.  USD/JPY finished the week above 108, a far cry from its lows just above 101 on Monday, which had prompted speculation about potential intervention by the Japanese authorities. 

The NZD and AUD both fell on Friday amidst broad-based USD strength, but the late-session surge in equities helped both recover somewhat into the market close.  The AUD closed the week at its lowest level since late-2008, at around 0.6180 while the NZD was at around 0.6065, its lowest level since 2009.  The NZD/AUD cross ended the week close to 0.98, its highest close since 2015. 

Focus will be on any further response from policymakers over the next 24 hours, including any headlines from G7 leaders’ summit tonight.  Expect volatility to remain very high in both directions. 

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