Fear in the market continues to recede, with US and European equity markets increasing for the third successive day, seemingly buoyed by the support of central banks and governments. Bond markets remain unaffected by the increased risk appetite, given the backstop of central bank buying. The USD has come under significant pressure, which sees the NZD and AUD make gains of over 2% since the NZ close.
The US S&P500 is on track for a third successive gain, up in the order of 4% and taking the gain since the intra-day low on Monday to over 17%. Improved market sentiment perhaps reflects a prevailing view that the tail risk of a “Great Depression” scenario has receded, with the economy facing a short, deep recession, rather than a prolonged period of weak growth. Governments and central banks are doing their best to throw everything they can to avoid the worst-case scenario.
Running through the most recent policy news, the US Senate voted 96-0 to approve the $2tn fiscal package, which now moves to the House of Representatives to vote on, before President Trump (who has already said that he supports the bill). This is seen to be the first of many fiscal support packages that will be required to get the US economy through the deep recession.
In a rare TV interview, Fed Chair Powell said that the Fed would keep supplying credit “aggressively and forthrightly” and that “when it comes to this lending we’re not going to run out of ammunition”. He noted that “this is a unique situation, this is not a typical downturn”, arguing that confidence will return once the spread of the virus is under control.
The G20 statement after a virtual meeting said that “we will continue to conduct bold and large-scale fiscal support”.
The ECB outlined the detail of its €750b bond buying plan, which looked to throw away the previous playbook which considered legal and political implications of its actions. Most of the programme’s bond-buying limits were scrapped, including the previous cap of not buying more than a third of any country’s eligible bonds. The ECB can now also buy more short-dated bills, paving the wave for buying Germany’s planned extra €150bn in borrowing, which is to come via issuance of bills maturing in less than a year. These polices will increase the calls that the ECB is simply just funding governments, a previous no-go area, but it also highlights how serious the ECB is taking the current shock facing the economy.
A positive sign for the market is that dire economic data is not affecting price action, as it is plain to see how deep this economic shock is. We saw that with the release of PMI data earlier in the week and the same goes following the US jobless claims figures. Initial jobless claims surged to 3.3m in the week to 21 March, highlighting the cliff-edge like drop in economic activity as cities and states have instigated mandatory lockdowns. Previous highs for this indicator have had a 600k handle, in the 1982 recession and 2008 GFC. Furthermore, the data understates the rise in unemployment, with claims’ websites crashing due to overloading and not everyone fulfilling the criteria to make a claim. The consensus estimate of 1.7m was always looking too light, with some credible forecasters picking a gain in the order of 3-4m.
Economic activity in China is picking up as factories re-open for business but face much weaker global demand conditions. China’s “Beige Book” is reporting weekly and the latest update is that “there are clearly firms going back to work, workers are returning, lights are going on. But the data is actually still getting worse through March across almost everything we tracked”. China provides a test case of what other countries can expect to see once the virus has been brought under control.
The surge in equity markets over the past few days hasn’t been met with a sell-off in the bond market. This reflects the backstop provided by central banks. Against a 17% rise in US equities, the US 10-year rate has been tracking close to the 0.80% mark. Overnight it has traded a range of 0.76-0.83%, tight by recent standards.
The oil market remains under pressure. The US suspended its plan to buy oil for its Strategic Petroleum Reserve while the IEA highlighted the free-fall in global oil demand, some 20m barrels per day. Brent crude is heading back down towards the low see early in the week and currently sits at USD26 per barrel, down 4% for the day.
The USD has fallen for the third consecutive day, tracking the inverse of risk appetite, with selling pressure ramping up most recently. However, traders are on alert for some possible reversal as we head towards quarter-end, which is expected to see heightened demand for the USD as investor portfolios are rebalanced.
For now, the weaker USD has seen the NZD track higher since the NZ close, up over 2% to 0.5950. The AUD has followed suit, up over 2% to 0.6050. GBP has been even stronger, up nearly 2½% to 1.2150, playing catch-up to other majors after its poor performance earlier in the month. The Bank of England didn’t change any policy settings after its regular meeting, having already enacted intra-meeting policy measures over recent weeks. Its forecasts showed a deep V-shaped profile for economic activity, highlighting the short-term nature of the shock. USD weakness sees EUR blast up through 1.10, while USD/JPY is down to 109.50.
Reporting on the domestic rates market is boring by comparison, with modest falls across bond and swap rates yesterday. The market awaits an announcement from the DMO on its tender schedule for the June quarter, while the RBNZ will be in the market again today as part of its large scale asset purchase programme. The domestic credit market remains one-sided (lacking bids), despite the improved credit markets being seen offshore.