The good news is that the market has ignored the bad news, seeing global equities start the week on a positive note, while the Fed’s backstop sees US Treasury yields fall again. The USD shows broad gains as we head towards month-end, seeing the NZD dip below 0.60, while damage to the AUD has been limited by a massive fiscal package announced by the government.
The pattern of US equities starting the week on a bad note – usually because of dire news over the weekend – has been broken, with the S&P500 currently up about 2½% and registering its fourth gain over the past five trading sessions. Buying ahead of month-end could be one factor as funds rebalance towards equities after their big plunge for the month to date. But it might also reflect that the market has already fallen enough, taking into account the slump in the economy. We won’t know for sure for several weeks, possibly months.
On a positive note, there wasn’t a negative reaction to the prospect of an extended lockdown period for much of the US. President Trump showed signs of listening to his top health advisors – who warned that as many as 200,000 Americans could die without mitigating the spread of COVID-19 – and abandoned his plan to see US cities back up and running by Easter. He said his guidelines for Americans to practice social distancing would remain in place until at least April 30. The NY Fed published an article highlighting the experience of the 1918 Spanish flu pandemic – longer term benefits can be gained during such a shock with the use of non-pharmaceutical interventions such as social distancing. It’s a case of short-term pain for long-term gain.
There is also some hope that medical technology can help save the day. Johnson and Johnson announced that a potential vaccine could be available by early next year, while Abbott Laboratories launched a portable, rapid five minute test for COVID-19 that could be deployed this week and manufacturing ramped up to enable 50,000 tests per day.
On COVID-19, Italy recorded the lowest number of new cases in almost two weeks and other European countries such as the Netherlands and Portugal showed a marked slowdown in growth of new cases, providing some hope that the worst is over for the region. Meanwhile new lockdowns around the world were introduced, with Moscow amongst others, joining in.
Policymakers remained active around the world to help soften the economic blow. The PBoC reduced its interest rate on 7-day reverse repos by a larger than usual 20bps to a record low of 2.2% and injected USD7.1 into the banking system, which also indicates a future move to lower its other key policy rates. Australia’s government introduced a third fiscal package worth 6.5% of GDP that takes the total fiscal package on income and cash flow support to around 10% of GDP.
It was a case of yet another Monday morning announcement from the RBNZ, this time introducing a new weekly open market operation, which will allow banks to access RBNZ liquidity using eligible corporate and asset backed securities as collateral. Trading banks’ access to cash isn’t really an issue and we don’t see the move as a game changer for the stressed local credit market, which remains very one-sided with buyers sidelined.
The market remains unperturbed by the dire economic releases that are emerging, a sign that a deep slump in economic activity caused by lockdowns is well recognised. Economic sentiment in the euro area plunged by a record amount. The Dallas Fed index of manufacturing activity in Texas plunged to minus 70, blasting past the minus 60 low seen during the GFC. Today sees the release of the ANZ NZ business outlook survey, which should break some records on how low the series of activity indicators fall. China’s PMIs are expected to show some recovery as businesses restart following the country’s extensive lockdown.
In credit markets, the first US junk bond in a month was being marketed, a possible sign of thawing conditions in the high yield market while the high grade market continues to actively see new issuance. The US 10-year Treasury yield is down 3bps to 0.64%, with higher risk appetite not negatively impacting the market, given the US Fed’s backstop.
Oil prices fell to an 18-year low, overwhelmed by the collapse in global demand, while Saudi Arabia and Russia still can’t agree on restricting supply. WTI crude is holding at around USD20 per barrel, having dipped below that mark several times during the current trading session.
In currency markets, the USD is well supported after its poor run last week, possibly influenced by month-end buying, with the various dollar indices up in the order of 0.8-1.0%. This sees the NZD slip 0.6% since the end of last week to below 0.60. The AUD has fallen by a more modest 0.3% to 0.6150, with the market encouraged by the massive fiscal package, as evident by the 7% rise in Australian equities yesterday. Thus NZD/AUD has slipped to about 0.9750.
CAD has been the weakest of the majors, down 1.3% with the fall in oil prices the likely key driver. This sees NZD/CAD approach 0.85. EUR and GBP have both fallen by more than the NZD seeing NZD crosses up to 0.5440 and 0.4850 respectively. JPY hasn’t lost much ground against the USD, seeing it oscillate around 108 overnight.