Market moves reasonably modest overnight (for a change). Trump proposes $2 trillion infrastructure package, Japan outlines big fiscal stimulus too

Market movements overnight have been reasonably modest (as least, at the time we are writing this).  The VIX measure of volatility has fallen to its lowest level in 3 weeks, just above 50.  There has been more activity in the USD and EUR primary credit markets.  Global equities and bond yields are modestly lower.  The USD has strengthened, despite signs of easing USD funding pressures.  The NZD and AUD have underperformed meaningfully, with the NZD trading at around 0.5910.  New Zealand Debt Management releases its funding plan for the June quarter, in which it has said it plans to issue $5.1b in bonds, at 8am this morning. 

There has been plenty of news over the past 24 hours in terms of COVID-19, and new fiscal and monetary policy measures, but market movements have been – for a change – reasonably modest.  The S&P500 is down around 0.8% which, if it stayed that way, would be only the second day in March with a daily move less than 1%.  It has still been a brutal quarter for risk assets, with the S&P500 around 20% lower since the end of last year.  Despite the relatively small moves overnight, we should expect volatility to remain high for some time. 

In terms of COVID-19, there have been further signs of stabilisation in the number of new cases in Italy, suggesting that the lockdown implemented by the Italian government is starting to work.  There were 4,053 new cases in Italy over the past 24 hours compared with 4,050 the previous day.  COVID-19 cases continue to rise sharply in the US, although Dr Fauci, the US medical specialist, said “we're starting to see glimmers ... just the inklings" that the social distancing measures were limiting the rise in new cases.  But he cautioned that "we're not seeing (a turnaround) yet."

The US Federal Reserve has unveiled yet another new liquidity measure, called the FIMA Repo Facility, which provides US dollar funding to foreign central banks and international monetary authorities in exchange for US Treasuries.  The measure appears most useful for those central banks with large stockpiles of US Treasury foreign reserves, which can then lend the cash to their businesses and financial institutions needing USD funding.  USD Libor-OIS has shown signs of stabilising at a still-high 136bps, although the market expects this spread to contract rapidly over the coming quarters, to 46bps by mid-June and 26bps by the middle of December.  The cost of borrowing USD via EUR/USD and USD/JPY FX swaps continues to fall, in a further sign that funding pressures are abating. 

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On this fiscal side, Trump is pushing for more stimulus, tweeting that the US should implement a $2 trillion infrastructure bill (~10%/GDP).  Democrats have, for some time, pushed for more infrastructure spending so Trump’s proposal could get bipartisan support.  In Japan, the government proposed a ¥60 trillion stimulus package (11%/GDP), including more than ¥10 trillion allocated towards cash, subsidies and coupons handed out to households.  ¥40 trillion would be used to provide subsidies and funding to firms.  The proposed Japanese stimulus would be bigger than its GFC response. 

Despite the prospect of even greater fiscal spending (and with it, huge amounts of government bond issuance), US Treasury yields have fallen overnight.  The 10-year rate is down 7bps to 0.65%.  Fed QE purchases continue to provide an important support to the market.  The current pace of Fed purchases ($75b per day) is enormous.  For context, the Fed purchased $85b per month (across US Treasuries and MBS), when it last implemented QE in 2013. 

Credit markets continue to improve, although spreads remain at very wide levels.  Yum! Brands became the first high yield issuer to tap the primary market since the market turmoil kicked off.  Meanwhile issuers from two of the hardest hit sectors plan to issue new bonds in the coming days.  Airbus raised €2.5b in the EUR investment grade market while Carnival, which operates cruise ships, intends to raise $3b across USD and EUR.  

Despite signs of easing USD funding pressure, the USD has risen again, up 0.3% in index terms.  Month and quarter-end rebalancing flows were expected to lead to USD buying.  The EUR has fallen 0.6%, to back below 1.10, while the JPY is close to unchanged over the past 24 hours, at around 107.90. 

The NZD and AUD have underperformed meaningfully over the past 24 hours.  The NZD was fairly stable during the local trading session yesterday, but it has experienced a steady decline since the London market opened, down from around 0.6020 to 0.5920 (-1.5%).  The AUD is off 1.3% over the past 24 hours. 

In terms of economic data, yesterday’s ANZ business survey for March was bleak.  ANZ had released a preliminary update of the survey (covering two-thirds of respondents) earlier this month, but it’s clear that business confidence and activity indicators have deteriorated significantly since this point.  The key ‘own activity’ indicator fell to a record low of -27% (indicating a net 27% of firms expect weaker activity).  Worryingly, the reading was -55% for those respondents which completed the survey later in the month.  A net 23% of firms intend to reduce employment.  There was no immediate reaction to the data in either currency or rates markets.   

In the US, there were smaller-than-expected falls in both the Chicago PMI and the Conference Board measure of consumer confidence.  In terms of the consumer confidence survey, it took place at the start of the lockdowns being implemented across US states, so we should expect some big falls in the months ahead.  Goldman Sachs updated its US economic forecasts and now looks for the economy to shrink at a 34% annualised pace in Q2, with the unemployment rate hitting 15% by mid-year. 

There were upside surprises to the Chinese PMIs yesterday, with the Manufacturing survey rising from 36 to 52 (45 exp.) and the Non-manufacturing equivalent rising from 30 to 52 (42 exp.)  China was the epicentre of the COVID-19 outbreak and was the first country to experience a sharp contraction in economic activity, as the authorities sought to contain the spread of the virus.  But with containment measures having been gradually lifted through March, activity is now starting to recovery (ahead of most other countries).  Note that the PMIs are a simple net balance of firms reporting expansion or contraction – i.e. they do not give the magnitude of any such expansion or contraction. Higher frequency data does suggest activity has rebounded strongly, but is running around 10-15% below 2019 levels.The focus for the domestic rates market in the session ahead is the New Zealand Debt Management (formerly the NZDMO) funding update for the June quarter, which it will provide at 8am.  Normally, this release, which outlines the schedule of bond tenders for the quarter ahead, wouldn’t cause much fuss.  But the market is much more interested this time because NZDM has said it needs to raise $5.1b in the June quarter alone and there are a variety of ways it could go about that (including higher weekly tender volumes or a new bond syndication).  There was some nervousness in the NZGB market yesterday, ahead of the announcement, with the 10-year NZGB yield increased 6bps, underperforming the 10-year swap rate by 2bps.