On Friday, global equity markets ended the week on a soft note and the USD made good gains for the third consecutive day, sending the NZD and AUD down to their lows for the week. Oil prices rallied strongly again on hope for widespread production cuts.
The rapid spread of COVID-19 around the world remains forefront of mind for investors and with lockdowns around the world being extended, the economic impact is getting worse by the day. That said, on a more positive note, in some of the hotspots such as Italy, Spain and New York, the number of daily deaths is turning down. NZ’s PM Ardern is not yet willing to rule out an extension to NZ’s four week lockdown – which is harsh by global standards – but the exact “exit criteria” was being worked on.
US equities ended the week on a soft note, with the S&P500 index down 1.5%, following a 1% fall in the Euro Stoxx 600. On a positive note, the VIX index has been on a declining trend since going above 80 a few weeks ago and closed below 50 for the first time in nearly four weeks, suggesting less fear and panic in the market.
The economic dataflow is starting to capture the impact of lockdowns to prevent the spread of COVID-19. US non-farm payrolls plunged by 701k in Mar, sending the unemployment rate up by almost a full percentage point to 4.4%. This is just a taste of things to come, with the next monthly reading expected to be a lot worse, with Pantheon Macroeconomics picking a 14-17 million drop in payrolls, sending the unemployment rate up to 12-14%.
As with other data released last week, the “miss” relative to expectations simply reflects timing factors, with the run of economic data we’ll be seeing over coming months as bad, if not worse, than that seen during the GFC.
Final PMI data for the euro area showed declines from the flash estimates as economic conditions deteriorated as March progressed. Markit’s composite PMI for the region fell to 29.7, consistent with an annualised contraction of 10% for GDP.
Oil prices were in the spotlight again and jumped higher after news that OPEC and Russia will hold a virtual meeting on Monday to discuss production cuts (since delayed to at least Thursday). Saudi Arabia and Russia now appear prepared to cut production but only if other countries, including the US, join in. Trump held a meeting with US oil executives on Friday to discuss the “plan” and over the weekend he threatened to impose tariffs to protect the US oil industry. Brent crude rose by 14% to USD34 per barrel, following the 21% gain in the previous session.
The US Fed is dialling back its pace of purchases of US Treasuries this week, down to $50bn per day, from $60bn and as much as $75bn per day earlier last week. This remains a formidable pace of QE. The announcement saw the 10-year rate rise from its low for the day of 0.57% to its high for the day of 0.62%, before closing unchanged for the session at 0.595%.
The RBNZ announced that it would increase it pace of government bond purchases, targeting $1.8b in the week ahead, up from $1.35b last week and $0.75b in the first week of QE. This comes ahead of the syndicated tap of the 2031 bond this week. On Friday, both Governor Orr and Assistant Governor Hawkesby spoke to the media, signalling that the RBNZ is prepared to upsize and expand the scope of its QE programme. This news supported a rally in NZGBs, which saw yields down 6-9bps across the curve, outperforming the swaps market, with the 10-year swap rate unchanged at 0.93%. We think that the RBNZ will soon be looking to purchase LGFA bonds (and possibly Housing NZ) to help reduce spreads and the cost of borrowing for local governments.
In currency markets, the USD recovered further, making up some of its losses the previous week. That the US is now the epicentre of the COVID-19 outbreak and faces a very deep recession has not mattered much to investors, with strong demand for the USD during times of market stress the overwhelming factor at present. The BBDXY USD index ended the day up 0.6% and the week up by 2.3%.
It was a steady grind lower for the NZD all week, given the positive USD trend, with the kiwi closing around 0.5860, near its low for the week. The AUD followed the same pattern, ending the week just below 0.60. The moves in the NZD crosses were fairly modest.
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