It has been a good night for risk asset markets, on hopes that European countries will soon start to phase out containment measures. The S&P500 is up almost 6%, while Treasury yields are higher too (US10y +8bps). Commodity currencies have appreciated, despite oil prices falling. The NZD has risen steadily overnight and trades this morning at around 0.5930.
Market sentiment has improved overnight amidst signs that the spread of COVID-19 has peaked in Europe and that countries will soon be in a position to start easing containment measures. Spain, which has the most cases in Europe, reported its lowest number of new cases in a fortnight and a fall in the number of deaths for the fourth day running. New cases and deaths in Italy continue to trend lower as well. In the US, they remain on a rising path, but Trump said that there was “light at the end of the tunnel”. Social distancing restrictions in the US should see the spread of the virus level off in the coming weeks if developments in Europe are anything to go by.
European politicians are now talking openly about plans to gradually ease containment measures. Austria plans to allow small shops, DIY stores and garden centres to open from next week. Depending on the results, Austria might then allow certain other types of stores, such as hairdressers, to open from May 1st, although schools remain closed for now. Spain extended the lockdown of the country for another fortnight, to April 26th, but said restrictions on some non-essential industries would be softened after Easter. Spanish Prime Minister Sanchez said the country planned to expand its Covid-19 testing to those with no symptoms. Continued testing is likely to be required for some time to reduce the risk of a resurgence in cases as containment measures get gradually lifted. In New Zealand, we think there is good reason to believe that both Covid levels 3 and 2 are an option by the end of April/early May, if things go to plan.
US equity markets are up strongly overnight, with all three major benchmarks up around 6%. Even energy sector stocks have managed a 3.5% gain, despite a 6% fall in oil prices (see more below). US Treasury yields have increased, in sync with the improvement in risk appetite. The 10-year rate is up 8bps to 0.67%.
The Federal Reserve has announced another (yes, another) new facility. In conjunction, with the US Treasury, the Fed will provide term loans to banks backed by small business loans made under Paycheck Protection Programme (a scheme which provides loans to small businesses which keep employees on their books and helps keep cash flow running).
In Japan, PM Abe announced a record and much larger-than-expected ¥108 trillion (~20%/GDP) fiscal package. Further details will be provided today. The package will reportedly include ¥6 trillion (~1%/GDP) in direct cash payments to households and ¥26 trillion (~5% of GDP) in tax deferrals and more social spending.
The improvement in risk appetite has seen safe haven currencies underperform overnight. The USD is weaker on an index basis (BBDXY -0.1%) while the JPY and Swiss franc sit at the bottom of the currency leader board (-0.5% and -0.1% respectively). The euro is unchanged.
Conversely, commodity and emerging market currencies (those typically most sensitive to the global growth cycle) have bounced strongly. The AUD is up 1.7% so far this week, trailing only the Norwegian krone in the G10. The NZD is up around 1.3% and trades this morning at around 0.5930. The NZD has experienced a steady rise since the local market close.
The oil market remains in focus amidst uncertainty around whether Saudi Arabia and Russia can agree to supply cuts. An OPEC+ meeting originally scheduled to take place overnight was pushed out to Thursday amidst reports of renewed squabbling between the two countries. There will be a meeting of the G20 energy ministers on Friday, where Saudi Arabia and Russia hope to convince other major oil producing countries, including the US and Canada, to participate in supply cuts. Oil prices opened 11% lower yesterday morning but they have retraced some of that fall overnight. Brent crude oil is down 6% on the day, at around $28 per barrel. That’s still much higher (~35%) than the lows reached mid-last week.
Offshore credit markets continue to show signs of improvement, although spreads remain at crisis-like levels. In an encouraging development, the leveraged loan market looks set to reopen, with Laundry’s Inc – an owner of casinos and restaurants – offering a $250m loan. The funding won’t come cheap for the company, with pricing set at Libor + 14%.
Locally, the RBNZ announced yesterday that it would start small-scale purchases of bonds issued by the Local Government Funding Agency (LGFA), purchasing $75m across a range of bonds. The motivation for the RBNZ’s entry into the non-government market is based on financial stability considerations (to ensure markets remain smooth and orderly). This is quite distinct from purchases signed off by the MPC under its QE programme (which need to be motivated on economic grounds, i.e. adding more stimulus to the economy). The secondary market for LGFA bonds, like those of other non-government issuers, has become increasingly strained and illiquid in recent weeks, and the RBNZ’s decision to step into the market as a buyer (albeit on small-scale at this stage) should go some way to providing investors and dealers with confidence that there is a deep-pocketed buyer they can sell to, if they need or want.
Also yesterday, New Zealand Debt Management (NZDM) launched its syndicated ‘tap’ of its existing 2031 maturity bond. It intends to issue at least $2b through the issue, which will price today. NZDM said last week that it intends to raise $17b this quarter, to fund the government’s fiscal response to COVID-19, which far exceeds any other quarter over the past twenty years.
NZ swap rates were marginally lower yesterday (2y swap -2bps). The move was mainly due to lower FRA-OIS spreads, with OCR expectations already well anchored at around 0.25%. RBNZ Chief Economist Yuong Ha said yesterday that the RBNZ was not working with the banks to prepare for a negative OCR at the moment, to avoid unnecessary distraction. That doesn’t necessarily preclude such a move in the future (beyond the next 12 months) but banks’ systems would need to be up to speed and Ha said the RBNZ Monetary Policy Committee would need to weigh up the impact of negative rates on the soundness and efficiency of the financial system. Ha also pushed back on the prospect of a ‘mini’ rate cut (say from 0.25% to 0.1%, like the BoE recently did). He suggested that small-sized OCR moves were unlikely to have much impact on the rates faced by New Zealanders.
The NZ QSBO business survey is released this morning. The survey is one of the best economic indicators around, but it will discarded by the market this time because the survey was conducted New Zealand went into full lock-down mode.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.