Hope on COVID-19 outlook drives further improvement in risk sentiment. USD under pressure; AUD higher on RBA “tapering”; NZD rallies as well. Higher government rates across the board

Higher risk sentiment seen at the beginning of the week has extended through Tuesday, with higher global equities, narrowing credit spreads, higher government bond yields and a weaker USD.

The market is looking on the bright side of life, encouraged that restrictive lockdowns are seeing the number of new cases globally of COVID-19 steadying, while notably falling across hot spots such as Italy and New York. Governments are planning for the reopening of their economies and this is also getting market attention, even though the general trend still seems to be extending school closures and lockdown periods. Japan is the latest notable country to go down this track, with half of the country now under a one-month state of emergency and “soft lockdowns” set to take effect.

On the policy front, the daily dose of new measures continues. Of note, the White House is in talks with US senators for an additional $200bn to fund a lending programme for small businesses. The ECB has eased collateral rules, such as accepting sub-investment grade Greek bonds, to help banks access cheap liquidity.

In NZ’s case, the RBNZ continues to do its best in greasing the wheels of commerce, this time adding $3b of Local Government Funding Agency debt to its $30bn large scale asset purchase programme, justified by the LGFA bonds playing “an important role in determining interest rates faced by firms and households”.  The scale of this new programme is big, with net LFGA issuance, taking account of RBNZ QE purchases, now looking to be negative over the next 12 months. The market reacted by taking LGFA spreads to swap tighter by 6-12bps, following a 4-9bp tightening in the previous session after the Bank began buying in the secondary market. There was a spillover effect onto other credit spreads and NZ’s credit market has taken a big step towards functioning again.

Ahead of that announcement, the NZDM increased its issuance of the 2031 government bond by $3.5b, a record amount for an NZ syndication, with the deal priced at a spread of 32bps to the 2029 bond. This was at the tight end of initial price guidance, helped by the fact that NZ bonds have cheapened up considerably over the past month or so, on a relative basis versus US and Australian government bonds and NZ swaps. The issuance programme over the rest of Q2 remains large but achievable, given the successful syndication and the support provided by the RBNZ’s large scale asset purchase programme.

NZ rates were higher across the bond and swap curves yesterday, reflecting global forces from improved risk sentiment. The move higher in global rates has extended overnight, with the US 10-year Treasury yield up 6bps for the day to 0.73%, after extending as high as 0.78% overnight.

After the NZ close, the RBA kept its super-easy policy settings unchanged. The Bank noted that it had bought $36b of government bonds in the secondary market but added that “if conditions continue to improve, though, it is likely that smaller and less frequent purchases of government bonds will be required.” While the statement is obvious, seeing it in writing triggered a significant market reaction, which now sees the Australian 10-year bond future up over 10bps in yield terms. The impact of this should spill over into the NZ rates market today, seeing higher yields.

In equity markets, the S&P500 opened up over 3% higher (since pared to +1½), adding to the more than 7% gain seen on Monday. The Euro Stoxx 600 index closed almost 2% higher after its prior 3.7% gain. Notably, despite the strong 2-day gain in equities, the VIX index is barely lower from the end of last week, down to 45 from 47. This gives reason to caution the interpretation of the two day rally in equities and what we’re seeing could easily just be a classic bear market rally. Strategists are nervous about the upcoming earnings season – how dire that might look and what companies project for the future, in an environment where revenues have collapsed and the outlook remains highly uncertain.

In currency markets, improved risk sentiment sees the USD under pressure, down in the order of 1% on the BBDXY index, while JPY is also on the weak side. The AUD has been the best performer after the RBA’s mention of “tapering” its bond purchases. For the day, the AUD is up 1.7%, finding resistance just above the 0.62 mark.

Alongside the better backdrop for commodity currencies, there has been some positive spillover of the RBA announcement on the NZD, which blasted up through 0.60 after the NZ close before meeting resistance ahead of the 0.6020 level. This morning it sits just under 0.60. NZD/AUD has fallen to 0.9670.

NZD/JPY is up through 65, while given EUR and GBP strength overnight, the NZD has made little progress on those crosses.

The GDT dairy auction overnight saw the price index up 1.2%, with whole milk powder prices up 2.1%.  This was a much stronger auction than expected, with our resident cow whisperer Doug Steel looking for a 4% fall in the price index. He’s been locked up at home for the past couple of weeks and his gumboots are squeaky clean, so we’ll cut him some slack this time.

Yesterday saw the release of NZ’s quarterly survey of business opinion, which wasn’t particularly insightful as it pre-dated the lockdown. However, the decline in confidence as the survey responses were coming in was notable with the survey publisher NZIER calculating that its activity-expectations index was on track towards minus 70% by the end of the period.

This afternoon, ANZ will provide an early release of its April business outlook survey. With the economy in lockdown, if business confidence and own-activity are better than minus 70% then let’s consider that a “win”. Economic data still feels irrelevant at present, as we know that much of the economy has come to a “sudden stop” and ultimately the recovery period will be driven by the government’s COVID-19 containment strategy, itself a function of the spread of the virus. Epidemiologists are more useful than economists at present (some would say this applies at any given time).