Risk sentiment is gradually improving. Equity markets have made gains (S&P500: 3.2%), the VIX has continued to trend lower and bond yields have pushed higher (US10y: +5bps). Markets are looking ahead to the easing of containment measures in the coming months. The NZD and AUD have performed strongly overnight, with the NZD trading back above 0.60. Yesterday there were more comments from senior RBNZ officials that point to an increase in its QE programme in May.
Risk assets have had another good session. The three main US equity indices are up 2.5% to 3.5%, with all sectors in the green. The S&P500 is approaching its 50% retracement from its February highs. The VIX measure of implied equity market volatility continues to trend lower and now sits at its lowest level in a month, at 43. Lower volatility will enable certain investors to take larger position sizes, which is a positive for market function.
There are a few things going on. COVID-19 cases continue to increase in the US, but the rate of change (the second derivative) is declining. Attention is now being turned to when, and how, the containment measures are eased up. Trump told Fox News that the administration was “looking at the concept where we open sections of the country and we’re also looking at the concept where you open up everything.” But US medical specialist Fauci warned not to ease up social distancing prematurely, noting that the measures had been effective and were likely to see fewer deaths than the 100,000+ estimate projected last week. Expect more discussion around opening up the economy in the coming weeks. In Europe, the Centre for Disease Prevention and Control cautioned against lifting containment measures too soon. But Austria looks set to start opening up certain types of businesses from next week.
More fiscal stimulus looks to be on the way, with leading Democrats calling for another $500b (~5%/GDP) stimulus package. In addition to the $250b requested by Treasury Secretary Mnuchin for small businesses, the Democrats want more money for hospitals and state and local governments.
In Europe, the focus is on whether finance ministers can agree a joint region-wide fiscal response to the crisis. There was no agreement reached in a long session of talks last night. The Netherlands is reportedly resisting a proposal for joint European bonds (so-called ‘coronabonds’) and insisting that lending to more vulnerable countries, like Italy, takes place through the ESM, with conditions attached. The Italian government, on the other side, is not prepared to accept strict conditions on ESM loans given the backlash that would occur in its home country. Leader of the populist League party in Italy, Matteo Salvini called ESM funding “illegal and senseless.” Finance Ministers will have another go at trying to reach agreement tonight. These kinds of difficult European negotiations have a history of being agreed at the last minute. French Finance Minister Le Maire said he was “certain” a deal could be agreed.
Italy’s 10-year bond yield increased as much as 20bps after news that finance ministers had failed to reach an agreement. But it retraced almost all that move over the remainder of the session, ending are only 3bps higher on the day. European equity indices were modestly lower overnight, underperforming US benchmarks.
US bond yields have pushed higher, with the 10-year rate up 5bps on the day to 0.77%. There hasn’t been too much reaction to the FOMC minutes, which were released a short while ago and don’t look to contain any major surprises.
Offshore credit markets have had a good session, with US CDS indices tighter by 10bps (for investment-grade) to 60bps (for high-yield). In other credit-related news, Everi Holdings, which makes casino games, is the second company to seek to raise funding via the leveraged loan market.
In the FX market, the improvement in broader risk appetite has led to a strong rise in the NZD and AUD. The AUD is at the top of the currency leader board and has risen almost 2% from late afternoon yesterday, to now trading around 0.6230. The appreciation in the AUD came despite S&P revising the outlook for the Australian government’s credit rating to negative. In other news, Australia yesterday passed a wage subsidy scheme, which will see the government pay a subsidy of $1,500 every two weeks per employee.
The NZD is back trading above 0.60 again, having gained more than 1% in overnight trading. The preliminary ANZ survey for April, which showed a collapse in business confidence, didn’t have any impact on the NZD. All aspects of the survey were grim, but what stood out to us was the net 50% of respondents that expect investment activity to reduce, a bad sign for future growth, and the net 8% that expect to lower prices, its lowest reading on record.
There were more interesting comments from RBNZ Assistant Governor Hawkesby and Chief Economist Ha yesterday. Both signalled that the QE programme was likely to be upsized at the May MPC meeting on the 13th, because the bond market will be a lot bigger than what the RBNZ had originally assumed. Both also seemed to push back on the notion that the RBNZ should buy corporate bonds. Ha told interest.co.nz “corporate ones are a little bit trickier. I don’t know where we’d go on that one.” Hawkesby expressed hope that the RBNZ’s large-scale purchases of LGFA bonds, on their own, will help other areas of the broader credit market. Ha also flagged the possibility of FX intervention, which would involve the RBNZ selling the NZD, in an attempt to lower the currency, and accumulating foreign assets. On the potential for a negative OCR, Ha said this was “probably something that comes back on the table at some point”, but it wasn’t an immediate priority.
Regardless, it was a good day for credit in the NZ market yesterday, with spreads on senior bank debt tighter by 5-10bps and a tightening bias evident in the market for corporate bonds too. Primary market activity remains non-existent though.
The NZ swap curve had a steepening bias yesterday, in response to global forces, with the 10-year rate up 6bps and the 2-year rate close to unchanged. Despite the rise in the swap curve, NZGB yields actually fell yesterday, leading to a big widening in swap spreads.
Oil prices have been very volatile (again) overnight, ahead of the meeting of OPEC+ tonight and then the G20 energy ministers on Friday night. As we write this, oil prices are trading about 9% higher after the Russian energy ministry said the country was willing to commit to proportionate supply cuts. The question is whether they are willing to cut production without a commitment from other countries such as the US and Canada.
Finally, in other news, Bernie Sanders conceded in the race to become the Democratic Presidential nominee, paving the way for Joe Biden to run for president later this year. The news isn’t a surprise, with Biden having amassed a strong lead.