AUD and NZD up strongly from pre-Easter levels. Following Fed announcement of further extraordinary policy measures US equities weaker ahead of earnings season

US equities have begun the new week on a soft note, with nervousness evident as focus turns to the earnings season which soon kicks into gear. Since the NZ close pre-Easter, the AUD and NZD have significantly outperformed, against a backdrop of a soft USD, following the Fed’s unleashing of further extraordinary policy measures.

The S&P500 ended last week on a positive note, taking the weekly gain to over 12%, the strongest since 1974. This followed an announcement by the US Fed (more on this below), taking policy down a path never seen before, adding junk bonds to its mix of asset purchases and fuelling a strong rally credit markets and risk assets to end the week.

But the Fed can only do so much, and focus this week now turns to the upcoming US earnings season, which could well be a horror show. Companies will be revealing the early impact that lockdowns have had on their revenues and earnings, and there is likely to be a reluctance to offer guidance on the next quarter or two, given the substantial uncertainty about the path forward.

Latest COVID-19 news shows the growth in new cases of the virus continuing to fall across Europe and the US, but still remaining too high for comfort. Late last week, Fauci, one of Trump’s top medical advisors, lowered the projection of US deaths to 60,000, down from the 100,000-200,000 range a week earlier, with widespread social distancing policies working to contain the spread of COVID-19.

While talk of removing lockdowns is a key focus, reality is setting in that restrictions are likely to be removed only very gradually and later than originally planned for most countries.  Flare-ups in Singapore and other parts of Asia highlight how difficult it is to control the virus without significant lockdowns in place. NZ and Australia are well placed to contain the virus, with the number of new cases falling to low levels now.

Following the Easter break, there is much more one can write about on action during the Thursday night session than last night’s trading session. The US Fed rolled out another round of substantial emergency policy measures, looking to invest up to $2.3Tn in loans to aid small and mid-sized businesses, state and local governments, as well as fund the purchases of some types of high-yield bonds, collaterised loan obligations and commercial mortgage-backed securities – moving into the realm of sub-investment grade securities.  Chair Powell said that “we will continue to use these powers forcefully, pro-actively and aggressively until we are confident that we are solidly on the road to recovery”.

There has been some criticism of the Fed’s actions, as it goes further down the slippery path of unconventional monetary policy – some saying the Fed has lost its independence and is effectively just another arm of the government; prioritising Wall Street over Main Street; and creating moral hazard issues by now supporting the junk part of the bond market.

The Fed’s announcement drove a strong a rally in credit assets, with the ETF on US investment grade bonds (LQD) now trading just 2% or so off its early-March peak (it was down over 21% at is mid-March low).

The news overshadowed another historical weekly report for initial jobless claims, which showed an increase of 6.6m, down a touch from an upwardly revised 6.9m in the previous week.  Over the past four weeks the number of claims above “normal” is over 16m. After adjusting for a cut to labour supply, Pantheon Macroeconomics projects that the April unemployment rate is on track to be about 10%, with a further increase over following months. In other data US consumer sentiment plunged by a record amount over a month, with the University of Michigan index down to 71.0, and US CPI inflation was lower than expected, with deflation in the core rate for March, dragging down the annual increase to 2.1%.

In other news from Thursday night, EU Finance Ministers agreed on a €540bn economic support package, including a joint employment insurance fund worth €100bn, a European Investment Bank instrument to supply €200bn of liquidity to companies and credit lines of up to €240bn from the euro area’s bailout fund (ESM) to backstop countries.

The IMF sees the world economy suffering its worst recession since the Great Depression and half of the 189 member countries are seeking aid.

Since we logged off pre-Easter, US Treasury yields have been range trading, without any significant move, even with the Fed’s further emergency measures thrown into the mix. The Fed will trim its daily purchases of Treasury bonds this week from $50b to $30b, and well down from the peak rate of $75b in mid-March, suggesting that Fed purchases are working to support the market at steady yields.

Over the weekend OPEC+ members agreed to a deal to cut production by 9.7m barrels per day in May and June and to continue with lower reductions for the next two years in an effort to stabilise global energy markets.  However, because global demand has fallen so much – in the range of 20-30 mbpd – even with the production cuts, supply will continue to exceed demand, and storage capacity will soon run out.  Oil prices are actually lower from pre-Easter levels, with Brent crude more than $1 weaker, down to $32 per barrel.

In currency markets, the Fed announcement has been the key driver since pre-Easter, taking the USD weaker across the board. The AUD has been the biggest winner, seeing it surge 2.8% to over 0.64, while the NZD is up “only” 1.5% to just over 0.61. NZD/AUD continues to track lower, now down to 0.9535. As well as the better sentiment for commodity currencies, the AUD might be benefiting from the fact that its COVID-19 case numbers are tracking down nicely without a lockdown as severe as imposed by the NZ government. This sees the Australian economy in a much better relative position than NZ at present.

The NZD is up on all the other crosses from pre-Easter levels, gaining around 1% against EUR to around 0.56, but more modest gains (less than 0.4%) against GBP, CAD and JPY.

On Thursday the RBNZ announced that it would buy $1.8b of government bonds and $150m of LGFA bonds this week as part of its Large Scale Asset Purchase Programme, giving the signal that it is front-loading the QE programme in a bid to drive down yields across the curve. And that it did, with yields at the long end of the government curve down in the order of 16-20bps for the 2031s through to the 2037s, outperforming the rally in the swaps market. Earlier in the day LGFA issued $1.1b of a new 2026 bond, a well-supported syndication with the RBNZ as a ready buyer of the name. The RBNZ announcement, along with the massive move in swap spreads, helped drive some significant spread compression in LGFA, in the order of 5-20bps across the curve.

In an interesting development, the BoE will directly fund the UK government’s fiscal plans, bypassing the bond market “on a temporary basis”. There was no market reaction to this direct monetary financing of government spending (announced Thursday night). While some purists see this as a slippery slope, in effect it isn’t too much different from what we are seeing elsewhere (like NZ), with governments issuing bonds and central banks hoovering them up.

In the day ahead there will be some interest in Chinese trade data. The NZ Treasury will provide scenario analysis for the economy and will make the first release of what will become a weekly data update. This analysis is important as it will identify what the Government is using to determine its policy mix. This release comes ahead of an update from the Finance Minister tomorrow, which will include detail on further measures to assist businesses.