Equity markets push higher. USD weakens as risk appetite continues to recover, but NZD underperforms. NZ government announces more fiscal assistance for businesses

Equity markets have pushed higher overnight (S&P500: +3%) as the market digests the extraordinary policy response from governments and central banks.  Trump is expected to make an announcement on plans for reopening the US economy in the coming days.  The risk-on backdrop has led to a fall in the USD, although the NZD has underperformed overnight.  There was more fiscal assistance announced by the NZ government this morning, including a $3.1b tax loss carry-back scheme. 

It’s been a good session for risk asset markets overnight.  US equity indices have increased by 3% and 4%, following on from gains in most European countries.  The S&P500 has now passed the 50% retracement from its February high.  It remains some 16% below that all-time high.  The VIX has continued to grind lower, as markets start to settle down, and looks set to close below 40 for the first time since the start of March. 

Investors’ focus is starting to turn to the easing of containment measures.  Trump’s economic advisor Larry Kudlow said the President would be making some “important announcements” on guidelines for states on reopening the economy.  Kudlow said Trump had spoken about “rolling” reopenings for the economy.  In Europe, Austria allowed the reopening of certain shops overnight, including DIY stores, garden centres and those shops smaller than 400sqm.  Denmark will allow children back to kindergartens and day care facilities and those aged under 13 back to school from tonight.  In France, President Macron said the lockdown would stay in place for another month, to May 11th, but said restrictions would be gradually eased after that.   As for NZ, we await the Prime Minister’s update on Thursday, when she will release details on what to expect under a Covid Level 2 or Level 3 framework, and the cabinet decision on April 20th on when and how to take the country off Level 4. 

US earnings season in now underway, with two of the biggest US banks (JPM and Wells Fargo) reporting overnight.  Both banks reported much lower-than-expected earnings due to greater loan loss provisions.  JPM and Wells saw their share prices fall by 2% and 4% respectively and the Financials sector underperformed. Citi, Bank of America and Goldman report earnings tonight.  Meanwhile, Johnson and Johnson reported strong first quarter earnings, in part due to consumers stockpiling pharmaceuticals and buying more of the company’s consumer products.  However, it lowered earnings guidance for the remainder of the year. 

For now, investors seem prepared to look through weak economic data (which has already been priced-in to some extent by markets) and dire outlooks from official institutions.  The IMF provided a sobering update overnight in a report entitled “The Great Lockdown: Worst Economic Downturn Since the Great Depression.”  The Fund expects advanced economies to shrink by 6.1% this year and emerging economies by 1%.  Notably, the Fund said that if the lockdowns currently in place need to be extended beyond the end of June and there is a milder outbreak of COVID-19 in 2021, the hit to growth would be double this. 

The USD has come under pressure amidst the risk-on backdrop and has fallen around 0.5%, in index terms.  The USD typically rallies when investors seek safe havens and falls when risk appetite is strong.  The Bloomberg DXY is close to a one month low. 

Commodity currencies (ex the AUD) have underperformed after a further sharp fall in oil prices.  Brent crude has fallen more than 9% on the session, with Bloomberg reporting that Saudi Arabia would maintain production at a very high level this month, ahead of the agreed supply cuts scheduled to take place from May.  The CAD and Norwegian krone are unchanged on the day, despite the USD falling against most other currencies. 

The NZD has also underperformed (+0.1%), although it looks set to close at its highest level in a month.  It trades this morning just below 0.61.  The NZD/AUD cross rate has broken below 0.95, its lowest level since late-November.

In government bond markets, yields have edged down overnight in the US and core European countries despite the rise in equities.  But the movements have been small.  Bond market volatility has normalised over the past few weeks amidst the unprecedented bond buying from central banks around the world, as part of their respective QE programmes.

Sentiment in offshore credit markets continues to improve, although credit spreads on CDS indices haven’t moved much overnight.  BBB- rated Marriott, a hotel operator, is seeking to raise $1b in bonds today, a positive sign that investors are willing to lend to companies in those industries most affected by the Covid crisis (albeit at high rates – pricing is in the 7.25% area).  The Fed’s recent announcement that it would buy so-called ‘fallen angels’ (i.e. those companies downgraded to high yield by rating agencies) as part of its corporate bond programme has reinforced investor demand for those companies with ratings just above the high yield threshold.  In Europe, Credit Agricole and BNP Paribas reopened the primary market for senior bank bonds, issuing a combined €2.75b, the first deals in this space for around two months.  The bonds priced between 30bps to 40bps lower than initial pricing guidance, a sign of strong investor demand. 

Domestically, the New Zealand Treasury yesterday released a range of possible scenarios for the economy, with a central scenario that economic activity will decline by 13.5% in the year to March 2021, with the unemployment rate rising to 9.5%. This is a slightly weaker near-term growth profile than we have although we have been warning of the downside risks to our estimates.  Additionally, Treasury provides a view where fiscal stimulus, in addition to that already announced, potentially delivers an improved performance over its base forecast. This potentially sets the scene for another large stimulus announcement from the government, which would be expected to put additional upward pressure on bond issuance over the coming months. 

Finance Minister Robertson will provide an update today on further fiscal assistance.  The government will provide a tax loss carry-back scheme, which will enable affected businesses to claim back tax payments in previous years as a cash refund (presumably up to an amount that corresponds to the tax credit they would receive in the current financial year due to any forecast losses).  The scheme is estimated to cost $3.1b over two years.  Other measures announced include greater flexibility for businesses to meet tax payments and changes to tax loss continuity rules. 

There was another big fall in long-dated NZ government bond yields yesterday, with the yield on the 2037 maturity bond falling 8bps (on top of its 20bp decline on Thursday).  The RBNZ’s planned $200m buyback of this bond (as part of its QE programme) was uncovered, meaning it did not attract sufficient offers from banks.  The buyback cleared with a weighted average yield an incredible 9bps below secondary market rates at the time.  This is the second consecutive week that the buyback of the 2037 maturity bond has attracted fewer offers than sought by the RBNZ.  We think the RBNZ is likely to respond by dialling down its QE purchase pace for next week (to what will still be a very large amount).  Shorter-dated government bond yields were little moved yesterday while swap rates edged lower by up to 3bps (at the 10-year point).

Finally, in other news, G7 finance ministers have agreed to a limited debt moratorium for 76 smaller emerging market countries.  But there remains disagreement between the US and other countries on how to increase funding to the IMF, to allow it to increase its assistance to emerging markets.