Market sentiment ended the week on a positive note, seeing strong gains in equity markets. Commodity currencies outperformed during the local trading session, amidst a broadly based fall in the USD, with a mild extension of the moves in the overnight session.
Risk sentiment was positive through the local trading session on Friday, buoyed by the White House’s roadmap to reopen the US economy and hope that COVID-19 can be beaten through biotechnological advances. An unauthorised report showed that Gilead Sciences’ anti-viral drug remdesivir was successful in a Chicago trial on severely affected COVID-19 patients, with “rapid recoveries in fever and respiratory symptoms”.
Experts were cautious about the preliminary result and it wasn’t even a proper trial but the market wasn’t one to let the facts get in the way of a good story. S&P futures rallied hard, and the move was sustained, with the S&P500 closing the day up 2.7%, continuing its upward trend since the market bottom on 23 March – the index now up 28½% since then. And on Friday it wasn’t just about the mega cap stocks outperforming, with the Russell 2000 index of small cap stocks performing even better, up 4.3% for the day.
In news over the weekend, House Speaker Pelosi and Treasury Secretary Mnuchin were optimistic about soon reaching a deal to top up funding for the loan programme for small businesses, for which the $300bn of funding previously allocated has already been exhausted. There is also talk of a $500bn fund for state and local governments to be in the next rescue package. Since Friday, data on COVID-19 continues to show a slowdown in the spread of the virus and number of deaths across much of Europe and the US, which will add to hope that lockdowns can soon come to an end. The NZ government will announce at 4pm today whether NZ can soon move to a less restrictive lockdown. The number of new cases has slowed to a trickle.
China GDP data for Q1 showed the first quarterly fall since the series began in 1992, down 6.8% y/y. While that was moderately weaker than the consensus, the market was prepared to look on the bright side, with monthly industrial production figures confirming a strong rebound in activity in March (+32% m/m on NAB estimates), following the slump in February (-23% m/m). Retail sales data were weaker than expected but consistent with the prevailing narrative that consumers are still anxious about the virus and aren’t out spending. Chinese news sources reported that the country’s leaders pledged to deliver more stimulus, including interest rate cuts to boost domestic demand. The consensus expects a 20bps drop in the key 1-yr loan prime rate to be announced later today.
US Treasuries were well supported even with the backdrop of positive risk appetite, seeing the 10-year rate down to as low as 0.585%. Later in the session, the US Fed announced that it will continue to taper its purchases of Treasuries, targeting $15bn per day, down from $30bn per day last week, seeing yields retrace and close the week at 0.64%, up 1.5bps for the day.
In a sign that the US junk bond market is open for business, Ford raised $8b across three maturities and faced strong demand for its issue – attracted by the juicy 9.625% yield for its 10-year maturity and the backstop provided by the Fed’s emergency programme, which captures the high-yield market.
In currency markets, the USD was on the backfoot, given the positive risk appetite vibe, showing broadly based losses during the NZ trading session and a mild extension of those losses in the overnight session. This saw the NZD regain the 0.60 handle and close the week around 0.6030, up more than 1% for the session. Still the NZD was weaker for the week as a whole, down 0.7%.
After its recent strong run, the AUD failed to keep pace with the NZD and ended the week at 0.6365, up 0.6% for the day. NZD/AUD probed a fresh 5-month low at around 0.9415 but closed the week higher at 0.9475. Other key currencies showed more muted gains against the USD, which saw the NZD crosses modestly higher.
Oil prices touched a fresh 18-year low, with WTI going sub USD18 per barrel, with significant excess supply conditions weighing on sentiment. The near-term May contract trades at a significant discount – some $7 to June – with concerns about storage capacity being reached. Brent crude is closer to USD28, not facing the same downward pressure on the near-term contract.
In the local rates market, a narrowing of the bills-OIS spread has been a recent trend, pushing down the 2-year swap rate to a fresh record low, down 4bps to 0.35%. Lower OIS yields are also part of the mix, as the market anticipates that the RBNZ could cut the OCR further, despite the RBNZ indicating that the 0.25% level would be unchanged for a year when it cut the OCR to that level. While trading banks systems might not yet cope with a zero or negative OCR, there aren’t any constraints taking the OCR down to small positive level. November OIS trades at 0.16%.
The government bond curve saw a modest steepening. The RBNZ will reduce its purchases of bonds in the week ahead, with $1.35b of government bonds (previously $1.8b) and $130m of LGFA bonds (previously $150m). NZ’s credit market is on a much healthier footing these days. Housing NZ’s dual tranche issue was more than 2 times oversubscribed, with the deal priced well to clear. There was some positive spillover for the market, seeing LGFA spreads narrow further and bank spreads have also seen significant narrowing recently as well, and now down some 60bps from the 175bps spread for 5-year paper at the highs.
In the economic calendar ahead, NZ Q1 CPI data are released, but this is of academic interest only, pre-dating NZ’s lockdown and of no relevance to current monetary policy.
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.