There has been plenty of news to digest overnight but market movements have been well-contained by recent standards. Commodity currencies have been well supported, with better price action in the oil market helping.
More dire economic data were released overnight, but the theme of the market ignoring that horror show continues. We all know that the world economy has fallen into a deep hole due to lockdowns, and the big question remains how we recover from that. A slowing rate of increase in COVID-19 cases and incredible policy support still offer hope.
Markit PMI data around the world highlighted the devastating and unprecedented blow to the global economy from the lockdowns – vastly exceeding that seen during the GFC – with the services sector suffering more than manufacturing. The services indicators ranged between 12-16 for the UK, Germany and the euro area and came in at 27 for the US. That the figures weren’t at the theoretical limit of zero across Europe simply reflected essential services being allowed to remain open.
US jobless claims were in line with expectations, moderating to “just” 4.4m and taking the total over the past five weeks to 26m. Google searches for “file for unemployment” continue to trend lower, but remain uncomfortably high as the lockdowns deal a significant blow to the US labour market, with credible unemployment rate estimates currently above 15%.
The data releases only had a passing impact on the market. The Euro Stoxx 600 index gained almost 1%. The S&P500 currently shows moderate gains after earlier being up as much as 1.6%. The rally lost momentum after the FT reported that a Chinese trial showed that the drug remdesivir, developed by Gilead Sciences, did not improve patient’s condition or reduce the pathogen’s presence in the bloodstream. This formal trial – although terminated due to low enrolment – contradicted previously released “studies” that provided some hope that the anti-viral drug was effective in relieving symptoms ofCOVID-19.
On the policy front, the EU endorsed the previously announced short-term plan worth €540 to support businesses and economies. There was also apparently agreement on the need for a long-term recovery package worth 5-10% of GDP, but disagreement on the form of funding – with Germany, Austria and the Netherlands insisting that any bailout comes in the form of loans than grants. However, there is some hope that a compromise solution can be agreed next month.
The Nikkei reported that the BoJ will next week discuss allowing unlimited government bond purchases, while keeping the 10-year target to zero percent. For some reason this caused a temporary spike in USD/JPY, briefly taking it above 108. In practice, this policy decision would have no impact on the market at the moment, with the Bank achieving the yield target easily. However, the report noted the BoJ will also double the purchase targets for commercial paper and corporate bonds, which might keep yields on those products lower than otherwise. USD/JPY is back down to 107.60.
Commodity currencies have led the gains overnight, perhaps supported by the further recovery in oil prices, with WTI crude up 23% to USD17 (that’s positive, not negative oil prices) and Brent up 6% to USD21.50. The NZD has pushed on up back through the 0.60 mark, meeting some resistance around 0.6040 overnight. The AUD has followed a similar path, meeting resistance just above 0.64. Gains have been in the order of 1% since the NZ close. NZD/AUD fell to a fresh 5-month low just below 0.94 yesterday but has since settled around 0.9430. Yesterday we published an update on the NZD/AUD cross, highlighting that it faces macro headwinds, with the more severe lockdowns in NZ than Australia causing a deeper economic hole to fill, and with RBNZ QE policy on a much more likely aggressive path than the RBA, amongst other factors.
EUR and CHF have been the two weakest currencies overnight. The Swiss National Bank reported a record loss of CHF38.2b reflecting massive losses on its stock portfolio. The SNB has been actively intervening in the market to prevent CHF strength against EUR. EUR slipped below 1.08 overnight, possibly reflecting some disappointment that the EU has yet to agree on a longer-term rescue fund.
In the bond market, US Treasuries have largely tracked sideways, with the 10-year rate hovering just above 0.60%, after yesterday’s dip below that mark. NZ rates showed little movement yesterday in an uneventful session, with the only thing worth noting that the RBNZ’s LSAP programme is having a notable impact on LFGA pricing, with significant spread compression for longer term maturities.
On a final note, Unilever reports a dramatic decline in personal grooming products as large numbers of people work from home. Demand for shampoo, shaving and deodorant products has dramatically dropped, something I can attest to.
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