Equities fall sharply on Friday. NZD and AUD fall over 1%. RBNZ keeps the foot on the throttle with QE. Another big fall in NZ interest rates

Equity markets fell on Friday as the market digested disappointing earnings results from Apple and Amazon and suggestions that Trump could reignite the trade war with China.  Commodity currencies fell sharply, with the NZD down 1% on Friday to around 0.6060.  There was another sharp fall in NZ rates last week, as the RBNZ kept the foot on the throttle with bond buying. 

Risk asset markets ended last week on a soft note.  The S&P500 fell 2.8%, reversing its gains from earlier in the week, while the NASDAQ fell 3.2%.  Corporate earnings results weighed on equities.  Amazon’s share price fell over 7% after it forecast significantly higher spending in Q2, which it said could push it to flat, or even negative, profit over the quarter.  Amazon is spending more on wages, transport and has plans to roll out in-house COVID-19 testing.  Apple released better-than-expected earnings but declined to provide earnings guidance going forward, which the market took as a negative sign; its share price fell 2% on Friday.  With five big tech companies (Microsoft, Apple, Amazon, Google and Facebook) accounting for more than 20% of the S&P500, moves in their share prices have a large impact on the broader index. 

Risk sentiment wasn’t helped by comments from Trump and his economic advisor Kudlow suggesting they could reignite the trade war with China.  Trump, likely with one eye on the election in November, again claimed (without evidence) that COVID-19 had originated from a Chinese laboratory and said that tariffs were “certainly an option” for retaliation.  Kudlow told CNBC that “they [China] have a lot to answer for, they’re going to be held accountable”, adding that it was Trump’s decision how to respond.  Clearly, a renewed trade war is the last thing the world economy needs right now.  While it seems unlikely Trump would want to batter the equity market and US economy any further, we can probably expect more hard-line rhetoric over the coming months as he seeks to lift his popularity ahead of the election. 

Just a few days after encouraging test results were released on the COVID-19 treatment drug, remdesivir, the US Food and Drug Administration (FDA) signed an emergency-use authorisation.  Gilead, the company that created the drug, said it would donate its entire supply, enough to treat around 140,000 patients.  It plans to get the drug to patients as soon as this week.  Separately, The FDA granted emergency-use authorisation over the weekend to Swiss pharmaceutical firm Roche for its COVID-19 antibody test, the latest firm to receive this approval.  Antibody tests are supposed to determine whether people have already had COVID-19 and therefore can safely go back to work. 

Currencies moved in familiar ways to the risk-off backdrop.  The AUD fell 1.4% on Friday to 0.6420, while the NZD was 1% lower, ending the week around 0.6060.  The pullbacks in the AUD and NZD follow a very strong run in April, in which the two currencies rose 6.2% and 2.8% respectively.  Weakness in the CNH on Friday (-0.75%) added to the downside pressure on the NZD and AUD. 

The CAD also experienced a 1% fall on Friday, despite a further bounce in oil prices.  The Canadian government appointed former Deputy Governor Tiff Macklem to replace Poloz as Governor at the Bank of Canada.  The market took note of Macklem’s comment at a press conference that negative interest rates were part of the policy toolkit for Canada.  However, Macklem went on to add that negative rates had “some disruptive effects” and he was “quite comfortable with the effective lower bound where it is”.  The Bank of Canada policy rate is 0.25% and the central bank is undertaking QE for the first time. 

The USD strengthened on Friday amidst the falls in equities.  The BBDXY was 0.4% higher on the day, but 1% lower over the course of the week.  It remains contained within its range since late-March.  

There wasn’t much movement in US bonds on Friday, despite the chunky fall in equities.  The 10-year Treasury yield was 3bps lower on the day, at 0.61%.  The Fed announced that it would reduce its pace of Treasury purchases for the week ahead, from $10b a day to $8b a day.  This is down from a peak of $75b per day in late March. 

In contrast to the Fed and the RBA (which bought only $500m of Australian government bonds last week, down from a weekly peak of $14b), the RBNZ continues to maintain its government bond buying at a very heavy pace.  The RBNZ announced on Friday that it would keep government bond purchases at $1.35b for this week, triggering a further sharp fall in NZ government bond yields and swap rates, especially at the longer-end of the curve.  The 10-year swap was down 6bps to a new all-time low of 0.72% while the 2037 maturity government bond fell 14bps in yield to 0.99%.  For context, that 2037 was tendered at a yield of 2.57% in mid-March, illustrating the powerful effect that RBNZ QE has had on the rates market. 

The NZ government announced on Friday it would offer direct loans to up to 400,000 small businesses (via the Inland Revenue Department), with these loans being interest-free if repaid during the first year and charged a 3% interest rate if repaid thereafter.  Small businesses can borrow $10,000 each, in addition to $1,800 per employee, up to a maximum of $100,000.  The scheme will add to the government’s near-term funding requirement.  We will get an update on government bond issuance from New Zealand Debt Management on Budget day next Thursday. 

In NZ data on Friday, the ANZ consumer confidence index fell to an almost-record low of 84.8.  While every component part of the index dropped in April, the fall was most outsized in attitudes toward buying a major household item. This component is now well below the lows it got to during the GFC.

In the US, the ISM manufacturing survey was stronger than expected, but the key components were very weak.  ISM new orders fell to a near-record low of 27.1, production fell to a record low of 27.5 while the employment component hit its lowest level since 1949.  The headline index was boosted by a sharp rise in the supplier delivery component (to 76), reflective of the breakdown in supply chains and the rising time taken for deliveries to arrive.