Equity markets have had another good night overnight (S&P600 +1.2%). The big news has been in the US rates market, where the market has, for the first time, started to price a negative Fed funds rate (-0.02% by the end of the year). The USD has fallen broadly amidst the fall in US rates. The NZD and AUD are up around 1.2% over the past 24 hours.
We’ll start with the US rates market today. Futures contracts on the Fed funds effective rate moved into negative territory for the first time overnight. Futures pricing for the end of the year now stands at -0.02%, 7bps lower than the current level of the Fed funds effective rate (0.05%). Fed policymakers have previously sounded resistant to the concept of negative rates, with Chair Powell saying in March “we do not see negative policy rates as likely to be an appropriate policy response here in the United States”. But the market is, at face value, pricing in a chance the central bank might change its mind.
There doesn’t appear to have been an obvious driver of the fall in US rate expectations overnight and technical factors may have contributed to the move. Some have attributed the move, in part, to comments from high profile bond investor Jeffrey Gundlach who tweeted “the pressure to go negative on Fed Funds will build as short term borrowing explodes and dominates. Please, no. Rates < 0 = Fatal."
US Treasury yields fell as the market ratchetted up rate cut expectations. The 2-year yield fell 5bps to 0.13% and the 5-year yield 8bps to 0.29%, both all-time lows. The 10-year yield is still within its recent range and trades this morning at 0.63% (-8bps on the day). NZ government bond yields fell by up to 4bps yesterday after a very strong tender of bonds from New Zealand Debt Management and they are likely to extend that move this morning on the back of the overnight moves. The market is focused today on what the RBNZ announces for its QE bond buying for the week ahead (announcement at 2pm). The RBNZ has kept its government bond buying at $1.35b for each of the past three weeks, exceeding the volume of issuance and driving yields lower.
Equities have risen strongly overnight, with the three main US benchmarks gaining between 1% and 1.5% and European indices up by a similar amount. Investors remain focused on the prospect of major economies gradually opening up over the coming months. Biotech company Moderna also saw its share price rise more than 10% after it received regulatory approval to proceed with further trials on a possible COVID-19 vaccine. It expects to undertake further (late-stage) trials by the early Northern Hemisphere summer.
The positive sentiment was reinforced by reports that US Trade Representative Lighthizer and Chinese Vice Premier Liu would speak as soon as next week on implementation of the Phase-One US-China trade deal. This provided some comfort to the market which had grown concerned about renewed tensions between the two countries over the origins of COVID-19 (Trump recently alluded to retaliation).
The USD has experienced a broad-based fall over the past 24 hours amidst the increase in Fed rate cut expectations and more positive risk sentiment. The BBDXY is 0.4% lower on the day, effectively reversing the move from yesterday. It remains stuck in a range for now.
Risk and growth-sensitive currencies have outperformed and safe-haven currencies underperformed. The NZD and AUD have increased 1.2% and 1.4% respectively over the past 24 hours, supported by the rise in equity markets and an appreciation in the CNH (+0.4%). The NZD trades this morning around 0.6080.
Yesterday, Prime Minister Ardern set-out what the economy would look like under COVID Level 2. Most of the economy will be able to return to semi-normality provided that social distancing is maintained. It is almost certain the Government will announce May 11 a future move to Level 2, which we think will likely start on May 14 (with schools and tertiary institutions opening from May 18). Ardern suggested the transition will occur in a staged fashion with higher risk activities (such as hospitality venues and domestic tourism facilities) the last to be permitted.
Earlier, Finance Minister Robertson gave little away in his pre-Budget speech though he did acknowledge that the Government’s accounts and economic forecasts will look simply awful. The government will unveil the Budget next Thursday and New Zealand Debt Management will update its bond programme for the coming four fiscal years. Bond issuance will be very high over the next few years to fund the government’s COVID-19 fiscal response.
The RBNZ’s survey of inflation expectations showed the 2-year ahead measure down to a record low of 1.24% in Q2 from 1.93% Q1. This shouldn’t really be a surprise to anyone, and we expect a big policy response from both the RBNZ (via a sizeable increase to its QE bond buying programme) next week, as well as new fiscal measures from the government at the Budget. The market wasn’t moved by the data release.
In central bank news, the Bank of England refrained from adding more stimulus at its meeting overnight, in a 7-2 vote. Analysts expect the BoE to upsize its QE programme over the next few months though, with the Bank set to reach its bond buying target as soon as July, if it carries on at its current pace. The Bank said it expected growth to fall 3% in Q1 and 25% in Q2 but Governor Bailey struck a relatively upbeat tone, saying he expected activity to bounce back “much more rapidly than the pullback from the global financial crisis”. The Bank said it expected “only limited scarring to the economy”. Time will tell.
ECB President Lagarde said the central bank was “undeterred” by the recent German Constitutional Court ruling, with threatens to constrain the ECB’s bond buying programme. The German Constitutional Court has ordered the ECB to conduct a “proportionality assessment” of its bond buying programme and has threatened to stop the German central bank from participating. But Lagarde struck a defiant tone, saying “we are an independent institution, answerable to the European Parliament…we will continue to do whatever is needed, whatever is necessary, to deliver on that mandate.” The 10-year Italian bond yield fell 6bps overnight, to 1.91%.
The Norges Bank surprised the market by cutting its cash rate from 0.25% to 0% overnight. The Norges Bank said it didn’t envisage making further cuts. Despite the surprise cut, the Norwegian krone has been the top performing currency over the past 24 hours, up almost 2%. Oil prices rose earlier in the session after reports that Saudi Aramco had increased its pricing for oil to be delivered in June, but that move has since completely reversed.
In economic data, US weekly jobless claims rose 3.17 million, although this was lower than last week’s count and it appears to be trending down. Nonfarm payrolls is tonight, with the market looking for a staggering 21.7 million job losses in April. Elsewhere, China’s Caixin Services PMI rose by less than expected in April, remaining in contraction territory at a level of 44.4, well below the official services PMI (52.1).
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13 Comments
If we were counting correctly (stocks rather than flows) we would know that we were already in trouble, pre-virus.
Our 'economies' are a revolving wheel running on a conveyor-belt of resources and energy - extracted, processed, consumed and excreted. For a brief while, there was enough resources and energy for a lot of us to tap into the flow. And economists, who only count the revolutions of the wheel, noted we were rotating faster but assumed that would mean ever-more stuff coming down the conveyor, for ever. So they sanctioned a system where ever-more bets were made within the wheel. Sooner (rather than later, given the rate of betting was increasing exponentially) those bets would become increasingly nonredeemable. And if it wasn't interest that got reduced, it would have to be something else - they all are ultimately underwritten - or not- by the amount of stuff on the conveyor.
Now we are hamstrung by two things; the reducing quality off the remaining resources at the front of the conveyor, and the increasing pile of poo at the back end - including CO2 and plastic oceanic soups.
To cope with the slowing conveyor and the reducing resource/energy stocks, we are down to zero and heading below, in interest terms. This is a permanent trend, for obvious physical reasons. But very quickly, the question goes beyond interest, and becomes one of total bets and how much underwrite there is, and how fast it is dwindling.
It is unlikely we ever get 'back' to activity levels seen pre-virus.
One does not solve the over indebtedness problem issuing more debt.
The Fed Reserve private banking cartel model is broken, and was always unsustainable. Charging interest relies upon exponential growth, on a planet with finite resource. It was only ever a private tax on the rest of us.
This cartel corrupted the US government some 100 years ago, and continues to peddle its wares until you get a situation like Lebanon. With 20% plus unemployment in the US, it wont be long before that happens there, and other places.
The only option is to forgive debt, which the ex politicians (including some of the current lot) and their masters wont like. Their tax haven money is no longer isolated in these circumstances, as they are now swimming naked.
Time for the people to take back the country, rather than let the likes of Jonkey sell more lies and our assets down the road.
There isn't a Western economy with a 2 year bond yield higher than 25bp, NZ just fell below 0.1% (10bp).
There are only two choices- monetise debt or yields go deeply negative. Deeply negative yields are a certainty in my opinion and will see mortgage rates as low as 1%. The best bank deposit rate you will find will be 0%. The Swiss 50 year bond yield is -.45% - that's right, you put $100k with the Swiss Govt and they will give you back $78.5k in 50 years.
Property: minus 20% in 2020, and another minus 10% in the first half of 2021. And I think I am being optimistic. I just can't believe how some people can expect only a decrease of 10% in such a high-unemployment environment, with many over-exposed mortgages and with current house prices that are inflated over and beyond the utter ridiculous.
Sharemarket: crazy upswings and downswings in 2020 (Dow down to 18,000, up to 28,000), with 2021 highly dependent on the prospect of a covid-19 vaccine. If found, the US sharemarket can easily climb over 30,000, possibly over 35,000 by end of 2021. If not, too tough to call, but it may still provide some shelter against longer term inflation pressures.
Using Switzerland as an example is muddying the waters. This is a not good example for the following reason (and I know this country quite well, having some relatives who live there): Switzerland has experienced, since the GFC, huge influxes of liquidity, as the Swiss franc is regularly used as a safe haven currency in times of crisis. This has been compounded by the perception that Swiss banks are very safe (perception that might be incorrect, but this is a different story), and a big problem with the an ongoing, unsustainable appreciation of the franc. The reason behind Swiss negative interest rates is purely a desperate move to control the movements of the franc.
By the way, the Swiss Central Bank has clearly stated that such negative rates are poisonous and destructive to the economy in the longer term (actually a Swiss banker has said: Negative rates [are] a bit like steroids. They are great in a short, sharp usage but long-term usage of steroids starts to dissolve your bones.”).
Regarding other countries, just to show what are the rates that we might see in the future in NZ, and they are all well above zero:
- I just opened a term deposit in Germany last week with the rate of 1.3% p.a. (and with the "OCR" being -0.5%)
- I am currently getting 1.45% p.a. in a UK saving account (their "OCR" is 0.1%)
In NZ, depositor rates can hardly go any lower than these numbers, especially considering that there is no government guarantee in NZ. Actually, even with the introduction of a deposit guarantee in NZ, I can't see this happening.
By the way, the European Central Bank has expressed no intention to further lower their rates, rather they are pursuing other methods such as QE. They might lower another 0.1%, if things turn catastrophic, but they have reached very close to their their bottom. Therefore talks of deeply negative rates are preposterous and utterly unrealistic, especially for a country such as NZ still dependent on foreign money. They are aware that going any lower would be destructive to their banking system, systemically poisonous and ultimately counterproductive for a long series of reasons.
$1.2 to $1.5 QUADRILLION. This is the estimated value of the global derivatives market, in 2017! I am yet to find an updated figure.
https://money.visualcapitalist.com/worlds-money-markets-one-visualizati…
This link will show you the value of global markets, and the derivatives section is quite simply horrific.
It's the monster, not in the room, it encircles the entire global economy, and it's worth looking at, and thinking about. $1.2 QUADRILLION in derivatives, a largely unregulated, little understood market has the ability to wipe the global financial system out many times over. Derivatives are in danger at times of high market volatility. Share buy backs should have been kept illegal, yet letting the derivatives market grow to this beyond gargantuan size is far far beyond criminal.
Look at the "graph", sorry it's not 2020, cannot find that yet.
It is certainly worth considering.
trump has instructed his finance cronies to use taxpayer money to buy market ETFs in order to artificially prop up the stock market so it looks good for the Nov. election?? In any pre trump era when you have an independent Attorney General that is not entirely corrupt, all players would be given Bernie Madoff sentences(150years??) for this kind of blatant market manipulation. Incredible that there are so many US citizens that have absolutely no clue what is going on.
It is becoming almost self-evident that the housing bubble in NZ (and in many other countries) will burst. It is going to be something that the GFC of 2008 does not come even close.
I can see 20% slump in 2020, plus another 10% slump in the first half of 2021. No QE nor negative interest policy (assuming this does not backfires into a run on the banks, which I think will become a real risk - no sane investor will keep deposits in a unsecured bank of a small trading economy for zero return, and with the possibility of OBR) can stop this. When people can't pay mortgages because they are unemployed, there is no RBNZ trick that can stop the resulting housing implosion process. Like every Ponzi scheme, the music will stop and many people will get hurt.
I am keeping enough cash available to invest in property in approx. 2 years time (most of it in foreign currency instruments as it is my forecast that the NZD will devalue against the other major currencies). By then, prices in real estate will have corrected and will easily be one third less than now. Still inflated, but at least an opportunity to diversify. Commercial property might become even cheaper.
Another areas of attention is the share market: after a 2020 of significant deflation, and a 2021 of less than average inflation, there is a not negligible risk of significant inflation kicking in, with the distinct possibility of the sharemarket providing a good shelter against it. It is quite likely though that In the short term the share markets will be a real, scary roller coaster, as current values in the US market are still probably inflated. I am also planning to keep my exposure to the NZ sharemarket, possibly even increase it. Excluding real estate and the financial institutions, I can see good medium term prospects in the NZ economy, including, yes, tourism.
Good on ya fortunr , nothing better than having a clear plan. Did you look at the info regarding the derivatives market? It may not be something you've taken in with regards your plan, and I'm certainly not suggesting any change to your plan.
However $1.2QUADRILLION or more, is going to have a significant impact (understatement) on all financial markets.
Just a thought, take a look at the graph.
https://money.visualcapitalist.com/worlds-money-markets-one-visualizati…
Anyway, all the best with your plan.
Thank you kindly.
I know mate, it does look scary. My personal bet on the sharemarkets is that governments and central banks will do everything they can to sustain them. They appear ready to inflate away any problem that may significantly impact them. My bet (risky, I know) is that they will mostly succeed to do it. I am investing in the sharemarket with open eyes, though, and considering a worst case scenario of -25% to -30% at the time I need the money. In terms of overall allocation, my total investment in shares is around 20%, and I am planning to increase it to 35%. so I can hardly be classified as an aggressive investor.
I second pretty much everything in your analysis and am similarly positioned. Only difference is I haven't waded back into the sharemarket yet because so far this rally is still not outside the norm for qualifying as a bear market rally. There also seems to be a lot of dumb money entering the market from amateur day traders. If it does break out higher than where it is now then I guess the Fed wins and all bets are off. Can we have all time highs in the sharemarket and the worst real economy hit since the Great Depression, at the same time? Who knows, I wouldn't want to bet against it but I'll believe it when I see it. Everyone still seems to be acting like the virus is all over with the US 're-opening the economy' when to the best of my understanding there are still x waves to come for an indefinite period of time.
Nice to see someone discussing their actual portfolio/asset allocation.
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