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Equity markets shrug off more US-China tensions. NZD underperforms, NZD/AUD makes fresh 6-month low. GBP under pressure on renewed Brexit concerns

Currencies
Equity markets shrug off more US-China tensions. NZD underperforms, NZD/AUD makes fresh 6-month low. GBP under pressure on renewed Brexit concerns

Equity markets made modest gains on Friday despite US-China tensions picking up further.  There wasn’t much reaction to record falls in US industrial production and retail sales, with global rates edging higher.  The NZD was the worst performing G10 currency on Friday’s session and the week itself.  NZD/USD closed at a three-week low around 0.5935 and NZD/AUD at a six-month low around 0.9250. 

US-China tensions have come back on the market’s radar.  The US Commerce Department announced on Friday that it was tightening restrictions on foreign companies supplying Huawei with semiconductors used in their mobile phones.  The new restrictions aim to prevent manufacturers producing key parts for Huawei, using US technology, in offshore production facilities without a licence.  The Commerce Department said it would extend a temporary 90-day waiver, allowing firms to supply Huawei over this period, but indicated that this would be the last extension.  In response, the Chinese state-owned Global Times reported that China was prepared to retaliate by putting certain US companies (such as Apple, Cisco and Qualcomm) on its “unreliable entity list”, subjecting them to investigations and new restrictions.  The Global Times also said China was prepared to stop purchases of Boeing aeroplanes. 

Equity markets took a hit from the Global Times report, with the S&P500 falling as much as 1.25% at one point.  But equities recovered over the course of the session, ending in positive territory (S&P500: +0.4%, NASDAQ: +0.8%).  The reaction suggests the equity market doesn’t think Trump will follow-through on his threats to China, given the likely negative impact on the economy and markets. 

Economies around the world continue to take cautious steps towards reopening.  Italy said it would allow gyms and swimming pools to open their doors from next week, travel to and from the EU could resume from June 3rd and movie cinemas could reopen from 15th June.  Meanwhile, Trump told reporters that he would reopen the US economy “vaccine or not vaccine.” 

The race to find a vaccine continues apace, with more than 100 vaccines in development globally according to the WSJ.  Small US biotech firm Sorrento Therapeutics saw its share price rise almost 200% after it claimed that initial lab results on its experimental antibody were effective against COVID-19.  Separately, the BBC reported that the US government's National Institutes of Health and researchers from the University of Oxford had seen encouraging results from their experimental vaccine on a group of monkeys.  US medical advisor Fauci has suggested it will take 12 to 18 months to develop a vaccine.  Overnight, Fed Chair Powell told 60 Minutes that a vaccine may be needed for the economy to fully recover from the current shock. 

There was a deluge of US economic data on Friday, most of it terrible.  US retail sales and industrial production both fell the most on record in April.  The Empire manufacturing survey, covering firms in the New York area, bounced back in May, with six-month ahead expectations of orders and business conditions rising sharply.  To put things in context though, the Empire survey remains at a lower level than the trough reached during the GFC.  The University of Michigan’s consumer confidence index also rose marginally in May, perhaps supported by the arrival of cheques from the US government and the resilience of the stock market.  Chinese data were mixed, with a recovery in industrial production but disappointing retail sales.  The lack of a convincing bounce in retail is worrying, perhaps pointing to lingering effects on the pandemic on consumption.

Economic data continues to have next to no impact on the market, being seen by investors as lagging and consistent with the prevailing view that the global economy is experiencing a severe recession.  Global rates edged higher on Friday, but remain at extremely low levels.  The 10-year US Treasury yield rose 2bps to 0.64%.  The US Federal Reserve said it would taper back its bond buying further, from $7b per day in US Treasuries and $5b in mortgage bonds to $6b and $4.5b respectively in the week ahead. 

Despite the recovery in equities, FX market movements reflected a more cautious mood.  The USD was generally stronger (BBDXY: +0.25%) and it is trading towards the upper-end of its trading range over the past two-months.  The USD typically appreciates during periods of financial market stress and uncertainty. The EUR made small gains on Friday along with the safe-haven JPY and Swiss franc. 

Oil prices rose further on Friday.  Brent crude oil increased 5%, reaching a two-month high of $31.50.  The US rig count is now at its lowest since 2009, as shale oil operators continue to shut down production.  Despite the rise in oil, there was weakness in other parts of the commodity market, with copper (-0.4%) and nickel (-1.8%) declining on Friday. 

Commodity currencies fell on Friday, possibly reflecting the re-escalation in US-China tensions.  The NZD was the weakest currency in the G10, falling more than 1% against the USD on Friday.  It ended the week at a three-week low around 0.5935.  The NZD/AUD cross fell further, reaching a six-month low around 0.9250.  The cross is approaching its lowest level since late-2018.  The divergence between RBA and RBNZ policy is one factor weighing on the cross.  The RBNZ has expressed an openness to cutting the OCR to negative next year whereas the RBA has forcefully pushed back on the notion that it might take its case rate negative.  And the RBA has tapered back its bond buying (last week it didn’t buy any government bonds at all) in contrast to the RBNZ which has maintained a heavy pace of bond buying over the past two months. 

The GBP underperformed on Friday (-0.9%) on renewed Brexit concerns.  The UK’s chief negotiator Frost said “very little progress” had been made in the talks with the EU while EU chief negotiator Barnier said he wasn’t optimistic.  The GBP may come under some further pressure to start the week after BoE chief economist Haldane said over the weekend that the Bank was looking at negative rates as a policy option “with somewhat greater immediacy.”  Haldane went on to add that the Bank had plenty of other options available besides cutting the cash rate further, including expanded asset purchases (including into higher-risk asset classes).  Governor Bailey said last week that the Bank wasn’t currently considering negative interest rates.

NZ swap rates fell by up to 4bps on Friday and the curve flattened after the RBNZ announced it would keep its government bond buying at $1.35b for the week ahead – this is a faster pace than New Zealand Debt Management is issuing the bonds.  The 10-year swap rate finished the week at 0.6%, near its all-time low. 

The New Zealand PSI for April is released this morning and will undoubtedly show a big fall.  The PMI, which was released last Friday, fell to a record low of 26.1 in April. 

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Source: CoinDesk

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