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US, European equities make small gains despite worries about Hong Kong, US-China tensions. NZD falls modestly, ends the week below 0.61. RBNZ tapers bond buying slightly, but little reaction in NZ rates

Currencies
US, European equities make small gains despite worries about Hong Kong, US-China tensions. NZD falls modestly, ends the week below 0.61. RBNZ tapers bond buying slightly, but little reaction in NZ rates

Despite mounting US-China tensions, including over Hong Kong, equity markets made modest gains on Friday.  There was again little change in global rates.  The NZD fell, along with other commodity currencies, and ended the week below 0.61.  The RBNZ said it would slightly taper its bond-buying for the week ahead although NZ rates were little moved by the news.  It’s a public holiday in both the US and UK today so markets should be very quiet. 

US-China tensions remain elevated, with China’s decision to press ahead with new national security laws for Hong Kong drawing condemnation from US politicians from both parties and raising the risk of US sanctions.  Hong Kong’s Hang Seng equity market fell 5.6% on Friday, its biggest one-day fall since 2015, as market participants braced for renewed protests in the city.  Demonstrations returned to the city over the weekend, with police firing tear gas and making arrests.  Chinese equity markets fell about 2%.

Weakness in Asian equities spilled over to the US equity market, with S&P500 futures falling by as much as 1.2% at one stage.  But US equities recovered over the course of the session, ending in slightly positive territory (S&P500: +0.2%, NASDAQ: +0.4%).  Sentiment was boosted by comments from the US government’s medical advisor Fauci who said Moderna’s experimental vaccine for COVID-19 looked “promising”. 

The trend in COVID-19 cases still appears to be heading in the right direction, encouraging more countries to take steps towards loosening restrictions.  Spain said it would reopen borders for international tourism from July and eased restrictions in Madrid and Barcelona.  New York reported 84 new COVID-19 deaths on Saturday, the lowest level since late-March, and state lawmakers said they would allow gatherings of up to 10 people. 

Global rates were little changed on Friday, with the 10-year US Treasury yield down just 1bp to 0.65%.  The 10-year US yield is in the middle of its narrow 0.55% - 0.75% range that has prevailed since April.  On Friday, the Fed announced it would again taper its government bond buying for the week ahead, to around $5b per day (down from $6b last week and a peak daily purchase pace of $75b). 

The National People’s Congress is underway in China.  While most of the focus has been on the proposed national security laws for Hong Kong, its notable that China omitted to publish a growth target for this year, testament to the extraordinary shock to the economy from COVID-19 and the highly uncertain outlook.  This is the first time China has opted not to publish a growth target for decades.  China outlined plans to increase infrastructure investment, lifting borrowing caps for governments and providing ¥2 trillion ($US285b) in stimulus to local governments to “cut taxes and fees, reduce rents and interest on loans, and increase consumption and investment”.

FX market movements were reasonably subdued on Friday.  The BBDXY index rose a modest 0.2%.  Like US interest rates, the USD indices remain well-contained within their narrow trading ranges over the past two months. 

The JPY and Swiss franc outperformed, with both currencies unchanged against the USD on Friday.  There was little reaction to the Bank of Japan’s announcement that it would provide a ¥30tn (~US$280b) loan facility to banks, to encourage lending to small businesses.  Banks will get access to funding at 0% and the BoJ will even pay banks 0.1% on funds they lend to small businesses under the government’s business loan guarantee scheme. 

The GBP fell after BoE Deputy Governor Ramsden told Reuters it was “perfectly reasonable to have an open mind” about negative rates.   Ramsden cautioned that the Bank needed to understand how negative rates could affect the banking system before deciding whether it would be an appropriate policy tool, echoing similar comments from Chief Economist Haldane and Governor Bailey from earlier in the week.  Separately, UK retail sales, excluding spending on petrol, fell a staggering 15% in April, matching economists’ estimates.  The GBP was 0.4% lower on Friday, at 1.2165.  

The NZD fell 0.3% on Friday, ending the week just below 0.61.  The fall in the NZD reflected broad-based USD strength and the escalation in US-China tensions, which saw the CNY fall to its lowest level since October (when the trade war was the market’s primary concern).  Despite Friday’s moves, the NZD was still the top-performing currency on the week (+2.7%), supported by buoyant equity markets and positive risk sentiment. 

The RBNZ announced on Friday that it would taper its government bond buying slightly for the week ahead (to $1.175b, down from $1.35b last week).  The RBNZ’s purchases of nominal government bonds this week ($1.1b) will be close to the pace of new issuance from New Zealand Debt Management ($1.05b), bringing supply and demand of these bonds more into balance.  There was little reaction from the bond market to the announcement, with interest rates barely changed on Friday at near-record-low levels (10-year swap rate: 0.6%, 10-year government bond yield: 0.61%).  We expect further tapering from the RBNZ over the remainder of the year, although it is likely to be a gradual process. 

In domestic data, NZ retail sales declined by a smaller-than-expected 0.7% in the March quarter.  Retail sales were boosted by supermarket and liquor store sales, as consumers stocked-up ahead of the lockdown.  We look for retail sales to fall close to 30% in Q2. 

In Australia, the Treasury revised down its forecast cost of the JobKeeper scheme from $130b to $70b after it discovered large reporting errors.  Our NAB colleagues think the lower-than-expected cost of the scheme provides scope for the Australian government to extend it beyond the legislated September end date.  Australian government bond yields fell by 3bps after the announcement, on the possibility of reduced government bond supply. 

It is a UK bank holiday tonight and the US market is closed for Memorial Day so it should be a quiet trading session ahead, notwithstanding the renewed protests in Hong Kong.  In the week ahead, the RBNZ Financial Stability Report on Wednesday will be worth watching. The final version of the May ANZ Business survey is also released (the preliminary report was released earlier in the month). 

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Source: CoinDesk

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