Markets continue to trade with a risk-on tone as investors concentrate on the prospect of economies reopening and global growth rebounding later this year. Equities, commodities and growth-sensitive currencies have all made gains since the end of last week. The USD has continued to fall amidst declining risk aversion. The NZD is approaching 0.63, its highest level since mid-March.
Most of the news-flow since Friday morning has ostensibly been negative, with continued US-China tensions, violent protests in the US in the wake of the killing of George Floyd, and more grim US economic data. But markets continue to trade with a ‘glass half-full’ lens and risk assets have made further gains.
On US-China tensions, markets were relieved on Friday that Trump’s much anticipated press conference on Hong Kong did not contain anything further than Pompeo’s already flagged actions of removing Hong Kong’s favoured trading status. Trump didn’t provide any details or timeframe for action on Hong Kong, there were no new tariffs or broad sanctions and the Phase-One trade deal remains intact.
The Hang Seng rose more than 3% yesterday and China’s CSI300 more than 2% as markets interpreted Trump’s response as symbolic and not as bad as feared. Since Friday morning, the S&P500 has added a further 1% (+0.5% overnight) while tech stocks continue to outperform, with the NASDAQ up 2% (+0.7% overnight). The S&P500 is now less than 10% and the NASDAQ less than 3% from their respective all-time highs.
Markets have also brushed off a Bloomberg report that Chinese state-owned agricultural firms have “paused” purchases of US farm goods such as soy beans and pork, as the Chinese government waits to evaluate the US response to Hong Kong. China is aware that Trump is sensitive to the US farm sector, a key support base, and its promised agricultural purchases as part of the Phase-One trade deal are one of its main sources of leverage.
The key theme driving markets at present is the prospect of the global economy rebounding as countries reopen. The trend in COVID-19 cases in the developed world continues to head in the right direction, giving investors greater confidence that restrictions will continue to be gradually lifted. Yesterday, New York state reported fewer than 1000 new COVID-19 cases for the first time in 11 weeks while Italy reported just 178 new cases, its lowest number in over three months. And, of course, in New Zealand there have been no new COVID-19 cases in 10 days. PM Ardern said this morning that the country could move to COVID-19 Alert Level 1 “as early as 8 June”.
Commodity and FX markets are also signalling greater optimism in the global economic outlook. Copper prices reached their highest levels since March while WTI crude oil is trading above $35/barrel, its highest since March. Oil prices have also been supported by reports that OPEC+ might extend its recent supply cuts, which were scheduled to taper from July, for another one to three months.
In FX markets, the USD has continued to move lower amidst declining risk aversion and growing optimism in a global economic recovery. The Bloomberg USD index (BBDXY) has fallen 0.75% since Friday night and trades at its lowest level since mid-March. The BBDXY broke out of its trading range early last week and it been heading lower since.
The big movers in the FX market have been those currencies perceived to linked to the global growth cycle and risk asset markets. The AUD has gained around 2.6% since Friday morning (+1.8% last night) and is approaching 0.68, its highest level since January. Higher iron ore prices, which breached $100/tonne on Friday, and commodity prices more broadly, have supported the AUD’s outperformance.
The NZD has lagged the rise in the AUD but has still made strong gains since Friday morning. The NZD is around 1.6% higher than Friday (+1.4% overnight) and is trading just below 0.63 this morning. The NZD is at its highest level since mid-March, when the COVID-19 crisis really took hold in markets. The NZD has made gains on all the key crosses except for the NZD/AUD, which has fallen towards its recent lows, around 0.9260.
The EUR has made more modest gains, rising about 0.5% since Friday morning, to 1.1130. Investor confidence in the EUR has been bolstered by the European Commission’s proposed €750b Recovery Fund plan, which markets see as reducing the risk of a Eurozone break-up (although it still needs agreement from some of the Northern European countries). The ECB meets this week, with consensus expecting the central bank to increase its QE programme by €500b. Germany is also expected to announce another fiscal stimulus package this week of between €50b and €100b (1.5-3%/GDP).
Economic data continues have limited impact on markets. The US ISM manufacturing survey bounced from 41.5 to 43.1 in May, close to economists’ expectations but still signalling contraction in the manufacturing sector. Following US economic data over the past two sessions, the Atlanta Fed’s GDPNow estimate for Q2 GDP now sits at -53% (annualised). More encouragingly, China’s Caixin Manufacturing PMI surprised to the upside in May and moved into expansionary territory at 50.7. Notably, the Caixin Output sub-index reached its highest level since January 2011.
Global government bond markets have been little moved, despite the increase in equity and commodity markets. The US 10-year Treasury yield is close to where it was on Friday morning, at 0.66%, and remains locked in a very tight trading range. Yield curves remain under steepening pressure, with the spread between the US 5-year and 30-year bond yields at its highest level since 2017. A steeper yield curve is usually a market signal of growing economic optimism.
New Zealand government bond yields rose sharply on Friday, by up to 8bps. The 10-year New Zealand government bond yield rose more than 20bps last week, reversing some of its recent outperformance against other major bond markets. NZ rates remain at very low levels in an absolute sense however, with the 10-year government bond yield at 0.82% and the 10-year swap rate at 0.73%. The RBNZ slightly tapered its government bond buying for this week, from $1.175b to $1.075b, although this was only because it chose to remove the (very short maturity) May-2021 bond from its planned purchase schedule.
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