Mixed markets, some profit taking evident. NZD and AUD retreat after posting fresh highs yesterday. US curve steepening gives way to curve flattening

It has been another quiet day of newsflow and markets are mixed, with global equity markets generally lower, US Treasuries lower in yield with a flattening bias and the USD on track to record its ninth consecutive daily fall, although there’s a risk-off feel, with the NZD and AUD on the soft side.

After we went to press yesterday the S&P500 staged a strong rally into the NY close, taking the index into positive territory for the year. It looks that milestone became an excuse for some profit taking after weeks of strong gains. The market opened a lot weaker today, down as much as 1.2% and is currently down 0.7%. Tech stocks have outperformed, with the Nasdaq up 0.4%, so a mixed day overall. The VIX index is up for the second day in a row, to 27, perhaps a better signal that investors have adopted a slightly more cautious tone.

There has also been a reversal of sorts in the bond market, with the trend of US curve steepening (a highly profitable trade over the past six weeks) giving way to some curve flattening as some profit taking takes place. The US 10-year Treasury yield is down 5bps to 0.83%, now well below the 0.955% peak on Friday, while the 2-year rate is down 2bps to 0.20%. This move has gone against the grain of slightly higher core European yields.

Economic data releases have been second-tier, with US small business optimism rising in May and in April US job openings plunged to their lowest level since 2014 while the quit rate – which measures voluntary job leavers as a share of total employment – fell to 1.4%, a nine-year low.

In currency markets, the USD remains on the backfoot even with the risk-off theme, not helped by lower US rates. The BBDXY index is on track to record its ninth consecutive daily fall, though currently down just 0.1% for the day. CHF has become the safe-haven currency of choice of late, seeing USD/CHF down to a three-month low, going below 0.95. USD/JPY is down to 107.70, back to where it began the month.

EUR remains well supported, up 0.4% to 1.1350. Germany’s Finance Minister spoke positively about discussions on the €750bn EU Recovery Plan, saying that there was a “constructive spirit” and that he had the impression that everyone “has the will to reach an agreement within a short time”.

The NZD and AUD are at the bottom end of the leader board, reflecting the slight risk-off tone and no doubt some profit taking after their exuberant run. The NZD peaked at 0.6580 noon yesterday, fell to as low as 0.6470 last night and has recovered to 0.6520. The ANZ business outlook survey yesterday implied a stalling in business sentiment in early June, with indicators making no real progress from late-May, even if the survey was better than readings of a full month ago. The absolute levels of many activity indicators remain historically low, suggesting that even though the worst is over, the economy is still very weak.

The AUD followed the same pattern as the NZD, down from a high of 0.7040, scrapping just below 0.69 and recovering to 0.6970. Australia’s NAB business conditions index showed some recovery but remained deeply negative at a historically low -24%. For those interested in the timing of any potential trans-tasman bubble, we note that no new COVID19 cases from community transmission were recorded in Australia yesterday, for the first time since the pandemic began.

NZD/AUD showed upward momentum yesterday, almost touching 0.94, before retreating back down to 0.9360. The NZD is lower on all the other key crosses, losing more than 1% for the day against EUR to 0.5750 and JPY to 70.2.

The NZ rates market continues to follow global trends, with long end government and swap rates down as much as 5bps.

The day ahead should be quiet, before the FOMC meeting announcement due tomorrow morning. No fresh policy measures are expected, although forward guidance on rates could be strengthened. The market will also be interested in whether a move to yield curve control is being seriously considered or not. Of some interest, the Fed will provide fresh economic forecasts. We’d be surprised if the market reacted much to this update. Ahead of that US CPI data should come in soggy.