US equities down over -5%, UST10s rally. NZD down -1.7%, AUD down over -2% in sharp correction

Turmoil has returned to markets, with a plunge in global equity markets and oil prices, a strong rally in government bond markets and safe haven currencies outperforming. The NZD is down over 1.7% for the day, while the AUD’s fall exceeds 2%.

A steady fall in S&P futures from yesterday early afternoon NZ time signalled that markets were taking a turn for the worst and selling pressure has accelerated overnight, with the S&P500 down over 5%, following a 4.1% fall in Euro Stoxx 600 index. Investors have taken some money off the table and flocked to safer assets, seeing the US 10-year Treasury down 7bps to 0.65%, with the bulk of that move coming after the NZ close. The move up to just over 0.95% on Friday now seems a distant memory and the yield has slotted back into the middle of its prior 0.55-0.75% trading range.

A number of reasons have been put forward for the aggressive sell-off in risk assets – high on the list are the sobering economic outlook from the Fed yesterday – a reality check – and concern about the spread of COVID19 in the US.

But the plunge in US equities should also be seen in the context of their recent rapid and significant recovery – with high participation by retail investors – that took technical indicators off the charts, including the widely followed 14-day relative strength indicator. The Put/Call ratio fall to a 9-year low was also signalling that a pullback was overdue. The big question now is whether this is just a short-term correction in risk assets from an over-bought level (which we’ve also highlighted has been evident in the NZD and AUD versus our short-term fair value models) or the beginning of a much nastier correction.

Yesterday, the number of COVID19 cases in the US broke up through 2 million and the country now has 27% of the world’s cases, even though it makes up just over 4% of the world population. While growth in US cases continues to edge lower, there are a number of localised hotspots, with 18 states seeing an increase, including Arizona, Florida, Texas and parts of California.

We’re hesitant to call this a second wave, as it is still part of the first wave. And there seems to be no clear correlation between the easing of lockdown restrictions and case outbreaks which is making experts wonder how easy the spread can be controlled. Even if the much dreaded second wave arrives, there is little appetite to re-impose strict lockdown measures. US Treasury Secretary Mnuchin said that “we cannot shut the economy down again. I think we’ve learned that if you shut down the economy, you’re going to create more damage”.

US initial jobless claims fell for the 10th consecutive week and were in line with market expectations, at just over 1.5m. Still, the figures are dire, with the latest figure being more than double the worst week during the GFC. While the peak in the unemployment rate may have passed, the road to recovery for the labour market remains a long one.

Oil prices plunged in the order of 8-9%, driven by the risk-off backdrop, as well as data showing that US crude stockpiles rose to their highest level in at least 40 years. After being as high as USD43.40 at the start of the week, Brent crude is now down to USD38 per barrel.

In currency markets, safe havens have outperformed, seeing the USD, CHF and JPY all at the top of the leaderboard. After a steady decline over the past 4 weeks, taking the USD BBDXY index down 4½%, it has recovered over 1% for the day.

Commodity currencies are the worst performers. As we go to press, the NZD has hit 0.6420, down 1.7% for the day, with the fall in NZD/JPY at 2% to 68.6. The AUD is down over 2% to 0.6850. NZD/AUD touched 0.94 overnight and is currently 0.9375.

EUR and GBP are in the middle of the pack, with GBP faring worst, down more than 1% to 1.26. The UK government reported that it has agreed with the EU to an intensified timetable for negotiations on a free trade agreement, including weekly formal negotiating rounds.

In economic news yesterday, NZ retail electronic card transactions showed a massive 79% bounce in May from the nadir in April, reflecting the easing of restrictions and pent-up demand for consumables and durables, but the value of total transactions was still 12.3% lower y/y. Job ads on seek.co.nz were up 72% in May, following the 65% plunge in April, but were still down 58% y/y. These indicators highlight the sharp pick-up in activity but also how current conditions are still far from normal.

NZDM announced the banks involved with the syndication of a new nominal May 2024 bond, which we expect to be launched early next week. The tender of $1.05b of bonds met strong demand, with the $200m of 2037s seeing the highest bid/cover ratio of 2.45, while the $350m of 2029s and $500m of 2023s saw bid/cover ratios of just under 2. Today sees the RBNZ offering to buy $160m 2025s, $150m 2031s and $25m of 2025 linkers.

NZ government bond yields were dragged down by global forces, seeing the 10-year rate down 9bps to 0.87%. Bonds outperformed swaps, with the 10-year swap down 5bps to 0.82%. Further downward pressure will be in force today after the move in US Treasuries overnight.

In the day ahead, NZ’s PMI should show a decent move higher in May, given the easing of restrictions. UK monthly GDP data and US consumer sentiment will be on the radar tonight.