After the plunge on Thursday, risk appetite recovered on Friday, with US equities up over 1%, the US 10-year rate nudging higher and commodity currencies regaining some poise.
After the 5.9% plunge in the S&P500 on Thursday – which many saw as a healthy correction – there was plenty of interest in what Friday would bring, whether it be another lurch down or some recovery. In the event, it was a chopping trading session with a trading range of 3.4%, ending in an unconvincing recovery of 1.3%, paring the loss for the week to 4.8%. The VIX index fell 5 points to 36. Evidence suggests retail punters have played a role in recent market volatility, armed with zero brokerage trading accounts and not much to do all day.
There wasn’t a lot of fresh news to drive markets. Latest comments from the WHO on COVID19 were sobering, noting that the “the virus is actually starting and will wreak more havoc”, highlighting the upswing in low-middle income countries and the risk of a second wave in countries that have exited lockdowns. On Friday a number of US states reported record one-day increases in cases, including Arizona, Alabama, Arkansas, North Carolina and Oklahoma, while Florida showed its biggest jump in cases in six weeks. The independent Covid Exit Strategy site reported that 25 of 50 US states were coded “red”, which meant a trend of rising case numbers.
Weekend news included a report that Beijing reported an outbreak of COVID – 36 new cases on Saturday, an all-time high, and some 50 cases over three days. A part of the city was shut down and strict controls introduced.
On the economic front, the University of Michigan consumer sentiment index rose for a second month but remained well below the level pre-COVID19. UK GDP shrank by a record 20.4% in April (on track for its weakest peacetime performance since the “Great Frost” of 1709), ahead of the next Bank of England meeting this week, with expectations odd a further increase in QE. Euro area industrial production plunged 17.1% in April, taking the fall since February to 27%, with the biggest hit being taken by the larger countries. Like other regions, April should represent the nadir in activity, given the easing of lockdown restrictions.
Better risk sentiment saw the US 10-year Treasury rate end the day up 3bps to 0.70%, and trading within a tight range of 0.67-0.72% after the NZ close – so showing none of the volatility seen in US equities, given the absence of retail investors in the Treasuries market.
Currency markets had a risk-on feel to them, with the commodity exposures heading the leaderboard. After going sub-0.64 early afternoon NZ time, the NZD recovered to around 0.6475, before ending the week at 0.6445. The AUD showed the same pattern, down to 0.6800 at its low, breaking up (and down) through 0.69 a few times before ending the week around 0.6865. Both currencies have been highly correlated with risk appetite recently. The 3-month correlation between our risk appetite index and the NZD is currently at its highest level in eight years. Tell me what risk appetite is going to do this week and I’ll tell you where the NZD will end this week.
EUR and GBP were on the soft side of the ledger, ending down 0.4-0.5% for the day to 1.1255 and 1.2540 respectively. This saw NZD/EUR and NZD/GBP up 0.6-0.7% for the day to end the week around 0.5140 and 0.5730 respectively. The UK formally rejected the option to extend its post-Brexit transition period beyond the end of this year. Brussels said that it accepted Britain’s decision as final. Negotiations on a trade deal step up soon with weekly formal meetings beginning towards the end of the month.
In local data, NZ’s manufacturing PMI recovered in May but remained at a deeply depressed level of 39.7, well in contraction territory. Interestingly, while most activity indicators recovered, employment went against the grain and nudged lower to 39.4, highlighting that we’re only at the beginning of the labour shedding process.
The RBNZ announced that it would buy $1b of nominal bonds this week for its large scale asset purchase programme, with slightly more weight towards shorter dated bonds, compared to last week ($60m more 2023s, $10m more 2027s, $30m less 2031s and $40m less 2037s). This comes ahead of NZDM’s syndication of 2024 nominal bonds. The RBNZ will again offer to buy $75m of linkers and $50m of LGFA bonds.
Global forces remained in the driving seat for domestic rates, seeing the NZ 10-year government rate down 4bps to 0.80%, taking its fall for the week to 18bps.
In the day ahead, REINZ housing market data and Business NZ’s performance of services index are released this morning, ahead of monthly China activity data this afternoon.
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