Risk off tone overnight. GBP lower as BoE stimulus not seen to be enough. NZD and AUD weaker as USD strengthens

There’s a mild risk-off tone to the market, with safe-haven currencies in the box seat and generally lower global bond rates. US equities have spent much of the session in modest negative territory. The NZD and AUD have shown modest falls overnight.

There isn’t much fresh news to drive markets and a cautious trading environment remains the order of the day, as the spread of COVID19 continues to raise a question mark over the extent of the recovery path ahead. Texas, Arizona and North Carolina have reported record daily COVID19-related hospitalisations, while daily case numbers continue to rise in more than a dozen other US states, including California and Florida. Meantime, Beijing continues to try to control its recent outbreak.

US equities started the session on the back foot after US initial jobless claims continued to trend lower but were more than 200k worse than expected at 1.5m. The data suggest a very slow recovery in labour market conditions, not a good sign ahead of the expiration of unemployment benefits. Not much credence was given to the stronger Philly Fed survey, with the diffusion index telling us that things are much better than before but no sense of how much. The S&P500 was down 0.7% early on, and pushed up into positive territory a few times, but is currently slightly down.

In policy news, the Bank of England held the Bank Rate at 0.1% and expanded its asset purchase programme by £100bn, as expected (although some analysts argued for a larger increase in QE), in an 8-1 vote with only Chief Economist Haldane against the move. The new QE target of £745bn should be reached around the end of the year and the BoE will be buying less bonds per week (from £11bn down to £6bn). Governor Bailey told reporters that negative rates or yield curve control wasn’t discussed. On the economy the Bank sees output holding up better than expected, but there’s probably worse to come for employment.

While GBP was initially stronger on the announcement, there was some evident disappointment that the stimulus provided wasn’t larger to support the economy. The UK 10-year rate was up 4bps to 0.22% against a backdrop of lower global rates. And in this upside down world, the lack of policy stimulus led to GBP underperformance, seeing it down over 1% for the day to 1.2420, at the bottom of the leaderboard for the majors.

The ECB’s latest TLTRO – or offer of 3-year loans which allow banks to borrow from the ECB at a rate as low as minus 1% subject to conditions – saw €1.3 trillion taken up. After accounting for expiring loans, this sees a net injection of almost €550bn of liquidity into the system to support lending into the real economy, alongside the ongoing $1.35 trillion pandemic purchase programme. This additional “easing” did no harm to EUR but against a stronger USD backdrop, it eventually succumbed and is down by 0.3% for the day to about 1.12.

The NZD has been dragged down overnight by the stronger USD, touching 0.6420 early this morning. This followed some support late yesterday after the PBoC continued with its measured easier monetary policy stance, cutting the 14-day reverse repo rate by 20bps to 2.35%, and the Governor later indicating that the Bank wants the total flow of credit to rise by almost a fifth this year to support the real economy.

NZ Q1 GDP data showed that the economy was on a weaker footing than expected in the very early stages of the lockdown, with mainstream media headlining the biggest quarterly contraction in 29 years. Of course, the 1.6% fall will pale in comparison to the Q2 outcome which is on track for a fall possibly as large as 20%, with a wide variance, given the difficulties that Statistics NZ will have in measuring the depth of the hole in the economy. The market ignored this old news, and even the Q2 result which will be reported in three-months-time looks old news when we already know a sharp recovery has already ensued from the depths of activity levels in April.

The AUD has followed a similar path to the NZD, and has traded down to 0.6840 this morning, a similar level it dropped to following a much weaker than expected employment report, with jobs down some 228k in May. That currency loss was reversed and it did break 0.69 yesterday evening, before USD strength took over.

The risk-off vibe sees the US 10-year Treasury yield down 5bps for the day to 0.69%, although only a couple of basis points lower from the NZ close. The NZ session saw bonds underperform swaps. The swaps curve was dragged lower by global forces that saw the 10-year rate down 4bps to 0.74%, while the long end of the government curve felt heavy, with the 10-year rate up 1bp to 0.86% – continuing the theme of curve steepening after the large, and well sought after, $7bn issue of a new 2024 bond on Tuesday.