US equities push higher again. USD lower, NZD and AUD rise sharply. Little change in global rates

It’s been a positive start to the week for risk assets with US equities and commodities making gains.  The NZD and AUD have risen sharply, with the NZD approaching 0.65 this morning. Global rates are little changed.

There hasn’t been much fresh news overnight, but market sentiment remains generally positive and the ‘buy the dip’ mentality for risk assets intact.  S&P500 futures fell more than 1% in Asian trading yesterday, but they have bounced more than 2.5% from that low point.  The S&P500 is up around 0.6% from the cash market close at the end of last week while the NASDAQ has outperformed again, rising 1% overnight.   The NASDAQ is close to its all-time high set in mid-May.

Both copper (+0.5%) and oil prices (Brent +2%) increased as well, a sign that investors are growing more confident that the global recovery will translate into greater demand for commodities. Brent crude oil is trading above $42 per barrel, its highest level since March while copper is near its highest levels since January.

There has been mixed news on COVID-19.  The spread of the virus continues to accelerate in several southern US states, with Texas recording over 2,600 new cases on Monday, more than double the amount recording this time last week.  But market participants appear sanguine, based on comments from officials within the Trump administration, that this won’t jeopardise the reopening process for the US economy.  In Beijing, there were 9 new cases on Sunday compared to 22 a day earlier, a sign that the authorities have been effective in containing the recent outbreak in the city without resorting to full lockdown measures.  The UK reported less than 1,000 new cases, the first time since the country went into lockdown in late-March.

The risk-on backdrop has led to a fall in the USD and a sharp appreciation in global growth and risk-sensitive currencies, including the NZD and AUD.  The Bloomberg USD index (BBDXY) is down 0.5% overnight, effectively reversing its gains over the course of last week.  The USD tends to decline during periods of improving risk appetite.  

The NZD and AUD have been the best performing G10 currencies this week and they remain tightly correlated to equity market movements (and risk appetite more broadly).  The NZD opened lower yesterday morning, in-line with the initial weakness in S&P futures, but it has been a one-way traffic (higher) since then.  The NZD is up 1.2% since the end of last week and is trading this morning around 0.6485.  The move in the AUD has been similar (+1.2% to 0.6915), with the market seemingly brushing off the recent increase in COVID-19 cases in the state of Victoria.  Victoria recorded 16 new cases on Monday, taking the current total of active cases to 125.

Global rates continue to show little of the optimism being reflected in equity markets.  There has been little change in US Treasury yields overnight, with the 10-year yield still sitting around 0.7%.  European government bond yields fell after German Finance Minister Scholz suggested that the government and the ECB were close to reaching a solution that would satisfy the German constitutional court and allow the Bundesbank to continue participating in the ECB’s QE programme.   Germany’s 10-year yield fell by 2bps, to -0.44%, while Italy’s 10-year yield fell 7bps to 1.29%, its lowest level since late-March.

New Bank of Canada Governor Tiff Macklem sounded a cautious tone in his first speech as Governor.  Macklem said “the recovery will likely be prolonged and bumpy, with the potential for setbacks along the way”, adding that it will be a “very long period” before the Bank would consider removing stimulus. Macklem said the policy rate in Canada was now at its effective lower bound (0.25%) and the Bank thought negative rates would lead to distortions.  The CAD underperformed other commodity currencies overnight, rising a more modest 0.6% against the USD.

There was little change in NZ rates yesterday.  Swap rates nudged down by 1-2bps, with the 10-year rate close to its lowest level since the end of May (0.72%).  The government bond curve was also broadly stable, having steepened on Friday after the RBNZ’s announcement that it would taper its bond buying for this week.  Wednesday is a big day for the rates market, with New Zealand Debt Management publishing its issuance plans for the month of July (which is likely to include plans for another syndicated deal) and the RBNZ OCR Review in the afternoon.

The preliminary versions of the European PMIs are released tonight, with the market anticipating a further bounce in these indices (to levels that still imply contraction in economic activity).