Risk appetite has improved, supported by stronger PMI data across Europe, seeing global equities up over 1% and USD weakness, helping the NZD and AUD break higher, with the NZD up through 0.65.
A run of positive PMI data out of the euro area beginning with France, then Germany, then the UK encouraged a rally in risk assets from early yesterday evening. Euro area and UK PMI data for both manufacturing and services recovered by more than expected, showing a second month of solid increases. This was further confirmation of their economies heading on the right track after lockdown restrictions have eased, but by remaining below 50, the message from the indices remained one of caution.
The US figures also showed improvement even if slightly undershooting expectations, but regional PMIs point to a healthy bounce in the more widely followed ISM index due next week. US new home sales data were consistent with recovery and beat expectations, and a surge in mortgage applications points to an even stronger recovery ahead for the housing market.
The Euro Stoxx 600 index closed 1.3% higher, while the S&P500 is currently up around 1%, seemingly unperturbed that US COVID19 case numbers continue to increase at an uncomfortable rate. Over 30 states are seeing an R0 figure of above one and California reported a record number of new daily cases (over 5000). US health expert Fauci told lawmakers that we are seeing a “disturbing surge” in new cases across the US and he urged officials to increase testing, contradicting President Trump’s weekend advice to slow testing to reduce case numbers. He also noted that at least one vaccine candidate was set to go into a phase 3 trial next month and others would quickly follow. On a positive note, Italy reported the lowest number of new cases since late February (122).
Higher risk appetite sees the USD back under pressure after its recent unconvincing rally, with the BBDXY index down 0.4% for the day. The NZD and AUD’s high correlation with risk appetite remains evident, with the NZD blasting up through 0.65 and reaching an overnight high of 0.6533, before easing back down to 0.65. The AUD peaked at 0.6975 and has since retreated to 0.6940.
The NZD and risk assets saw a fleeting fall yesterday afternoon after headlines that White House trade advisor Navarro had indicated that Trump had decided to terminate the China trade deal – this saw the NZD collapse 40pips and S&P futures down as much as 1.9%. However, the move was soon reversed after Navarro said that his comments were taken wildly out of context and Trump tweeted that the trade deal was fully intact. It was a friendly reminder of the sensitivity of risk assets to US-China trade tensions.
It hasn’t been a classic risk-on rally for currencies, with JPY outperforming, seeing USD/JPY down 0.4% to 106.50 and NZD/JPY down a touch to 69.2. Some traders have pointed to flow giving JPY a lift, as Softbank looks to divest some foreign assets to raise capital. EUR and GBP have been well supported after those PMI figures were released, seeing NZD crosses slightly weaker.
US Treasuries have tracked sideways, with the 10-year rate unchanged at 0.71%, against a backdrop of modest upward pressure in European bond yields.
Curve steepening remained the order of the day for the NZ rates market, ahead of NZ Debt Management’s announcement (due 8am) of the tender programme for next month. We also expect an announcement on the next planned syndication – being a good chance of a tap of the April-2033 maturity or possibly a new 2041 bond. The 2031 bond closed up 3.5bps to 0.92%, while 10-year swap was up by just 2bps to 0.74%.
In the day ahead the focus turns to the RBNZ’s OCR review. The scope for any surprise seems lower than usual, with the Bank expected to keep policy unchanged and take a wait-and-see approach. Compared to the May MPS, NZ’s restrictions have come off a lot earlier than expected and there is clear sign of a global recovery underway from the depths of April, so some of the downside risks the Bank saw back then should have moderated. But a cautious tone about the economic road ahead should remain a given.