Risk assets have been hit by a number of negative headlines, seeing chunky falls in global equities in the order of 2-3%. Commodities currencies have underperformed, with further weakness in the NZD following its losses seen after yesterday’s RBNZ monetary policy review.
A trifecta of negative news headlines sees markets adopt a cautious tone – disturbing trends in US COVID19 case numbers, US-EU trade tensions, and another economic downgrade by the IMF. The S&P500 is current down 2½%, following a 2.8% fall in the Euro Stoxx 600 index. Energy is the weakest sector, with crude oil down 5-6%, reflecting the risk-off backdrop and the EIA reporting US crude stockpiles increasing to a record high of 541m barrels. Global rates are lower, with the US 10-year rate down 3bps to 0.68%.
New case numbers of COVID19 are accelerating across the US, with 33 states showing increased growth compared to two weeks ago, with notable rises in the South and West. New York, New Jersey and Connecticut will require visitors from hot spots to quarantine for 14 days. These trends threaten the nascent US economic recovery, as states slow down the easing of restrictions and consumers vote with their feet and stay home, in the absence of strict lockdown orders. This is already evident in real time daily data like OpenTable restaurant bookings. The US is not the only region showing increased growth in cases. The WHO noted the dire trend of case numbers in Latin America – rising 25-50% in the past week for some countries.
As part of its six-month review, the Office of the US Trade Representative published a notice to impose new tariffs on $3.1b of European imports, subject to a month of public consultation. These punitive tariffs could be as high as 100%. This comes ahead of a ruling by the WTO on whether the EU can legally impose tariffs on $11b of US goods in retaliation for US subsidies to Boeing. It was a reminder of the mini US-EU trade war that has been bubbling underneath the surface for some time.
There was little economic data overnight, other than Germany’s IFO survey pointing to increased business confidence, with the expectations component at a four-month high and continuing the global run of data beating market expectations. On a more negative note, the IMF downgraded its global growth outlook from its forecasts of just two months ago, picking a contraction of 4.9% this year (previously minus 3.0%) and a rebound of 5.4% next year (previously 5.8%), but now seeing both upside and downside risks around these forecasts.
The NZD is at the bottom end of the leaderboard, down 1.3% since this time yesterday to 0.6410. This reflects a combination of weaker risk appetite and some weakness after the RBNZ announcement yesterday, even though it was bang in line with market expectations. This suggests that the market was long NZD going into the meeting.
In the RBNZ’s Monetary Policy Review (no longer called an OCR review, given the reduced status of interest rates near their lower bound), an easing bias remained evidently intact, as the Bank was prepared to provide additional stimulus as necessary. More guidance on the outlook for the $60b QE programme and “readiness to deploy alternative monetary policy tools” will be outlined in the August Monetary Policy Statement. The Bank remained cautious on the economic outlook, noting that risks remained skewed to the downside, despite the earlier-than-expected recovery in the economy. Comments on the NZD remained factual and non-judgmental about its value, with the Bank simply acknowledging its recent appreciation and negative impact on export returns.
NZ short-end rates showed a small fall following the announcement, with bank bill futures ending the day down 1-3bps and the 2-year swap rate down 2bps to 0.21%. There was more action in the long end of the curve following NZ Debt Management’s announcement of a new May-2041 bond planned for syndication mid-July, adding a significant amount of duration supply for the NZ bond market, and a tap of its existing April-2027 bond in August. The long end of the curve sold off hard on the news, with the 2037 bond up 14bps, before buyers returned, taking the rise for the day to just 6bps to 1.27%. Heavy supply conditions continue to weigh on the market, seeing NZGBs underperforming swaps across the curve.
NZD crosses are all lower, given the NZD’s underperformance. NZD/AUD found some support near 0.93, and is now up a little from the NZ close to 0.9330, albeit still down 0.4% for the day, with the AUD down to 0.6870.
Broadly based USD strength has been the theme of the day, with its safe-haven characteristics outweighing concern about potential US economic underperformance as it battles the wave of COVID19. The BBDXY index is up 0.6% for the day, with all of the gain coming in the overnight session.