Choppy trading but little net change in equities, rates or FX. Fed releases US banks stress tests this morning. NZD outperforms overnight (+0.2%) as it continues to track the S&P500

It’s been a choppy trading session overnight, but with little net change in equities, rates and currencies.

The market remains focused on the rapidly rising number of new COVID-19 cases in several Southern and Western US states.  The Texas Governor announced last night that he would “temporarily pause” plans to further reopen the state’s economy amidst what he termed a “massive outbreak” in the region.  The state cancelled all elective surgery as Houston, the biggest city in the state, reached capacity with ICU beds.  This follows similar moves in North Carolina, another affected state, which said the previous night it would pause its re-opening for three weeks and ordered masks be worn in public.  At a national level, the US reported its highest single day rate of new COVID-19 cases on Wednesday, at over 45,000.

The reacceleration in cases raises the risk that the reopening process for the US economy is interrupted, even if officials don’t resort to widespread lockdown measures this time, and the economic recovery proceeds slower-than-expected.  This is the key concern weighing on market participants.

S&P500 futures fell as much as 1.5% at one point over the past 24 hours, but they have clawed back those losses to now be close to unchanged on the day.  The S&P500 was down 2.6% the previous trading session on these renewed concerns about the spread of COVID-19 in the US.

Equities have been supported overnight by news that US regulators would ease some of the restrictions contained in the so-called ‘Volcker rule’, which will free-up capital for US banks.  US financials rose almost 2% overnight, helping to prop up the overall index.  The Fed will release its regular ‘stress tests’ on US banks after the market close this morning, which will include scenarios for how banks’ capital levels might be affected by several pandemic scenarios.  The results of the stress tests influence whether regulators permit banks to pay dividends to shareholders.

Economic data has been mainly second-tier and had little impact on the market.  Jobless claims fell again last week, but by less-than-expected and they remain at very high levels.  More encouragingly, continuing claims (which take account of those no longer requiring unemployment assistance) fell by more than expected.  Durable goods orders were also stronger than market expectations, but inflated by volatile aircraft orders. Manufacturing remains weak, although it is gradually improving.

The USD is a touch stronger (BBDXY +0.2%) and close to a four-week high.  The NZD and AUD have outperformed, with the NZD up 0.2% to 0.6420 and the AUD flat on the day, at around 0.6870. The NZD and AUD continue to closely track movements in the S&P500.

The GBP is down slightly overnight (-0.2% to around 1.24) after the UK’s chief Brexit negotiator, David Frost, said the UK would not agree to a mooted compromise over tariffs.  Brexit negotiations are ongoing, and there is a lot of ground to cover before UK’s scheduled leave date at the end of the year, but it remains a secondary concern for the market at present.

Global rates have fallen slightly overnight, more so in Europe than the US, but the moves have been modest.  The US 10-year Treasury yield is 1bp lower overnight, at 0.67%, while the 10-year German yield fell 3bps to -0.47%.  The minutes to the ECB’s June meeting contained a lengthier discussion among Governing Council members about the merits of increasing its QE bond buying programme.  Analysts think might go some way to assuaging the concerns of the German Constitutional Court and permit the Bundesbank to continue buying German bonds as part of the programme.  The EUR fell 0.3% overnight, to trade just above 1.12 this morning.

The NZ curve flattened back yesterday, reversing some of the steepening moves seen over the past week.  The 10-year swap rate fell 3bps on the day, reflecting the previous night’s risk-off moves, compared to a 1bp decline in the 2-year rate.  The longest maturity NZGB (the 2037) fell 2bps on the day after a strong tender of this bond, although it remains much higher than where it was a week ago.  The long-end of the NZGB curve is likely to remain under some upward pressure ahead of New Zealand Debt Management’s planned 2041 bond syndication in mid-July.