Equities fall sharply on growing COVID-19 concern in the US. Global rates fall, curves flatten. NZD and AUD surprisingly resilient to equity market falls

Equities fell sharply and global rates declined on Friday as the continued rapid spread of COVID-19 in several US states heightened concerns that the US economic recovery could be put at risk.  The NZD held in well despite the risk-off backdrop on Friday.

Equity markets were hit on Friday on growing concerns about the fast rising spread of COVID-19 in US states such as Texas, Florida and Arizona.  New daily cases of the virus reached new, or close to, record levels in all three states on Friday and at a national level, the US recorded a record 44,373 cases. Texas Governor Greg Abbott, whose state was one of the first to open up its economy, said bars would be closed in the state and new restrictions applied to restaurants (restricting them to 50% capacity).  Abbott highlighted that positive test results now exceeded 10%, a threshold he had previously said would lead to restrictions, contradicting claims from the Trump administration that higher rates of testing as the reason for the increase in cases.  In Florida, bars have been banned from serving alcohol and beaches in Miami will be closed for five days around Independence Day, in a bid to slow the spread of the virus.  US medical advisor Fauci convened his first daily briefing in two months on Friday, warning that the country had a “serious problem.”

High frequency economic data (such as reservations on online booking site OpenTable) have been pointing to a bounce back in economic activity over the past two months, as states and cities eased social distancing restrictions.  The acceleration in cases in these states raises the prospect of more restrictions being re-imposed which could interrupt the broader US economic recovery, even as other parts of the country, like New York, take steps to reopen.

The S&P500 fell 2.4% on Friday, leaving it more than 7% below its recent peak in early June.  In addition to renewed market concerns around COVID-19, equities were hit by the Fed’s stress test results, released after the market close on Friday morning.  The Fed said US banks would not be allowed to return cash to shareholders via share buybacks before Q3, at the earliest, and dividends would be capped at current levels.  Under the more severe ‘pandemic scenarios’, the Fed’s modelling showed capital levels at several US banks falling near regulatory minimums.  There were big falls in US bank share prices (JPM -5%, Wells Fargo -7%, Citi -6%, Goldman -9%).

The other factor weighing on equities on Friday was news that consumer goods company Unilever had suspended advertising on all social media platforms, including Facebook, until at least the end of the year.  Unilever cited concerns around hate speech and a "polarized election period" as the reasons for its move.  Other companies, including Coca-Cola and Verizon, are also part of the boycott, albeit for differing lengths of time.  Facebook’s share price fell over 8% on Friday, its biggest one-day fall since mid-March, while Twitter fell over 7%.  Tech stocks have hugely outperformed since the crisis began, and remain a consensus position among investors.  Given the large weighting the big tech firms now represent within US benchmarks (Facebook, Amazon, Apple, Microsoft, Netflix and Google account for around 22% of the S&P500), big changes in these share prices have repercussions for the overall indices. The NASDAQ fell 2.6% on Friday.

The risk-off backdrop led to a ‘bull flattening’ of government bond curves, with long-end rates falling sharply.  The US 10-year Treasury yield fell 4bps to 0.64%, its lowest level in more than a month, while the 30-year yield fell 6bps to 1.37%.  With the exception of a brief run-up to almost 1% in early June, the US 10-year Treasury yield has remained well-contained within a 0.55% - 0.75% range since late March.  In the absence of the Fed shifting its stance on negative rates (multiple Fed officials have consistently said they don’t favour this policy), there is only so far US rates can fall from these already low levels.

The USD appreciated on Friday, with the Bloomberg USD index (BBDXY) rising 0.3% and reaching a one-month high at one point.  The USD tends to appreciate during periods of heightened risk aversion.  It bottomed out a month ago, shortly before the S&P500 reached its recent peak.

Surprisingly, given the sharp fall in equities, the NZD and AUD experienced only modest declines on Friday.  The NZD fell 0.1%, to around 0.6425 while the AUD was 0.3% lower, at around 0.6865. The NZD and AUD have been joined at the hip with the S&P500 since the crisis kicked off, but that correlation started to break down last week, with the two currencies making gains (NZD +0.25%, AUD +0.45%) despite equities falling. The market continues to seemingly put little weight on the upswing in new COVID-19 cases in the state of Victoria, which reported 41 new cases on Friday, 15 of which were via community transmission.

In economic data, US personal spending increased by a record amount in the month of May, albeit by less than economist expectations.  Personal income fell 4.2% on the month, leaving the US savings rate at a still-very high 23%.  Personal income has been supported by the US government’s fiscal measures, including the cheques sent to households and more generous unemployment payments, which are scheduled to roll-off at the end of July (unless extended by Congress).  The Atlanta Fed’s GDPNow estimate for Q2 GDP improved from -46% (q/q% annualised) to a still-terrible -39%.  Meanwhile, Chinese industrial profits turned back to positive territory in May, the first time since November, as the economy continues to recover from its virus-induced recession.

In New Zealand, the RBNZ kept its QE government bond buying unchanged for this week, at $940m ($880m nominal government bonds and $60m inflation-indexed bonds), having tapered last week.  The pace of the RBNZ’s bond buying for this week modestly exceeds the amount of issuance from New Zealand Debt Management ($800m nominal bonds and $50m inflation-indexed bonds).  This week will see the first tender issuance of inflation-indexed bonds since March.

The 10-year government bond yield fell 2bps on Friday while the 10-year swap rate increased by 3bps, resulting in a 5bp widening in the so-called ‘swap spread’.  Despite the moves on Friday, swap spreads remain negative (i.e. swap rates are below government bond yields) across the curve.  We continue to expect some upward pressure on longer-dated government bond yields, and a steeper government bond curve, ahead of the coming 2041 bond syndication planned for mid-July.

In domestic data, the ANZ Roy Morgan index of consumer confidence improved to 104.5 in June, from 97.3 in May and an 84.8 low in April.  While consumer confidence is heading in the right direction, the index remains well below its long-term average of 119.  The final version of the ANZ business survey is released this week, and we would it expect it to improve on the preliminary read released earlier in the month.

It’s a data heavy week ahead, with non-farm payrolls released on Thursday rather than the usual Friday (due to the Independence Day holiday).  The market is looking for +3 million jobs, following last month’s surprising 2.6 million gain, and for the unemployment rate to fall to 12.4% from 13.3%.  The ISM surveys and the minutes to the Fed’s June meeting are also released.