Global equities round off a strong quarter with further gains. NZD and AUD well bid into month-end after falling last evening. UST yields push higher into month-end

Markets are ending Q2 with a risk-on feel, taking equity markets higher, while US Treasury yields have been pushed up a few basis points.  The NZD and AUD have traded a wide range, more than recovering lost ground made yesterday evening.

Month-end flows have likely been a dominant force driving markets in the last 24 hours. The S&P500 is currently up 0.9%, on track to record its best quarterly performance in more than 20 years, up 19%, while the Nasdaq is heading for a 30% gain. Ironically, the strong gains have come as bankruptcy filings in the US are running at their fastest pace since 2013 (approaching 3,500 year-to-date), making the strong gain in equities one of the most hated rallies in recent history for those focused on the poor economic and earnings backdrop.

On the COVID19 front there is little to cheer about. US daily case numbers have fallen for the second day running, but the rolling 7-day average continues to increase. Outbreaks and in South and West are encouraging other States to scale back re-opening plans, including halts to allow indoor dining. US Health expert Fauci said that he was concerned about the trend in US case numbers and that he wouldn’t be surprised if the number reached 100,000 per day (up from over 40,000), alongside a “disturbing” number of deaths. Yesterday, in Australia the state government of Victoria imposed a 4-week lockdown in 10 Melbourne postcodes in response to an outbreak of community transmission there.

In other news which hasn’t had much impact on markets, China’s national security law for Hong Kong was passed and the legislation was published, which included life in prison for the most serious cases of terrorism, secession, subversion of state power and collusion with foreign forces. The US began its roll back of special trading privileges and the government vowed “strong actions”.  Separately, the Federal Communications Commission designated Chinese manufacturers Huawei and ZTE as national security threats, meaning that money from federal subsidies used by many small rural carriers may no longer be used to buy or maintain equipment produced by those two companies.

In data released overnight, US consumer confidence rose by more than expected and included decent rises for virus hotspots California and Florida – it remains to be seen whether the virus outbreak over the last couple of weeks will dent confidence there. The recovery in the Chicago PMI underwhelmed, but that was put down to the impact of Boeing, with other regional indicators still pointing to a decent recovery in the nationwide ISM index released tonight. Canada GDP plunged almost 12% in April but the flash estimate for May showed a 3% rebound, while June is looking even stronger.

Yesterday, China PMI data were encouraging, showing a lift in activity in June and beating market expectations, supported by recent policy stimulus and a reopening of the economy. The slump in Japan industrial production for May was much worse than expected, putting the country on track to record the weakest growth in the quarter of any country in the G7, despite having one of the better records on COVID19 case numbers.

In currency markets, GBP is the strongest of the majors, up 0.7% to 1.2390 after UK PM Johnson outlined a commitment to a long-term infrastructure spending plan – what he called a “New Deal”, allocating some £5bn. Still, GBP is one of the worst performing majors for the month and some of its gain overnight might be put down to month-end reallocation flows.

There has been no clear theme in currency markets overnight, with risk havens JPY and the USD underperforming, while CHF is near the top of the leaderboard.  NZD is mid-range, having been for a bit of a ride – falling to a low of 0.6385 yesterday evening, rallying strongly into the London fix to 0.6460 and since holding on to much of that gain. The AUD has followed a similar path and sits this morning near 0.69. Our view on both currencies is for a sideways performance during Q3 after being the two best performers of the majors in Q2, with gains of 3-4%.

Yesterday, ANZ’s NZ business outlook survey showed activity indicators clawing their way higher, but remaining at depressed levels. Despite a second consecutive monthly increase in the own-activity indicator, at a net minus 25.9% it remains below the GFC nadir of minus 21.5%, indicative of the deep hole that the economy is still trying to climb out of.

RBNZ Chief Economist Ha had a Q&A session on a webinar yesterday. He said the June policy statement was about keeping options open rather than signalling extra stimulus as any fait accompli.  And when asked about whether there was anything to read into the comment on the NZD’s appreciation in the recent MPR and its impact on export returns, said that it was simply a “statement of fact” and “that doesn’t imply any monetary policy action or inaction”.  It was the same interpretation we made on the day, with the current RBNZ leadership shying away from unnecessary value judgements on the NZD, a welcome change compared to previous regimes.

US 10-year Treasuries traded a tight range, but have pushed on up about 4bps over the past few hours to 0.66%, possibly driven by month-end positioning. Yesterday, NZ swap rates were little changed, while NZ government rates were up 2-3bps, taking the 10-year rate to 0.93%. NZGBs have underperformed swap and key US and Australian markets through June, despite the RBNZ’s aggressive bond buying programme, reflecting the mountain of bond supply being issued by the Treasury and with still much to go on that front.

The economic calendar remains heavy over the next 24 hours, with tonight’s key releases being the US ADP private payrolls and ISM manufacturing indicators. Both are expected to be better versus May, with the regional indicators pointing to a decent lift in manufacturing activity.