Equity markets finished last week on a strong note after Gilead reported its COVID-19 treatment drug, Remdesivir, could significantly reduce the death rate of those with the virus. Global rates and commodity prices increased. FX moves were muted, despite a sharp turnaround in the S&P500, with the NZD finishing the week around 0.6575.
The main market-moving news on Friday was Gilead’s report on its phase three clinical trials of Remdesivir. Gilead said that the drug cut the death rate of those in its trials by 62% compared to those not using the drug (7.6% of patients in its trials died compared to 12.5% of patients in a representative real-world sample). Gilead’s study, which compared the results of its 312 patients to a selection of 818 patients with similar characteristics in the ‘real world’, is not seen to be as authoritative as a randomised controlled trial, but it boosted risk appetite nonetheless.
Equity markets moved higher after the report, with the S&P500 finishing up 1% on Friday (Gilead’s share price was up a relatively modest 2%). There were big gains for US banks (+5%), energy-sector stocks (+3%) and airlines (+4%) on growing optimism that the reopening process for the global economy can continue to move forward. The NASDAQ was up a more modest 0.6% on Friday but still closed at an all-time high. US earnings season kicks off this week, with the big US banks and Netflix amongst those reporting. There will be a focus on, amongst other things, the level of loan-loss provisioning among the banks.
The news from Gilead overshadowed a fresh daily record for new COVID-19 cases in the US on Friday (66,000), with the virus continuing to spread quickly in numerous Southern and Western US states. Overnight, Florida reported a single day record for new cases in a US state (15,300 on Sunday) while officials in Miami, Louisiana and Texas have all warned that hospital facilities are at, or near, capacity and that further restrictions may be necessary. But, for now at least, the market appears sanguine that the broader reopening process for the US economy won’t be materially interrupted (and there seems little political appetite for widespread lockdowns like those seen in March and April).
The market also looked through comments from Trump that a Phase-Two deal between the US and China was “unlikely” given the “severely damaged” relationship. The market had already discounted any chance of a Phase-Two deal given the current tensions between the two countries and the focus is more whether the Phase-One deal can be kept intact. The CNY was slightly softer on Friday, but USD/CNY still sits near a four-month low, around 7.0.
The Chinese equity market took a breather on Friday following its sharp rise earlier in the week. The CSI300 index fell around 2% after reports that state-owned pension funds were selling equities, a possible sign that the authorities think the market has risen too quickly. It was still up 8% last week, to its highest level since 2015.
In economic data, Chinese credit growth in June was stronger than expected, following previous credit and monetary easing measures and the easing of COVID-19-related restrictions. Optimism over the Chinese, as well as global, economic recovery is reflected in both equity and commodity prices. Copper prices, which have also been affected by supply issues, hit their highest levels since April 2019 while nickel and zinc reached five and six-month highs respectively on Friday.
The US 10-year Treasury yield initially reached a three-month low of 0.57% but it swiftly turned higher after the Gilead news, in-line with the move in equities. The 10-year rate ended 3bps higher on Friday, at 0.64%. It has remained contained within a tight 0.55% - 0.75% trading range for most of the past three months. NZ rates moved lower on Friday (the 10-year swap rate and government bond yield both fell 3bps to 0.74% and 0.97% respectively), but they should open higher this morning on the back of the moves in Treasury yields after the NZ market close.
Currencies didn’t follow their typical risk-on pattern on Friday. The AUD, typically seen as one of, if not the most, risk-sensitive currency was the worst performer on Friday. It fell 0.2% to 0.6950. News that Victoria had recorded 288 new COVID-19 cases the previous day may have played a part in the AUD underperformance. In contrast, the JPY bucked its usual safe-haven tendencies and rose 0.25%, to just below 107. The USD was little changed, in index terms.
The NZD rose modestly in the Friday evening session but was little changed from where it was trading on Friday morning, at around 0.6575. The NZD remains close to its highest level since January, and towards the top of the 0.62 – 0.66 trading range we have pencilled in for Q3. The NZD rose 0.7% last week, mainly due to buoyant risk appetite (rising equity markets) and a stronger CNY.
There was little market reaction to stronger-than-expected electronic card spending in New Zealand in June. Total electronic card transactions rose 19% in June, following the massive 80% increase in May, and they are now above pre-COVID levels in level-terms. There are a multitude of factors likely to have boosted retail spending in June, including the move to COVID-19 Alert Level 1 early in the month, pent-up demand, and funds previously used for overseas holidays being redirected to spending in New Zealand. We remain cautious about the spending outlook given the likely deterioration in the labour market ahead.
NZ Q2 CPI is released on Thursday. We suspect it’s unlikely to generate much market reaction either given it is historic data and the global economic outlook is changing rapidly. As things stand, we look for CPI inflation to fall 0.7% in Q2, which would take the annual rate down to 1.3%, near the bottom of the RBNZ’s 1-3% target range. The key event for the domestic bond market this week is the expected syndication of a new 2041 maturity government bond, which will be the longest bond on the curve.
Elsewhere, Chinese Q2 GDP and June activity data are released on Thursday. The market consensus is for Q2 GDP to increase 9.6% q/q, a sharp v-shaped rebound from Q1’s -9.8% q/q (for annual growth of 2.4% y/y). In Australia, our NAB colleagues forecast a 175k increase in jobs in June, partially reversing some of the 835k jobs lost in April and May. US retail sales and CPI are also released but the market focus is more likely to be centred on the trend in COVID-19 cases in affected states. In Europe, there is an EU leaders’ summit on Friday and Saturday where countries are trying to forge agreement on the proposed EU Recovery Fund.
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